July 16, 2009
Regarding: File Number S7-09-09
To whom it may concern:
Greetings. I am writing in response to the SEC’s proposed changes to the custody rule, Release No. IA-2876.
I am a state Registered Investment Advisor, a member of the Financial Planning Association (FPA), and a Certified Financial Planner™ registrant. I plan to be SEC registered within the next 2-3 years.
I wanted to take this opportunity to formally object to the proposed amendments to the custody rule that would subject investment advisers to a surprise audit by an accounting firm, solely because those advisors automatically deduct client fees from their investment accounts. If passed, this regulation would require surprise audits at approximately 11,000 SEC registered firms. To my knowledge, this is an attempted fix to a non-existent problem, in that I am unaware of any RIA citations around the subject of inappropriate fee withdrawal from client accounts.
I can understand the need for increased regulation in the financial services industry, but as a small business owner, the costs involved in implementing these surprise audits would be extremely burdensome. Ultimately, these increased costs will end up being passed on to my clients, the very individuals this additional regulation is designed to help. My clients are middle-income clients, not high net worth. They do not have the money to pay me my fee out of cash flow, but must have the fee deducted from their IRAs or other accounts. My 80+ clients with a total of $12 million under management generate gross fees of less than $200,000 per year for me. Does it make sense to impose an administrative burden of an additional $8,000 expense for me per year, or 4% of my gross receipts? It is already difficult to afford to run a business that caters to the middle class instead of the high net worth client; this will make it nearly impossible. As discussed above, it will be very detrimental to the majority of clients (as there are many more middle class clients than high net worth clients).
As far as I am aware, there have been no systemic problems in the area of fees deducted by advisors, and the additional costs that will be borne by investment advisors and our clients are both unnecessary and burdensome. Our clients’ assets are held at a third-party custodian, and the amount of the fees debited for our services are always clearly itemized on the client's monthly statements, as well as in a separate invoice mailed by us. Further, our custodian’s internal controls dictate that they contact us for any fees in excess of 2% per year.
In the current climate this rule may force out the smaller firms (like mine) that serve the lower net worth public just as they need help the most. Not only will this hurt the general public, but many small businesses such as mine provide good jobs in their community. Obviously, were I to be forced out of business, I would have to lay off my staff. This is not the message to send in this economy.
Mad off and others stole from clients by generating fictitious statements, not by debiting their investment advisory fees from client accounts. I think the most appropriate regulatory solution to enhance consumer protection would be for Congress to appropriate additional resources to the SEC to hire additional examination staff, so this additional staff can increase the regular audit cycle of investment advisors. As a former auditor, I know that appropriate compliance work can find fraud.
Thank you for your consideration – and for your support going forward.
Jennifer L. Davidson, CPA MSFP CFP(R)
Milestone Financial Planning, Inc.