SEC exam sweep shows advisers overcharging clients

Investment advisers are charging clients more than they owe as a result of inaccurate fee calculations, the Securities and Exchange Commission said Wednesday.

The agency released a risk alert that outlined problems in how firms bill clients and disclose their fees. The deficiencies, which often led to clients suffering financial harm, included overbilling of advisory fees, faulty determinations of break points, and incorrect charges to households. Advisers also failed to credit fees due to clients or charge them on a pro rata basis for account opening.

The SEC released a separate risk alert Tuesday regarding investment advisers who provide digital advisory services, or robo-advisers. In an examination sweep, SEC staff issued deficiency letters to most robo-advisers, citing shortcomings found in compliance programs, portfolio management — including acting in a client’s best interests — and performance advertising and marketing.

In the fee risk alert, the SEC said advisers were lax in their internal oversight of the way they charged clients for their services. The findings were based on examinations of 130 investment advisers. The typical adviser in the sweep charged fees based on clients’ assets under management.

“Many of the examined advisers did not maintain written policies and procedures addressing advisory fee billing, monitoring of fee calculations and billing, or both,” the alert states.

Alan Foxman, managing director at Foreside Financial Group, said advisers are getting more creative in how they are paid, which creates compliance challenges.

“The more complicated you make things, the more detailed and clearer your disclosures need to be so clients can figure out how they’re being charged,” Foxman said.

The results of the fee sweep indicated that there’s miscommunication within firms regarding fees between people who interact with clients and staff who run the financial operations, said Todd Cipperman, principal at Cipperman Compliance Services.

“What the salespeople are saying is one thing, and what’s being done in the back office is something else,” Cipperman said.

When it comes to robo-advisers, the SEC said that their algorithms were failing to test whether the investment advice they provided matched their clients’ investment objectives and was in their best interests. Other problems the SEC highlighted were a lack of written compliance policies and procedures, failure to disclose conflicts of interest, and misleading advertising and marketing.

“The litany of compliance problems the SEC notes in the risk alert runs the gamut of everything [it] can find wrong with an investment adviser,” Foxman said. “In the near term, we may see them make examples of the worst offenders to see if the rest of the robo-advisers make a concerted effort to focus on those areas the SEC is concerned about.”

The fact that the SEC is on a roll with risk alerts — two in consecutive days — may be an indication that advisers are struggling to comply with rules that can be “dense, complex and esoteric,” Cipperman said.

“It really raises the question of whether the rules are effective if people aren’t following them on a mass basis,” he said. “They need to rethink the rules or their enforcement or both.”

Getting the assumptions right in retirement plans

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Andrew is half-human, half-gamer. He’s also a science fiction author writing for BleeBot.

Andrew Vincent
Andrew is half-human, half-gamer. He's also a science fiction author writing for BleeBot.
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