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US SEC building in Washington, D.C., 2008 Chip Somodevilla/Getty Images
US SEC building in Washington, D.C., 2008

SEC: RIAs Often Mischarge Clients

A new alert from the commission’s Division of Examinations found that many RIAs are miscalculating fees and often overcharging clients, risking enforcement actions.

Advisors are too often overcharging clients by miscalculating their fees, according to a new risk alert released for the Securities and Exchange Commission’s Division of Examinations (DOE), which observed an array of fee-related deficiencies during an analysis of about 130 registrants.

According to the risk alert from earlier this week, examiners found many instances when miscalculating fees resulted in harm to clients, including instances of overbilling or when advisors failed to combine family account values in such a way that should result in lower fees (known as “householding” accounts).

“Advisers that fail to adhere to the terms of their agreement and disclosures, or otherwise engage in inappropriate fee billing and expense practices, may violate their fiduciary duties and the Advisers Act, including its antifraud provisions,” examiners warned in the alert.

The risk alert followed a national initiative conducted by the DOE focusing on advisory fees charged to retail clients, looking at both advisors’ accuracy in fee calculations as well as the level and quality of disclosures. The division previously released a risk alert on compliance issues related to advisory fees in 2018 and urged advisors to consider the two alerts in tandem.

While advisors employ a wide array of fee arrangements, examiners found that they typically had a standard fee schedule with tiered levels based on AUM, charged quarterly, and that they deducted fees directly from clients’ accounts and calculated those fees based on the account value at either the start or the end of the billing period; most use software or third-party vendors to calculate the fees. 

But examiners found advisors often used an incorrect fee schedule, sometimes failing to convert clients into new or revised arrangements. They also found instances of manual errors when calculating fee percentages. Sometimes, clients were double billed or billed at a higher tier than their asset level stipulated. In some cases, advisors didn’t refund prepaid fees when accounts were terminated or inconsistently refunded unearned fees.

“The examined advisers were obligated—by disclosures, advisory contracts or both—to refund unearned advisory fees, but the examined advisers were inconsistent in providing refunds to clients...or were unnecessarily delayed in providing such refunds, sometimes for several years post termination,” the alert read.

Exam staff also felt advisors fell short on fee disclosures in their Form ADV Part 2 brochures, in some cases failing to show how current fees were charged (and whether they were negotiable) and not describing how fees were determined. In some instances, the clients’ fees were inconsistent from document to document. Additionally, exam staff found that advisors did not have written procedures outlining how fees were billed and calculated, despite some advisors having informal or unwritten policies and procedures related to billing.

Firms with written policies in place had fewer errors, according to the SEC analysis. Fee calculations should be reviewed, records kept and the billing process centralized, the SEC recommended.

“The staff observed that the examined advisers with centralized billing—rather than billing that was dispersed throughout the adviser with separated, supervised persons preparing and invoicing client billing statements—had fewer clients being billed incorrectly or clients’ accounts being calculated inconsistent with the advisers’ written policies and procedures,” the alert read.


TAGS: Industry
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