When it comes to Securities and Exchange Commission advisor examinations, the fees that advisors are charging clients on certain investments continue to top the list of red flags, commission officials said today.
Advisors should expect examiners to drill down into the fees they’re charging clients, the adequacy of their fee disclosures and how investment choices impact investors’ bottom lines.
Those insights came from current and former SEC officials during the 21st Annual IA Compliance conference in Washington, D.C., today.
“Every dollar an investor doesn’t get to leave in the market for compounding will hit their wallet,” said Dan Kahl, deputy director of the SEC Office of Compliance, Inspections and Examinations.
The SEC’s goal is to ensure that advisors are choosing the lowest-cost, most appropriate investments for investors, said Kahl. Advisors must clearly disclose any higher-cost investments they have chosen—or if their clients have legacy investments that are higher-priced than other options.
“This is an area where it is easy for us to test, run spreadsheets and come up with deltas that show us where clients are being overcharged,” said Kahl. When overcharges are found, SEC examiners will “expect you to make clients whole,” he added.
It is critical for advisors to ensure that they’re following client agreement contracts regarding their billing and controls “because if we’re there, we’ll do audit work ourselves,” Kahl said.
Voluntary Settlement Program
Despite more than a year of publicity, the SEC is continuing to see problems with firms still using higher-cost mutual fund share classes when less expensive shares are available, often without disclosing the less pricey options to clients, the SEC official said. This is despite the agency’s voluntary share class settlement program, which allowed firms to self-report transgressions to the SEC and make clients whole in exchange for an elimination in penalties.
“We allowed firms to come in and ’fess up, but we’ll continue to be looking at whether you’re disclosing this or not,” said Kahl.