Switching clients from different business models can be good for the clients. Of course, it can also be very lucrative to switch models for the adviser and bad for the clients.
Unfortunately, for the clients for Michael DeRosa when he joined One Oak it was bad for his clients. According to the SEC order, Mr. DeRosa moved over from a broker-dealer to One Oak as an investment adviser representative. He reached out to his clients and the firm did a poor job of onboarding them.
Mr. DeRosa failed to deliver a new fee schedule to all of his clients. In some cases he provided an investment management agreement without a fee schedule attached. In several other instances, he failed to even provide the agreement. One Oak’s compliance manual required a complete agreement before providing services and charging a fee.
They failed to deliver the Form ADV Part 2A brochure to all of the transitioning clients. That’s required by Rule 204-3.
The biggest failure was that the clients mostly ended paying more in fees. As brokerage accounts, DeRosa earned commissions on trades. On average the accounts only had a handful of trades each year. As advisory accounts, the clients were paying a percentage fee on the assets under management. According to the Order, the average increase in fee load was 7X. There was no increase in the trading activity for the accounts.
The biggest news about this case is that is the first under Acting Chair Uyeda, straight down the middle, protecting retail investors.
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