Many RIAs look to tackle operational projects during the summer months, when inbound client requests inevitably slow down due to travel plans and family vacations. With one more month left in the summer season, now is the perfect time to audit your firm’s fees—comparing the ones listed on client agreements with those loaded in your billing software. Unfortunately, it’s quite common for an advisor to get a new investment advisory agreement signed by a client, but forget to pass the new agreement to the operations or finance team in charge of updating the billing software, resulting in a currently-executed client agreement indicating a new fee of 50 basis points, for example, but the billing software still reflecting the old fee of 75 basis points. Without a regularly-scheduled audit, the fee discrepancy between agreement and billing software could go unnoticed for years. Further, the client could catch the discrepancy while reviewing their invoice and bring it to the attention of the advisor—never a comfortable conversation. The summer slowdown is the perfect time of year to conduct such an audit.
A summer intern could help locate each IAA on file for every client. Once found, someone in Operations or Compliance should take the time to verify all individuals related to the entity covered by the contract have signed in the proper place, as well as the counter signature of the advisor or other designated signatory representing the RIA. It’s also important to verify the agreement on file is the most recent version of the firm’s IAA, as many RIAs update language in their agreements, change standard fee schedules, impose or change the firm’s stated minimum fee, or even change billing methodology over time. Lastly, someone will need to verify the data in the billing software matches the current version of the IAA signed by the client—noting not only the fee itself, but the methodology applied to the fee (billing in advance/billing in arrears, for example) and any minimum fee, if applicable.
An audit of this magnitude can be a daunting task, and will require proper documentation throughout the process: Which clients need to sign an updated agreement? Which fees need to be adjusted in the billing software to match the executed IAA and need to be retroactively credited to clients who were inadvertently over-billed starting on the date the new contract was signed but the billing software was not updated? If you discover you have been under billing over a period of time, will you debit the client’s accounts for the missed revenue? Members of operations, compliance, client service and the firm’s management team will need to be involved in these conversations, reviewing the documentation of audit results together. Finally, once each discrepancy has been addressed, it is incumbent on the operations or finance team to ensure all records are updated accordingly, and proper training and process-development must take place to prevent such discrepancies from occurring in the future.
If your team determines that there simply isn’t enough time left this summer to conduct a thorough audit of all contracts, at a minimum, you should embark on a random sampling style audit, where you pull 20–30 random IAAs and compare the details of those contracts to the information housed in the billing software. This type of audit is how the SEC would conduct a review of your firm’s billing methodology and accuracy during a routine exam. Should any discrepancies present themselves during this random sampling, be sure to adjust those affected accounts accordingly, and schedule a more comprehensive audit of all remaining contracts as soon as possible.
When interviewing him as part of the compliance course inside The COO Society, attorney Andrew Melnick of Murphy & McGonigle (now Davis Wright Tremaine) advised our members to complete a random sampling audit “at least annually” and to be sure to review a select set of accounts “across the spectrum of types of accounts managed by the RIA.”
Beyond identifying discrepancies between IAAs and billing software, the fee audit process allows RIAs to review fees across clients and identify opportunities to raise fees for those clients who have been too heavily discounted in relation to the number of services they are utilizing from the firm. The billing audit process will bring these fee rates front and center and prevent advisors from saying, “I had no idea Mr. Jones’ fee was so low.” This process provides an intimate knowledge of one’s client base and a power over the profitability of each client relationship. Completing this audit by year-end can assist in guiding conversations during client annual reviews, specifically around any updates needed with client agreements or more difficult conversations around fee discrepancies or the elimination/reduction of fee discounts for certain clients.
No one is claiming this fee audit process is easy. It requires locating every client contract—some of which may have been signed decades ago—and verifying every record embedded in your billing software. As discussed, this process will involve multiple people at all levels of your organization. I’m sure there are more fun ways to spend the final month of summer, but these action items present a powerful opportunity for your RIA to not only correct any billing errors that have occurred, but also confirm your firm’s commitment to clients and the transparency in which you handle their financial lives.
Matt Sonnen is Chief Operating Officer at Coldstream Wealth Management, as well as the creator of the digital consulting platform The COO Society, which educates RIA owners and operations professionals how to build more impactful and profitable enterprises. He is also the host of the popular COO Roundtable podcast.