Registered investment adviser (RIA) regulators at both the federal (SEC) and state levels are continuing to focus on proper client client fee billing as a regulatory examination focus area. According to the North American Securities Administration Association (NASAA) 2013 examination report, over 18% of state-registered RIA firms had at least one fees-related compliance deficiency.
As RIA compliance consultants, some of the most common client fee billing compliance issues that we observe are:
- Fee charged does not match what is specified in the client contract and/or Form ADV
- This is one of the core inspection areas of any RIA regulatory audit and a very common area for compliance issues. Has the Chief Compliance Officer (CCO) of the firm reviewed all client agreements to ensure that the client is actually being billed as stated? In addition, has the CCO reviewed the firm's fee schedule on the Form ADV Part 2A to ensure that no client is being billed more than the stated fee?
- Miscalculated fees
- Often when an RIA firm is using a more manual process such as Microsoft Excel to calculate client advisory fees, this is a common regulatory issue. Mistakes can range from an improper formula being utilized to basic human input error to not using the specified balances as stated in the client contract of Form ADV. For example, if the agreement states the client will be billed in arrears based on the ending balance on the last day of the quarter, is the firm using the proper date and balance to calculate the advisory fee? If the contract states that a group of accounts will be bundled together or excluded for billing purposes, is this bundling or exclusion taking place as agreed upon? Firms should also expect the calculation of performance fees to receive intense scrutiny.
- Excessive fees
- Regulators expect client fees to be reasonable. Some states have stated maximum advisory fees (or at least fee levels which require additional client disclosures) while many other states and the SEC do not have a stated maximum allowable fee. However, it's essential to remember that all RIA firms have a fiduciary duty to their clients. Just because a client has agreed to pay the fee does not mean that the fee may or may not be reasonable. In addition, are all the fees charged fully disclosed to the client?
- Billing invoices
- Many states require RIA firms to send separate billing invoices (in addition to the custodian statement) to clients when a fee is charged. This is an operational challenge that many new state-registered investment advisers underestimate. It's also important to remember that such invoices can only be sent electronically to clients if the advisory firm has proper electronic delivery authorization from the client.
As RIA compliance consultants, we continue to see an increasing number of investment adviser regulatory compliance issues related to fee billing. Some of our key recommendations are:
- Invest in the proper technology to help simplify and automate the client fee billing and invoicing process to improve operational efficiency and reduce errors. Our MyRIAOperations technology platform includes client fee calculation and invoicing as one of its key features.
- Review all client investment advisory contracts and the Form ADV to ensure that the actual fees being charged to clients match exactly what is stated and agreed upon as far as calculation method, frequency, time period, date of ending balance, etc.
- Look to simplify the client fee billing process by moving to a standard client fee schedule. Every time a new client fee schedule is introduced to the firm's operations, there is additional risk for error or oversight.
Lexington Compliance and RIA in a Box LLC are not law firms, investment advisory firms, or CPA firms. Lexington Compliance and RIA in a Box LLC do not provide legal advice or opinions to any party or client. You should always consult your relevant regulatory authorities or legal counsel if applicable.