After completing an examination of 130 registered investment advisors, the SEC this week issued a warning that advisors may be violating their fiduciary duties and securities laws because of errors in fee calculations.
The warning came in the form of a risk alert that was a follow-up to a 2018 investigation into the most frequent advisory fee and expense compliance issues.
“Every dollar an investor pays in fees and expenses is a dollar not invested for the investor’s benefit,” the alert stated. “The staff conducted approximately 130 examinations of SEC-registered investment advisers under this initiative and identified deficiencies related to the advisory fees charged during most of these examinations.”
The two most common deficiencies were advisory fee calculation errors (over-billing, inaccurate calculations of tiered or breakpoint fees and inaccurate calculations due to incorrect householding of accounts) and not crediting fees due to clients (prepaid fees for terminated accounts and pro-rated fees for onboarding clients).
“Advisers 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 [Investment] Advisers Act, including its antifraud provisions,” the alert stated.
All of the advisors examined by the SEC provided investment advice to retail clients and had a wide range of assets under management, business operations, staffing levels and affiliations, the SEC said. The review specifically looked at compliance policies, procedures and practices related to fee calculation and disclosure to clients.
The inaccuracies in billed fees were due to a variety of errors, including inaccurate percentages used in the calculation, fees being double-billed, breakpoint or tiered billing rates not being applied correctly or at all, and using incorrect client account valuations, according to the alert. In addition, advisors were inconsistently refunding unearned fees or requiring clients to provide written requests for refunds of those unearned fees.
It also became clear advisory firms were failing in their fee disclosures to clients, the alert said, detailing the areas of most concern as cash flows and their effects on fees; timing of advisory fee billing; valuations for fee calculations; and minimum fees, extra fees and discounts. In addition, firms lacked written policies and procedures addressing fee billing and monitoring, and issued inaccurate financial statements, the SEC said.