Avoiding Conflicts of Interest: Compliance Best Practices for RIAs

Avoiding Conflicts of Interest: Compliance Best Practices for RIAs

As Registered Investment Advisers (RIAs), maintaining the highest ethical standards is critical to building trust and ensuring compliance with regulatory requirements. One of the most scrutinized areas of compliance is the management and disclosure of conflicts of interest. The SEC and state regulators expect RIAs to identify, disclose, and mitigate conflicts effectively. Here’s how RIAs can stay compliant and uphold their fiduciary duty to clients.

What is a Conflict of Interest?

A conflict of interest occurs when an RIA’s personal or business interests could interfere with their duty to act in the best interests of their clients. These conflicts may arise in various forms, including:

• Compensation-based Conflicts – Earning commissions, referral fees, or revenue-sharing arrangements that could incentivize recommendations not aligned with a client’s best interests.

• Affiliated Services – Directing clients to products, services, or custodians in which the RIA has a financial stake.

• Soft Dollar Arrangements – Receiving research, software, or perks from broker-dealers in exchange for directing trades.

• Personal Trading Conflicts – RIAs or employees trading securities ahead of client orders (front-running) or in a manner that conflicts with client interests.

Best Practices for Avoiding and Managing Conflicts

1. Conduct a Conflict Assessment

RIAs should proactively review all aspects of their business to identify potential conflicts. Ask:

• Do we receive any indirect or direct compensation from third parties?

• Are we recommending proprietary products or affiliated services?

• Could our trading practices disadvantage clients?

Conducting regular compliance reviews will help identify new conflicts as the business evolves.

2. Fully Disclose Conflicts in Form ADV

The SEC requires RIAs to disclose conflicts of interest in Form ADV, Part 2A (Brochure). Ensure disclosures:

• Clearly describe conflicts in simple language.

• Explain how the firm mitigates or manages these conflicts.

• Are updated at least annually or whenever material changes occur.

3. Implement Policies to Mitigate Conflicts

Regulators don’t just want disclosure—they expect firms to actively mitigate conflicts. RIAs should:

• Adopt a Code of Ethics outlining ethical standards and conflict management policies.

• Use Best Execution Practices to ensure clients receive the most favorable trade execution.

• Limit or eliminate third-party incentives that could bias investment advice.

• Monitor Employee Personal Trading through pre-clearance procedures and restrictions.

4. Establish a Compliance Culture

A strong compliance culture starts at the top. RIAs should:

• Conduct annual compliance training on conflicts of interest.

• Designate a Chief Compliance Officer (CCO) responsible for monitoring and enforcing conflict policies.

• Encourage transparent communication with clients about potential conflicts.

5. Regularly Review and Update Policies

RIAs must ensure conflict management practices evolve with regulatory changes and business growth.

• Conduct annual compliance audits to assess conflict disclosures and mitigation strategies.

• Monitor SEC enforcement actions to learn from industry best practices and failures.

Final Thoughts

Avoiding conflicts of interest is more than just a compliance requirement—it’s a core part of an RIA’s fiduciary duty. By proactively identifying, disclosing, and mitigating conflicts, RIAs can maintain client trust and stay ahead of regulatory scrutiny.

By implementing these best practices, your firm can ensure ethical and compliant operations while reinforcing your commitment to acting in your clients’ best interests.

Need help refining your conflict of interest policies? Reach out to RIA Compliance Concepts.