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Top RIA Compliance Deficiencies: Fees

Posted by RIA in a Box

Oct 11, 2014 10:00:00 AM

In 2013, coordinated state exams conducted by members of the North American Securities Administration Association (NASAA) uncovered the top registered investment adviser (RIA) compliance deficiencies across 20 categories. Last week we discussed the top deficiencies in advertising, specifically in the website disclaimer, misuse of “RIA”, “IAR”, or other qualifications.

In this week’s installment we’ll cover another common RIA compliance deficiency category: Fees. The 2013 NASAA investment adviser examination report contains results from 1,130 state-registered investment advisory firms examined. In the fees category, of all RIA firms examined, 18.1% of audits noted at least one deficiency. This figure is slightly less than 2011’s NASAA investment adviser report findings, which noted fee-related deficiencies in 19.4% of firms reviewed.Download our free white paper: RIA Systems and Operational Best Practices

According to the 2013 report, 19.6% of firms with greater than $30 million in assets under management (AUM) had fee-related deficiencies, compared to 16.3% of investment advisory firms with less than $30 million in AUM. Around 20% of RIA firms examined for the first time had fee-related deficiencies compared to around 18% of firms that had previously been examined.

As previously stated, 18.1% of investment advisory firms examined according to the 2013 NASAA report had fee-related deficiencies. The top fee-related deficiencies in 2013 were:

  1. Fee charged doesn’t match contract or Form ADV (49.8%)
  2. Miscalculated fees/overcharging (11.9%)
  3. Unreasonable/Excessive fee (8.0%)
  4. Charging undisclosed fees (3.5%)
  5. Preferential fees (1.5%)

In 2011, the top fee-related compliance deficiencies were:

  1. Fee charged doesn’t match contract (~23%)
  2. Other/Charging undisclosed fees (~22%)
  3. Fee invoices (~16%)
  4. Fee doesn’t match Form ADV (~14%)
  5. Billing errors (~13%)

Although slightly down in frequency in 2013 compared to 2011, fee-related regulatory compliance deficiencies remain a regulatory focus. In particular, a significant number of RIA firms are charging fees that do not match what is stated on the client’s investment advisory contract or the firms Form ADV. As RIA compliance consultants, we encourage the Chief Compliance Officer (CCO) of each investment advisory firm to review the NASAA report and ensure the firm is calculating and charging fees as stated on the firms Form ADV and the relevant client contract. Unfortunately, even unintentional billing errors can lead to major problems for RIA firms.

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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.

Topics: RIA Compliance

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