No upstanding RIA firm sets out to erroneously charge clients. Yet faulty fees happen more than you might think. In late 2021, the Securities and Exchange Commission (SEC) published a “risk alert” after it uncovered a significant number of “deficiencies related to the advisory fees charged” in 130 random examinations of RIA firms. Here’s what you should know about this alert, and what actions you should take in response.
What types of fee errors did SEC examiners find?
The faulty fees uncovered by SEC examiners fell mostly into these two areas of concern: 1) fee calculation errors and 2) improper crediting of fees.
As you might imagine, fee calculation errors ranged from over billing to inaccurate calculations of breakpoint fees, the latter of which was largely due to accounts being incorrectly householded.
Improper crediting, or not paying money owed to clients, often involved prepaid account fees. For example: A client pre-paid Q1 fees on January 1 but closed the account in February—and the RIA failed to credit the remaining fees to the client.
SEC examiners also found RIAs charging fees that differed from the investment advisory agreement as well as instances of double billing and incorrect account valuations.
What will the SEC do now?
Within the alert, the SEC included a warning for RIA firms: Inappropriate practices related to fee billing may constitute violations of fiduciary duty as well as the antifraud provisions of the Advisors Act—both of which could result in steep fines or a sanction. It’s safe to assume the SEC will be taking a closer look at RIA firms’ advisory fees from now on.
What should you do?
If you haven’t already, consider reviewing your RIA firm’s fee billing practices as soon as possible. A fee review should be part of your routine—as should improving your billing practices as necessary. At Elevate, we understand how complicated fee billing can get. If you’d like to make sure your fee billing is accurate and streamline your practices, we’re here to help. Contact us today to learn more.