Risk Alert: SEC finds RIAs Fee Calculations Harmful to Investors  

Registered Investment Advisors Fee Calculations found Lacking

According to a Risk Alert published by the SEC On November 10, 2021, the regulator’s Division of Examinations (formerly known as the OCIE) shared examiners’ observations regarding investment advisors’ fee calculations.  

The Division launched a national initiative that focused on advisory fees, predominantly those charged to retail clients, and determined that there were many deficiencies that frequently resulted in financial harm to customers.  The examiners reportedly conducted close to 130 examinations of SEC-registered investment advisors and found fee-related deficiencies at almost every Registered Investment Advisor (RIA) that they examined.   

What did the deficiencies mean for investors?  

1-Calculation errors, including over-billing advisory fees, inaccurate calculating of tiered or breakpoint fees, and errors stemming from incorrect “householding” of accounts;   

2-Not crediting certain fees owed, such as prepaid fees to be refunded when accounts were terminated or pro-rated fees when onboarding clients.  

The staff also found fee-related compliance and disclosure issues.   

Fiduciary Duty for Registered Investment Advisors  

Under the Investment Advisors Act of 1940 (Advisors Act), fiduciary duty was established for investment advisors.  

Advisors 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 Advisors Act, including its antifraud provisions.  

According to the Risk Alert, several examined advisors either did not refund prepaid fees on terminated accounts or did not pro-rate fees on new accounts. Some RIAs provided refunds to certain clients but not others or delayed refunding the unearned fees. Certain firms made it difficult for clients to request a refund by requiring unearned advisory fees in writing.  

More Observations by SEC Examiners  

While Registered Investment Advisors (RIAs) have an assorted range of advisory fee arrangements and use many different calculation methodologies, examiners observed that the typical advisor:  

• Had a standard fee schedule with tiered fee levels based upon assets under management 
• Assessed advisory fees quarterly 
• Deducted advisory fees directly from clients’ accounts 
• Calculated fees based on the account value at the beginning or end of the billing period 
• Relied upon third-party service providers or software to calculate fees 
• Documented advisory fees with client advisory agreements 
• Combined family account values where this practice results in lower fees (“householding” of accounts). 

Notable Fee-related Deficiencies   

Several advisors charged advisory fees inaccurately, according to the examiners. These inaccurate calculations were due to a variety of errors, including:  

• Inaccurate percentages were used to calculate advisory fees.  
• Advisory fees were double-billed.   
• Breakpoint or tiered billing rates were not correctly calculated.  
• “Householding” of client accounts were not correctly calculated.   
• Incorrect client account valuations were used  

  Many advisors that were examined either did not refund prepaid fees on terminated accounts or did not assess fees for new accounts on a pro-rata basis. The examiners found:  

• Inconsistently refunding unearned fees.  
• Requiring clients to provide written requests to refund unearned advisory fees. 

Misleading, False, Omitted Disclosures  

Advisors were found to have a range of fee-related disclosure issues, such as incomplete or misleading brochures such as the following:  

• Inconsistent or insufficient descriptions of cash flows and their effect on fees.  
• Inaccurate disclosures regarding the timing of their fee billing. In some cases, advisers disclosed that advisory fees would be billed in advance, but elected to have some or many clients billed in arrears (and vice versa).   
• Some advisers failed to disclose any information about the timing of advisory fee billing.  
• Some advisers provided inaccurate disclosures about the values used to calculate advisory fees, such as using the month end account values rather than the disclosed average daily account values.  

Inadequate Policies and Procedures  

Many of the advisers did not maintain written policies and procedures about advisory fee billing, monitoring of fee calculations and billing, or both, according to the Risk Alert. Some examples:  

• Examiners found that some advisors had generic policies and procedures that didn’t address specifics related to the processes for computing, billing, and testing advisory fees.  
• Some advisers had no policies for testing or monitoring fee calculations.  
• Some advisers’ policies and procedures were missing a variety of critical advisory fee components  

Issues with Financial Statements  

Finally, the staff reportedly observed issues or inaccuracies with financial statements at several examined advisers with respect to advisory fees. These issues included examined advisers in potential financial distress   

Free Consultation with a Securities Attorney   

According to the Risk Alert, it’s important for clients to receive timely and accurate information regarding fees and expenses when hiring an RIA because “every dollar an investor pays in fees and expenses is a dollar not invested for the investor’s benefit.”  

(To learn more see Registered Investment Advisor (RIA) – Securities Fraud Attorneys)   

 If you are concerned about your investments with your registered investment advisor (RIA) the securities attorneys at the White Law Group may be able to help you. For a free consultation with a securities attorney, please call the offices at 888-637-5510.  

The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Seattle, Washington.     

For more information on The White Law Group please visit https://whitesecuritieslaw.com.