Safeguards Scant for U.S. Investors as Registered Advisers Increase by 39%

Arnold and Cheryl Levy were a year away from retiring when Jeffrey Liskov, acting as their registered investment adviser, took a large position during July 2009 in a speculative fund with Arnold’s retirement money.

The Levys were dealing with an ill family member at the time and the trade escaped their notice until December of that year when Liskov alerted them to losses on the fund, the Levys said in a telephone interview. According to court filings they lost about $85,000 on theProShares UltraShort MSCI Emerging Markets (EEV) exchange-traded fund, which placed bets that foreign stocks would drop.

“We were just beside ourselves,” said Cheryl, 67. She and Arnold, 69, of Stoughton, Massachusetts, felt they could trust Liskov’s judgment, she said. Actually, Liskov was sliding toward bankruptcy, and they had to absorb a 44 percent loss on the fund.

Registered investment advisers -- firms that employ about 280,000 individual representatives nationwide -- are billed as an alternative to traditional brokers because they are legally bound to a fiduciary duty to put their clients’ interests first, and typically charge fees instead of commissions. Brokers, who number about 632,000, are held to a suitability standard that their advice meet clients’ needs at the time a product is sold.

In practice, the lightly regulated RIA industry -- where low barriers to entry helped swell membership by 39 percent in six years -- may offer few protections for investors who wind up with incompetent advisers.