If your firm is charging advisory fees without providing ongoing advice to so-called orphan accounts, you can expect scrutiny from Securities and Exchange Commission examiners and maybe even an enforcement proceeding.

Just ask $1.9-billion, Michigan-based Regal Investment Advisors and its two principles, who were hit with nearly $1 million in fines in September after SEC examiners found that 81 of the firm’s orphaned clients (those left behind when advisors depart the firm) were still being charged ongoing advisory fees, but not receiving advice.

The SEC’s case against Regal alleged the firm and its partners, John Kailuna and Brian Yarch, with “improperly charging $85,432 in advisory fees to client accounts for which Regal failed to provide advisory services after the departure of the assigned IARs.” The firm and both its partners settled the charges, without admitting or denying guilt.

Making sure your firm is notifying and servicing orphaned accounts “should definitely be a priority for RIA firms,” Max Schatzow, a partner in the law firm of Stark and Stark, told Financial Advisor magazine. “I’ve seen this issue come up in SEC exams for years, but this is the first time I’ve seen it become an enforcement action.”

Ever since the Department of Labor started to roll out its fiduciary rule in 2016, the brokerage business has been forced to address the issue of small, incidental clients. The $8 trillion RIA industry has always dealt with orphaned clients—small accounts and those unassigned accounts left behind when an advisor departs, retires or dies—but now because of its soaring growth and regime change at the SEC, investment advisors appear to have a bigger target on their back.

“Every firm should have a process in place to make sure clients don’t slip through the cracks when an advisor leaves or passes away,” Schatzow said. That should include notifying clients that their advisor has departed and that either they’ve been assigned a new advisor or that the firm is referring them to another firm if they don’t meet asset minimums.

The level of ongoing advice a client can expect “is a contractual matter between an advisor and the client, as long as the client has consented to it,” he said. If a client is on track and doing great, an advisor may not need to reach out.

“But if the client agreement says, ‘we’ll have an annual meeting and do financial planning every year,’ that’s what the firm needs to provide and that’s what the SEC will expect you to do,” he added.

The stakes get even higher if there is a market downturn and the client experiences losses while an advisor is AWOL, Schatzow said.

Beyond SEC enforcement, if the losses are high enough a plaintiff’s attorney may also step in to recover investor losses, he said.

“Any time there are substantial losses, you always hear about claims and one of those claims is ‘you neglected me, you breached our client agreement and I have losses in my portfolio because you failed to contact me,'” Schatzow said.

He said he thinks the SEC was aggressive with Regal because its two principles were involved. In addition to the partners agreeing to pay $945,000 to settle charges that included charging client fees for advisory services that were never rendered, Yarch was barred from serving as a compliance officer for any financial company for three years.

Regal did not respond to a request for comment by the time of publication.

The SEC’s case against Regal offers insight into what what firms should try to correct if they aren’t living up to the letter of their client agreement with orphan clients.

The regulator alleged that between July 2015 and April 2021, Regal improperly charged $85,432 in advisory fees to client accounts, yet did not provide advisory services after the assigned advisors left the firm.

It was standard practice at Regal to reassign orphaned clients to Kailunas and Yarch, who were, respectively, the CEO with an 80% stake in the firm and chief compliance officer with an 18% stake. Such clients were considered “house accounts,” the SEC said.

The SEC filing also asserts that Regal failed to adopt and implement written policies and procedures to deal with the management of house accounts and the disclosure of conflicts of interest.

The firm’s Form ADV, however, promised that Regal clients would receive “continuous and focused investment advice,” that the accounts “are reviewed regularly by your account representative,” and that the reviews would “ensure that the advisory services provided to you and the portfolio mix is consistent with your current investment needs and objectives,” the SEC said.

From July 2015 to April 2021, Regal allegedly classified about 250 accounts as house accounts, and Kailunas and Yarch received compensation from the advisory fees charged on them, the SEC said.

Some of their orphaned clients received varying levels of advisory services, but 81 clients received none at all, yet Regal continued to charge advisory fees on all accounts regardless of the level of service, the SEC said, adding that many clients weren’t notified their original advisor had left the firm and that Kailunas and Yarch had taken over their accounts.

Even though Regal did adopt a policy in November 2019 that required it to notify clients who remained at the firm for 90 days following the departure of their advisor and to not charge advisory fees during that 90-day transition period, the filing says the policy was applied haphazardly, with at least three departures going unnotified—one for six months, one for 11 months and one for a year after the advisors left.

Regal also failed to disclose to its clients that it had financial and managerial interests in Durand Capital Partners, a portfolio management company recommended to Regal clients by Regal advisors, the SEC said.