July 7, 2009
Dear Sir/Madame,
I would like to comment on the proposed custody rule (IA-2876) that lumps investment advisors who have the authority to debit advisory fees from clients custodial accounts into the group of advisors who directly take custody of client assets.
Clients who have advisors who take direct custody of their assets need safeguards to ensure the advisor properly accounts for the funds. Assurances such as an annual surprise audit by an independent public accountant may be warranted in these circumstances.
However, including advisors who have the authority to debit advisory fees from client custodial accounts is not appropriate. Most custodians (such as TD Ameritrade) have safeguards in place that flag accounts when an advisor attempts to debit abnormally high fees. The cost of an annual surprise audit by an independent public accountant would be cost prohibitive for many small advisory firms. These costs would have to be passed on to the investor making matters worse and not better for the clients. The alternative of not debiting the fees from the accounts would force clients to write checks for the fees which would inconvenience both the client and advisor.
Including advisors who have the authority to debit advisory fees from custodial accounts in the proposed custody rule is an attempt to fix an item that is not broken. Clearly, an advisor with direct custody of a client’s funds should be subject to regulations that ensure a high standard of accountability for those assets. This relationship is fraught with danger from a clients’ perspective, which is why the vast majority of investors decide to custody their assets at a large brokerage firm and limit the advisor’s ability to withdraw funds to only the advisory fees agreed to in the investment advisory agreement.
I strongly encourage the committee to remove the wording in the proposed custody rule to exclude advisors who have the authority to debit advisor fees from custodial accounts. Unduly burdensome and irrational regulations impair the ability of the investment advisor community to effectively service their clients, As written, the proposed Rule is unnecessary and unreasonable as it imposes an unjustified financial burden on small to medium size advisors subject to the Rule change.
Thank you for the opportunity to comment on the proposed rule.
Regards,
Lee Harris
Lee Harris Capital Management Inc