July 2, 2009
I am an investment advisor with custody of my clients funds at a qualified custodian, that sends statements directly to my clients. I have limited power of trading and deduction of fees. Moreover, the custodian will not agree to deduct fees beyond a certain percentage (3%, I believe).
I am not sure how I could technically misuse my client funds with the current setup, and feel that an independent annual examination would provide no real benefit to my clients.
While providing no benefit, it can hurt my ability to provide service. I am a sole advisor and sole employee in my Investment Advisory business, and would have a hard time handling the cost and time related to this audit.
If you want to maximize the protection to clients of advisors like me, I have an alternative proposal: Require the advisor to provide for each new account the name of household it belongs to. Then the custodian would not allow charging more than a certain low percentage (e.g., 3% annually) of each household balance, to a single account in the household (or a combination of accounts in the household).
This may be too onerous for the custodians, may require some software development (adding a field to each account: "household name"), and adding software checks on the total fees charged to the collective of accounts in a household as a percent of the household balance.
It is fine to contact me regarding my response. I am happy to help evaluate solutions.