It’s important for RIAs of all sizes to stay up to date with rules, regulations, and regulatory bulletins, such as risk alerts, to remain in compliance with all business operations, like billing practices.
We recommend that your firm’s Chief Compliance Officer (“CCO”) and all advisory firm principals carefully review the latest regulatory guidance in conjunction with your organization’s current practices and make adjustments accordingly.
Billing is a common focus for regulatory exams, and has been a rising concern for the SEC in recent years. In November 2021, the regulatory organization released a risk alert that outlined recent findings from the Advisory Fees Initiative examinations, which outlined results from 130 different firms regarding their billing policies, procedures, and practices.
Some of the consistent issues the risk alert noted include:
- Inaccurate advisory fee calculations – Common deficiencies in this arena related to inaccurate percentages used in fee calculations, double-billing for advisory fees, incorrect or lack of follow-through with breakpoint or tiered fee schedules, and incorrect client valuations.
- False, misleading, or omitted disclosures – Disclosure issues often related to incomplete or misleading Form ADV Part 2 brochures. Advisors had insufficient disclosures regarding how cash flow changes impact advisory fees, as well as incorrect information regarding the timing of advisory fee billing.
- Missing or inadequate policies and procedures – Policies and procedures for several advisors failed to adequately address advisory fee billing, monitoring of fee calculations, and billing.
- Inaccurate financial statements – Issues arose regarding financial statements with advisors in potential financial distress and who did not properly maintain financial records. Among other issues, some advisors also incorrectly labeled client advisory fees as “accounts receivable.”
To avoid discretions like these, we’ve compiled a list of dos and don’ts each RIA firm should follow for billing best practices. Please note that the findings from this SEC examination were based on information gathered from RIAs providing advice directly to retail clients.
RIA Billing Dos
Below are several best practices to follow, as outlined by the SEC and our compliance experts.
- The first step your firm can take to improve billing accuracy is to adopt and implement policies and procedures specifically written to address supervision, calculation, review, and billing of advisory fees. The SEC recommends the implementation of a centralized billing approach, and fee validations that confirm charges are consistent with policies, contracts, and disclosures.
- We cannot stress enough the importance of conducting thorough reviews! Review the firm's Form ADV to ensure that full and accurate disclosures related to fees and expenses are being made that match the firm's current billing practices.
- Review all client advisory agreements to ensure fees are being billed appropriately, and/or in advance or in arrears, as specified.
- For advisory firms that offer bundled fees known as wrap fee programs, check out our recent blog post, in which we discuss best practices and common deficiencies.
- We also recommend that you ensure your firm has adequate record keeping processes for all advisory expenses and fees assessed to and received from clients, including those paid directly to advisory personnel. You can use resources and tools, such as checklists, for fee calculation reconciliation with advisory agreements.
While these recommendations may require extensive time and preparation on your part, there are also several time-saving strategies you can implement to improve your efficiencies over time.
Time-Saving Client Billing Tips
Our top three recommendations for saving time and ensuring billing accuracy include:
- Invest in proper automated client fee billing technology. This will help simplify your processes and streamline client fee billing, as well as invoicing, improving your RIA’s efficiency and reducing manual errors.
- Review all client investment advisory contracts in addition to your Form ADV. The fees charged to clients should match exactly what is stated and agreed upon in terms of calculation method, frequency of billing, time periods, date of ending balance, etc.
- Simplify the client fee billing process by creating a standard client fee schedule. This reduces risk for errors or oversight each time a new client fee schedule is introduced to the firm’s operations.
RIA Billing Don’ts
Now that you know what steps to implement to improve your billing processes, it’s important to note the actions you should avoid that would otherwise be a detriment to your compliance practices.
- Our first recommendation is to avoid completing all your billing tasks by hand. Manual inputs leave ample room for error or miscalculations – mistakes that can range from an improper formula to not using the proper account balances, as stated in the client contract of Form ADV.
- Another tip to remember is that your state of practice may require your firm to send separate billing invoices to clients when fees are charged. Even if unintentional, errors involving over billing advisory clients can lead to serious regulatory compliance issues.
- Advisers should avoid falling behind on ensuring proper oversight of their fee and billing practices. Instances of improperly charging customers can occur in numerous ways, like failing to account for the use of margin in calculating fees, billing at improper times, failure to apply discounts or rebates, and applying the incorrect fee rate depending on the type of account.
- Advisers should also be cautious when updating advisory fees and ensure that contracts match the actual fee being billed to clients.