July 1, 2009
On one hand i agree with the need to increase the level of confidence of clients about the extraction of management fees from brokerage account, on the other hand i think having an expensive accountant audit of the RIA is the wrong way to address the problem.
Currently fees extracted from customers' brokerage account by the IRA are subjected to an audited procedure from the broker. This procedure seems to prevent extraction of more than 3% of any account. Since the extraction of fees is often carried out in one account for several accounts this 3% limit is often reached. And the problem for client confidence is that this limit is easily circumvented. I can simply press a "discard" button and extract the amount i choose.
An easy way to address this is to regulate the brokers so that they make available a software platform that would allow a strict control of the amount extracted. It would be easy for the broker to allow a specific maximum percentage of assets in a group of accounts to be extracted from anyone of the accounts in the group.
Remember that the brokers are very large and have the means to bear this extra rugulatory burden. Also, one simple software effort for each broker (there is a handful of brokers dealing with RIA) would enforce the limitation to all RIA's, in a very effective way. All RIA would be effectively prevented to extract more than so and so.
This would be overall substantially less costly to the whole system, it would actually enforce (through software) limits on how these fees are extracted. It would also give more confidence to clients about this fee extraction, because the limit would be implemented by the independant third party broker.
I also can not resist a general comment. If a "no connection or influence" rule between the IRA and the instituional broker he uses was implemented, there would not have been a Maddoff case. The independance of the third party custodian is the safety pillar of the RIA industry. SEC should use that independant broker as an effective way to enforce safety. FOr example by putting extra fee extraction requirements on the broker, not the IRA.
I would be glad to talk about this with anyone at the SEC interested.
my phone is 888 592 2676