July 9, 2009
I am writing to object to the proposed regulation (File Number S7-09-09) that would require federally registered investment advisers, that uses accounts which automatically deduct client fees through a qualified custodian, to undergo annual surprise audits by an independent public accountant. The audit would affect SEC-registered advisory firms that automatically deduct client fees through a qualified custodian. The SEC deems this kind of activity to be custody of client assets by the advisor when in fact it is not.
This is an ineffective over-reaction that will not serve the general public well. In fact it will do far more harm than good to the general public.
1) The cost of such surprise audits will increase costs and result in higher Advisory Fees paid by clients.
2) This regulation will drive Financial Advisors to move away from an asset based managed account, where Advisory Fees are clearly reported on monthly statement, to the old “B” and “C” Share mutual fund approach, where Fees are hidden and buried within the fund’s internal expenses and very difficult for the clients to identify.
3) The proposed change is just a smoke & mirrors routine to mislead the public into believing they are safer when in fact they are not. This will only help politicians temporarily take the heat off by those poorly informed investors. Form over Substance.
Asset Based Fee Accounts (held by an outside custodian) that have an automatic deducted Advisory Fee but does NOT allow the Advisor transaction discretion is the most prudent approach to managing a client’s account. The Advisor cannot take action without client approval and withdrawals/disbursements require a client signature. Furthermore, the client sees all transactions on each monthly statements mailed from an in dependent custodian. I do not understand how an annual audit would benefit any client and I certainly do not understand why a brokerage account earning fees via hidden 12b(1) fees from a mutual fund family should be treated differently.
The public would be better served limiting the proposed regulations to truly discretionary non-custodian accounts and perhaps requiring more and better accreditations and certifications of Financial Advisors which must abide by very specific ethical standards.
Please think through this carefully.
Jud Durel, CFP®, CIMA®, CPA*, PFS, MBA
Certified Investment Management AnalystSM
Private Wealth Advisor
Montoya Brower Financial Strategies