SEC Risk Alert: Widespread Problems with Advisor Fees

“Advisory fee-related deficiencies” often result in financial harm to clients, according to the SEC.

According to a Risk Alert posted on November 10, 2021, the Securities and Exchange Commission says it has found widespread problems with how registered investment advisor firms charge advisory fees. 

After the regulator’s Division of Examination reportedly conducted close to 130 exams of Registered Investment Advisors (RIAs), it found “deficiencies related to the advisory fees charged,” according to the risk alert. 

The SEC says that examiners found two main areas of concern: fee calculation errors, such as over-billing, inaccurate calculations of tiered or breakpoint fees, and inaccurate calculations arising from incorrect house-holding of account; and failure to credit certain fees the clients are owed, such as prepaid fees for closed accounts or pro-rated fees for onboarding clients. 

For example, examiners reportedly found instances of advisors charging fees that were different from those that were contractually agreed to, using incorrect fee schedules and making errors in calculating fee percentages manually entered into their systems, according to the SEC. 

Double-billing, incorrect account valuation, inconsistent refunding of unearned fees and RIA firms requiring clients to submit written requests for refunds of unearned fees were also found, the regulator said. 

There were also several firms that were found to have disclosure deficiencies related to fees, such as not reflecting their current fees in their Form ADV Part 2 brochures, failing to outline a variety of other fee-related topics or the fees themselves, and failing to accurately describe how the fees are calculated and billed, as well as errors in disclosing the timing of the fee billing, according to the SEC. 

The examiners also found instances of inadequate or missing policies and procedures in regard to fee calculation and billing and inaccurate financial statements, according to the risk alert. 

The Division encouraged advisers to “review routinely, refine, and improve, as appropriate, their fee billing policies, procedures, and practices and address new risks as they are identified.” The regulator further warned that “inappropriate fee billing and expense practices,” may constitute a violation of RIA firms’ fiduciary duty and the antifraud provisions of the Advisors Act.  

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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 and its representation of investors in FINRA arbitration claims, visit https://whitesecuritieslaw.com. 

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