RISK ALERT – Why the SEC is Watching Fees

The Securities and Exchange Commission (SEC) has alerted that client fees are a key area of focus regarding compliance scrunity. Financial advisers are encouraged to regularly audit their practices, policies, and procedures to ensure they meet regulatory standards. Unfortunately, with complicated traditional billing practices, this area is fraught with risks that can significantly impact both client trust and compliance status.

What are the Key Areas that Put You at Risk?

1. Incorrect Account Valuations

Because advisers generally assess fees as a percentage of the value of assets they manage in each client’s account, an incorrect account valuation will lead to an incorrect advisory fee being assessed to that client.

2. Discrepancies in Account Valuation Processes

For example, using the market value of the account’s assets at the end of the billing cycle, instead of using the average daily balance of that account over the entire billing cycle as specified in the advisory agreement

3. Inappropriate Billing Cycles and Advance Fees

Including billing advisory fees on a monthly basis, instead of on a quarterly basis as stated in the advisory agreement and billing a new client for advisory fees in advance for an entire billing cycle, instead of pro-rating such charges to reflect that the advisory services began mid-billing cycle.

4. Application of Incorrect Fee Rates

OCIE staff has observed advisers that applied an incorrect fee rate when calculating the advisory fees charged to certain clients including applying a rate higher than what was agreed upon or double-billing clients.

5. Mismanagement of Rebates and Discounts

Advisors did not aggregate client account values for members of the same household for fee-billing purposes, did not reduce a client’s fee rate when the value of that client’s account reached a prearranged breakpoint level and charged a client additional fees, such as brokerage fees, incorrectly.

5. Inadequate Fee Disclosure Practices

Fee disclosure is key to compliance – all fees and how they are calculated, including the order of calculation, should be disclosed to the client.