Avoid These Common Advisory Fee Billing Mistakes

Avoid These Common Advisory Fee Billing Mistakes - Elevate CPA Group

The Securities and Exchange Commission (SEC) has long paid attention to what RIA firms are charging their clients. Recently, the agency announced it will take an even closer look at advisory fee billings, among other business practices, in its mission of rooting out inaccuracies. This makes now a great time to review your RIA firm’s advisory fee billings for mistakes. But an advisory fee review can be a complicated process. Not only must your billing software inputs be accurate—they must also match the disclosures you’ve made to clients.

Keep in mind inaccurate billings aren’t detrimental only to your clients but will pose a major problem with the SEC as well. What’s more, if you’re undercharging clients, you could lose out on revenue, too.

To help you check for inaccuracies in your RIA firm’s advisory fees, here are the three most common advisory fee billing mistakes we see.

Advisory Fee Calculation Errors

In many cases, advisory fee billing inaccuracies can be traced to a simple calculation error. Yet some result from a failure to exclude certain holdings, such as long-term stock or even cash accounts, from fee calculations. To ensure you’re including the right accounts in your fee calculations, reviewing your clients’ investment management agreements side-by-side with their billing statements is a good place to start.

Inaccurate Calculations of Tiered Fees

Things can get tricky when you’re dealing with tiered fees. Say your client has an account with $1 million in assets. The client adds $500,000 to the account, which, per the investment management agreement, should trigger a breakpoint discount. This will likely require you to manually change the fee within your firm’s billing software. If you neglect to do so, your client would be overcharged.

Failure to Refund Prepaid Fees for Terminated Accounts

Most advisory fees are charged at the beginning of a quarter; clients are billed in advance for the next three months. Clients who leave before the billing period is up, however, must be reimbursed. This can easily be missed. For example, if you charge a client $2,500 in quarterly advisory fees on January 1 and the client decides to leave on February 1, you must reimburse the client for February and March.

The same is true for when a client passes away. In one case study I read, a husband and wife had separate accounts that were managed by the same advisor. When the husband passed away, his assets transferred to his wife at the date of his death, but the firm didn’t transfer the associated fees. This caused the firm to miss out on nearly $1,500 in fees.

Make Sure You’re Getting it Right

Ensuring your advisory fees are correct is critical to protecting the trust you’ve built with your clients. It can also keep you from leaving money on the table or incurring an SEC sanction. Ideally, you should complete a fee review each quarter to make sure everything adds up correctly. If you don’t have a staff member who can do this, Elevate can help. Contact us today to learn more.