On November 19, 2018, the Securities and Exchange Commission ("SEC") Division of Enforcement announced that it settled claims with a registered investment adviser ("RIA") firm "that it charged more than 290 client accounts higher advisory fees than those in its fee schedule. According to the SEC release, like many advisory firms in the industry, this RIA firm charged clients advisory fees calculated based on a percentage of the assets under management ("AUM"). The firm's fee schedule included a series of “breakpoints” that reduced advisory fees charged to a client as the total amount of that client's AUM increased. The fee schedule was incorporated and disclosed in the firm's client advisory agreements, distributed as a separate document by client request, and disclosed on the firm's Form ADV Part 2A. The SEC order found that from early 2010 to early 2018, the advisory firm inconsistently applied the advisory fee "breakpoint" discounts. As a result of this issue, the firm "overcharged more than 290 client accounts during that period by assessing approximately $304,000 in excess advisory fees."
This particular enforcement case is relevant to RIA firms of all sizes that charge client advisory fees based on the client's AUM with "breakpoints" that reduce the total advisory fee when the client's AUM increases.