The Securities and Exchange Commission has sounded the alarm about the risks associated with wrap fee programs and is urging financial advisors who participate in them to implement policies to address the concerns.

The SEC’s Division of Examinations assessed more than 100 advisors and broker-dealers using wrap fee programs and found frequent deficiencies in areas including the tracking and monitoring of the programs and disclosures about conflicts, fees and expenses, according to an alert issued by the agency.

The agency said it is scrutinizing wrap fee programs because they are attracting more investor assets and have a history of issues for conflicts and disclosures.

Clients in wrap fee programs pay an asset-based “wrap fee” that covers investment advice and brokerage services. The wrap fee is generally based on a percentage of the value of the client’s account in the wrap fee program, the SEC said.

In its observations, the SEC said it found cases where advisors’ recommendations for clients to participate in wrap fee programs were not made in the clients’ best interests. Also, clients’ wrap accounts were not monitored, or the monitoring was ineffective, the report said.

“The most common duty-of-care issue was the examined advisors’ failure to monitor for ‘trading-away’ from the broker-dealers providing bundled brokerage services to the wrap fee programs and the associated costs of such trading-away practices,” the report said. “In these instances, the advisors were purportedly providing ongoing monitoring services and continued to recommend the wrap fee programs to clients, but did not consider that the clients may have incurred transaction costs in addition to paying the bundled wrap fees.”

In addition, the report found that clients with low trading activity could be paying higher fees and costs than they would in non-wrap-fee accounts.

SEC staff also found that advisors routinely recommended the wrap fee programs without assessing whether the programs were in the best interests of clients, the regulator said. Advisors’ ongoing assessments of clients were rendered inadequate because the reviews only considered a small sample of client accounts, the agency said.

Furthermore, the report found cases of wrap fees not being fully disclosed in firms’ brochures, as well as the firms’ failure to explain that clients are responsible for both advisory and brokerage fees, the SEC said. There were also instances of overbilling because “disclosed house-holding discounts and other rebates such as 12b-1 fees on clients’ fee billing statements were not applied,” the report said.

Many of the advisors’ disclosures pertaining mainly to conflicts of interest, fees and expenses were inadequate or omitted, the report said, adding that disclosures were inconsistent in documents such as advisor ADV brochures, advisory agreements and other account documents and agreements for wrap fee clients.

As for compliance, the staff found that policies and procedures relating to wrap fee programs were ineffective. “Also, in some instances, advisors did not comply with their own policies and procedures, and a few advisors did not comply with the annual review and other provisions of the compliance rule,” the report said.

Wrap fee program advisors also lacked written compliance policies and procedures for key business functions and risk areas, according to the SEC. “In some instances, the wrap fee advisors had no compliance policies or procedures that addressed the risk applicable to recommending and managing client participation in wrap fee programs, despite providing advisory services to such programs,” the report said.

SEC staff found that advisors either did not perform required annual compliance reviews or performed them inadequately.