Since I am in the investment world I find it interesting when the SEC brings forth a case against a financial advisor. The overwhelming majority of the time the financial advisor/investment advisor has stole money, lied to clients, or just outright over promised something to clients like a "guaranteed 12% return per year". Back in May 2019 the D.C. Court of Appeals in the Robare Group, Ltd. vs SEC held the SEC decision that if a financial advisor professional claims there "may" be a conflict of interest would violate the Investment Advisers Act of 1940 (specifically Section 206 (2) which covers prohibited transactions by Investment Advisers) and the SEC claims Robare violated this.
Mark Robare is the president and CEO of Robare Asset Management and from the company's last regulatory filing managed $175 million for clients (as of December 31, 2018). The company grew assets and clients over time. In the early 2000's the company had 150 client households and in recent times had 300 client households. The company worked with retired current oil and gas executives who were approaching or entering retirement. The average account balance of was between $500,000 to $800,000.
The firm also did very little advertising and added clients by referrals from existing (and I might add satisfied clients). In fact the firm had a 97% retention rate over a 10 year rolling period among clients which shows how happy clients were. Clients of the firm were invited to meet with their advisors at least once a year (however some clients visited with their advisor more frequently).
Robare had been practicing financial planning for clients in the Houston area since 1977 (32 years of experience), was a Chartered Financial Consultant (CHFC), a Certified Financial Planner (CFP), and Chartered Life Underwriter (CLU) it should be noted that having all these designations is not typical. In addition to this Robare passed 7 different exams in the investment industry. Clearly, Robare had experience in the investment/financial planning world. Prior to this allegation from the SEC Robare according to his BrokerCheck record never had any type of infraction brought either from a client or any regulatory authority.
The firm also did very little advertising and added clients by referrals from existing (and I might add satisfied clients). In fact the firm had a 97% retention rate over a 10 year rolling period among clients which shows how happy clients were. Clients of the firm were invited to meet with their advisors at least once a year (however some clients visited with their advisor more frequently).
Robare had been practicing financial planning for clients in the Houston area since 1977 (32 years of experience), was a Chartered Financial Consultant (CHFC), a Certified Financial Planner (CFP), and Chartered Life Underwriter (CLU) it should be noted that having all these designations is not typical. In addition to this Robare passed 7 different exams in the investment industry. Clearly, Robare had experience in the investment/financial planning world. Prior to this allegation from the SEC Robare according to his BrokerCheck record never had any type of infraction brought either from a client or any regulatory authority.
In 2004, Robare entered into revenue sharing agreement with Fidelity Investments (their custodian who would actually hold the securities of clients and provide support for trading and back office needs). Revenue sharing agreements work by allowing financial advisors to invest in different funds for their clients and then the financial advisor gets revenue for investing in those funds (similar to a commission-just like real estate brokers, car sales people, salespeople, and other professions). Robare as part of their financial planning for clients would recommend mutual funds for clients to invest in. Robare created model portfolios of various mutual that didn't contain any transaction fees. Some funds do have transaction fees and many times clients have to pay the transaction fees (there are advisors that do recommend these products). There were some funds that weren't associated with Fidelity that were no transaction fee. For recommending the funds that weren't associated with Fidelity nor had any transaction fee Robare would receive between 2-12 basis points (a basis point is 1/100 of a 1%). However, Robare had to pay Triad (an outside firm) a 10% fee (so the amount Robare would receive was actually 1.8%-11 basis points). So for example if a client invested $100,000 Robare would only earn a whopping $18-$110! Between September 2005 and September 2013 Robare earned $400,000 under the revenue sharing arrangement (which would be around 2.5% of the firm's revenue). It appears on the surface that given the lack of revenue generated from the revenue sharing agreement someone could conclude that these funds didn't change the recommendations from Robare. It is important to note Robare was never recommending the funds based off the fee he would receive. During the financial crisis in 2008 Robare and his firm actually moved money of clients into funds that didn't have commissions to save clients money.
In 2004 when Robare was exploring the revenue sharing agreement they asked Fidelity (their broker/dealer and custodian) if their clients would incur any additional fees and Robare was told no and that the fees would come from the mutual funds on the Fidelity platform (mutual funds will pay custodians like Schwab, TD Ameritrade, and Fidelity in order to get more access to financial advisors). When Robare entered the agreement with Fidelity however it wasn't even clear which funds were eligible for revenue sharing nor was Robare ever given a list of funds that were eligible for revenue sharing. Also given their agreement with Fidelity the advisors attested it wasn't even clear that they knew what funds paid what revenue sharing fees as the amounts would constantly change. Even when Robare asked Fidelity for a spreadsheet of the list of funds and the fees they paid he would testify it was "virtually unintelligible" and "too difficult" to determine what the fees were.
Robare in their 2005 ADV Part II (advisors must provide this to clients at least 48 hours before entering an agreement/contract) which can be found here it is added that that representatives of the firm "may receive selling compensation from such broker-dealer". It should further be pointed out that in their 2003 ADV (even before they entered the revenue sharing agreement) stated that representatives of the Robare sold products for sales commissions. Clearly Robare disclosed that some of the products they sell have sales commissions. Also clients are given this disclosure before they even enter the relationship with Robare they could question or ask Robare how this arrangement worked. Of course with the SEC no amount of disclosure can ever be enough. The SEC would bring their complaint against Robare in 2014 (10 years after Robare entered into the revenue sharing agreement!). In 2016 the SEC ordered Robare to pay a civil penalty of $150,000.
Robare in their 2005 ADV Part II (advisors must provide this to clients at least 48 hours before entering an agreement/contract) which can be found here it is added that that representatives of the firm "may receive selling compensation from such broker-dealer". It should further be pointed out that in their 2003 ADV (even before they entered the revenue sharing agreement) stated that representatives of the Robare sold products for sales commissions. Clearly Robare disclosed that some of the products they sell have sales commissions. Also clients are given this disclosure before they even enter the relationship with Robare they could question or ask Robare how this arrangement worked. Of course with the SEC no amount of disclosure can ever be enough. The SEC would bring their complaint against Robare in 2014 (10 years after Robare entered into the revenue sharing agreement!). In 2016 the SEC ordered Robare to pay a civil penalty of $150,000.
Now you might ask who was doing the compliance work for Robare? Robare had hired multiple compliance advisors to help him and his firm with complying the with Form ADV. What is ironic is even when Robare was audited for their Form ADV in 2008 the SEC didn't have any concerns (the SEC would letter testify that this was the best result a firm could receive). It should also be pointed out that Robare hired multiple different compliance firms who never found any issues with the Form ADV as well (and any changes the compliance firms recommended were implemented by Robare).
What is even more ridiculous is that clients before they even opened an account with Robare were told 7 times (page 36 if you want to see all the instances) of the possible conflicts of interest. I wonder if telling clients another 7 times would have changed anything. Triad who Robare initially used for the revenue sharing agreement even audited the ADV of Robare and didn't see any issues with it. Even the SEC testified that the firms should not include every possible conflict of interest since "it should be made understandable to the client".
Now let's get to the heart of what the SEC alleges. The SEC claims Section 206 (2) of the Investment Advisors Act of 1940 was violated by Robare. The Investment Advisors Act of 1940 under Section 206(1) and (2) say that "it is unlawful for any investment adviser..to employ any device, scheme, or artifice to defraud any client or prospective client or to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client". Clearly Robare was never trying to defraud his clients. In fact he often was looking out for their best interest by ensuring the funds clients purchased didn't have any transaction fees and the amount of revenue earned from the commissions were such a small amount of the overall business that no one could claim this was an influential factor. What did Robare tell clients that was factually untrue?
Clearly, the SEC overstepped in the Robare case as the company clearly never deceived clients. Looking back even before Robare entered their revenue sharing agreements they always disclosed they may receive commissions Also clients were informed of this in the forms they received and signed prior to entering a relationship with Robare. Furthermore, none of the 300 clients ever complained about this arrangement! Also even if Robare had disclosed more it wouldn't be beneficial to clients as Robare didn't even know what commissions they were receiving from Fidelity (as Robare asked Fidelity what the commissions were and didn't get a clear answer). The firm during the 2007-2008 financial crises moved funds for clients into funds that didn't provide a commission to Robare showing the firm was trying to do the right thing for clients. I would even have more sympathy if a client filled a complaint but there is no evidence that a client ever brought forth a compliant.
Mark Robare has been in the industry over 30 years, was knowledgeable amount financial planning and investments, never had a disciplinary action in his whole career, had a 97% client retention rate, and even a judge found Robare and his partner Jack Jones to be "honest and committed to meeting their disclosure requirements. Robare and his firm communicated to clients 7 times that the firm may have a conflict of interest, the firm covered they may have a conflict of interest even before they switched over to a revenue sharing agreement, and even Robare didn't understand the degree to which they were receiving revenue sharing fees from Fidelity. Even if Robare knew what fees they were receiving from different funds under the revenue sharing they wouldn't be able to place it in their ADV as the SEC testified the ADV has to be "digestible" and easy to understand for clients.
As a consequence of what the SEC deemed as deceiving clients for not fully disclosing conflicts of interests Robare will have a disciplinary action on his record that potential clients could find under BrokerCheck or by Googling his name. Not only would the firm loose future clients but may have existing clients start to doubt whether or not they should work with the firm (according to Robare the firm hasn't lost any clients). To add further insult to injury Mark Robare and his firm has faced legal bills that run $700,000. It is quite obvious that the SEC is trying to penalize someone for a problem that never existed or was brought forth by a client.
Mark Robare has been in the industry over 30 years, was knowledgeable amount financial planning and investments, never had a disciplinary action in his whole career, had a 97% client retention rate, and even a judge found Robare and his partner Jack Jones to be "honest and committed to meeting their disclosure requirements. Robare and his firm communicated to clients 7 times that the firm may have a conflict of interest, the firm covered they may have a conflict of interest even before they switched over to a revenue sharing agreement, and even Robare didn't understand the degree to which they were receiving revenue sharing fees from Fidelity. Even if Robare knew what fees they were receiving from different funds under the revenue sharing they wouldn't be able to place it in their ADV as the SEC testified the ADV has to be "digestible" and easy to understand for clients.
As a consequence of what the SEC deemed as deceiving clients for not fully disclosing conflicts of interests Robare will have a disciplinary action on his record that potential clients could find under BrokerCheck or by Googling his name. Not only would the firm loose future clients but may have existing clients start to doubt whether or not they should work with the firm (according to Robare the firm hasn't lost any clients). To add further insult to injury Mark Robare and his firm has faced legal bills that run $700,000. It is quite obvious that the SEC is trying to penalize someone for a problem that never existed or was brought forth by a client.
