“Every dollar an investor pays in fees and expenses is a dollar not invested for the investor’s benefit.” This obvious, yet impactful statement set the stage for the SEC’s latest Risk Alert, which shared results from a recent examination of 130 SEC-registered investment advisors. The examination focused on advisory fees charged to retail clients and assessed the ways in which investment advisers charge fees for their services, as well as evaluated the adequacy of fee disclosures and the accuracy of fee calculations.
The examination, which has been termed, the “Advisory Fees Initiative” (or “Initiative”), reviewed adviser’s compliance policies, procedures, and practices related to advisory or other fees charged and the related disclosures provided to retail clients. More specifically, examiners focused on the following areas:
- The accuracy of fees charged by the examined advisers;
- The accuracy and adequacy of the examined advisers’ disclosures; and
- The effectiveness of the examined advisers’ compliance programs and accuracy of their books and records.
The exam sweep yielded several notable deficient practices committed by the examined firms. These deficiencies fell under one of four categories: Advisory Fee Calculations, False, Misleading or Omitted Disclosures, Missing or Inadequate Policies and Procedures, and Inaccurate Financial Statements. Some of the most notable deficiencies found include:
- Changing advisory fees inaccurately;
- Not refunding prepaid fees on terminated accounts or not assessing fees for new accounts on a pro-rata basis;
- Having a range of disclosure issues;
- Lacking written policies and procedures addressing fee billing, monitoring of fee calculations and billing, or both; and
- Issues or inaccuracies with financial statements, with respect to advisory fees.
Since firms often have varying policies, procedures, and practices designed to address their legal and regulatory obligations, the SEC’s Risk Alert concluded with several takeaways that can be applied to any firm structure. The SEC encourages investment advisors to:
- Adopt and implement written policies and procedures addressing advisory fee billing processes and validating fee calculations;
- Centralize the fee billing process and validate that the fees charged to clients are consistent with compliance procedures, advisory contracts, and disclosures;
- Ensure resources and tools established for reviewing fee calculations are utilized; and
- Properly record all advisory expenses and fees assessed to and received from clients, including those paid directly to advisory personnel.
As fee calculation and billing continues to catch the eye of regulators, the Division encourages advisors to routinely review and adjust their fee billing policies, procedures, and practices and address new risks as they arise. Additionally, advisors should continue to review their disclosures regarding such practices to ensure that clients are provided full transparency on all fees and expenses and related material conflicts of interest.
To review the official Risk Alert released by the SEC’s Division of Examination, click here.