July 1, 2009
While the intention behind this proposal is to aid investors, in reality it hurts them. First of all, it has been proven time after time (see Enron, Healthsouth, Petters, ...) that an independent audit does not prevent any determined criminal from committing a fraud. However, what it is guaranteed to do is increase advisor's costs, which in most businesses just ends up resulting in higher prices for the end consumer. In addition, this requirement will cause substantial additional manpower to be redirected from beneficial client service initiatives to preparing for the independent audit.
An analogy also comes to mind in terms of whether the ability to deduct fees should be considered "custody", thus exposing advisors to this requirement. For convenience sake I provide many companies with my credit card and/or bank information so that they can automatically debit my account. Will the government consider them to have "custody" of my assets, and require them to be subjected to the same independent auditor standards regarding their management of my account?
Unfortunately, you cannot mandate morality, which is the best way to protect investors from dishonesty and fraud. That being the case, please don't penalize the vast majority of advisors, who are honest (and ultimately the people you are trying to protect - their clients).