Investors might focus on their advisors’ performance, but the Securities and Exchange Commission is focusing on fees—specifically improper advisory fees and expense transgressions that eat away at investors’ balances.

In a risk alert on the $82 trillion industry’s advisory fee transgressions released Thursday, the SEC detailed the most frequent advisory fee and expense compliance issues examiners are finding during inspections. The offenses have also been the most often identified in deficiency letters SEC staff have sent to advisor firms, the SEC said.

The key takeaway? “Advisors should review their practices, policies and procedures to ensure compliance with their advisory agreements and representations to clients in light of the fee and expense issues noted in this risk alert,” the SEC said.

The agency is also encouraging firms to do internal testing, correct practices and proactively reimburse clients for incorrect fees and expenses they identify.

“We need to partner with you to fight the good fight,” said Peter Driscoll, director of the SEC's Office of Compliance Inspections and Examinations (National Exam Program), which is examining approximately 15 percent of advisor firms in 2018, up from 11 percent last year.

“If we can get you to address some of the most common findings in the risk alert, think of how smoothly exams would go,” Driscoll said at the SEC’s Compliance Outreach Program in Washington, D.C.

Top fee improprieties found by SEC examiners include:
• Billing advisory fees based on incorrect account valuations, which result in clients being overbilled.
• Valuing assets and calculating fees using different metrics than stated in clients’ advisory agreements. Examiners found firms billing to manage client cash, cash equivalents, alternative investments and variable annuities, when these assets were to be excluded from fees.
• Billing fees in advance or with improper frequency, such as monthly rather than quarterly. Examiners also found firms that billed for entire billing cycles instead of pro-rating fees to reflect that advisory services began mid-billing cycle. They also found failure to refund advisory fees after clients left, despite promising to do so in Form ADV Part 2.
• Applying incorrect fee rates, including a rate higher than agreed upon in the advisory agreement, double-billing and charging non-qualified clients performance fees on capital gains.
• Omitting rebates and discounts, including failure to aggregate client account values for members of the same household for billing purposes and reducing fees when prearranged breakpoints are reached.
• Charging clients in advisor wrap-fee programs additional fees when the account qualified for a bundled fee program.

The SEC continues to advise advisor firms to correct and self-report mutual fund share class errors, when there are less expensive fund shares available. The SEC’s Share Class Selection Disclosure Initiative (https://www.sec.gov/news/press-release/2018-15) gives eligible advisors until June 12 to self-report misconduct and take advantage of the SEC Enforcement Division’s willingness to recommend more favorable settlement terms, including no civil penalties against the advisor.

“Should we find out about it after June 12, there will be charges and remedies,” C. Dabney O’Riordan, co-chief of the SEC’s Division of Enforcement in the LA Regional Office, said at the SEC conference. “Firms could cross their fingers and hope we don’t find them. But there is always a chance we’ll discover the problem or get a tip from another source.” 

Earlier this month, PNC, Securities America Advisors and Geneos settled fund share violations brought by the SEC and were fined $15 million, with $12 million going to clients. The advisor firms violated best execution rules by investing advisory clients in higher-cost mutual fund shares when lower-cost shares of the same funds were available, the SEC alleged.