July 17, 2009
We are a small investment advisory firm that is deemed to have custody under the Rules. We estimate that an audit would cost, at minimum, $10,000 annually, a cost which would have to be passed along to our clients. This is not an insignificant cost for us.
Investment advisors who are not affiliated with a broker dealer should not have to have an annual audit since we have no ability to access client accounts outside of our fee billing capabilities.
Since the issue is security, it should be easy to accomplish for independent investment advisors. Require a statement from our broker dealer that the assets are indeed in custody and titled properly. Schwab is particularly good at monitoring flows from client accounts. We routinely move money for clients via pre-approved "Money Links". Schwab has to review each one and approve and verify that the funds are going to the pre-established client bank account. They are the first line of defense and are better able to assist in detecting potential abuse.
Ask Schwab, Fidelity or Vanguard how many of their client accounts have had fradulent activity from an investment advisor? I will wager it is very, very low.
The way to accomplish the objective is to work with the custodians.
Thank you.
Sam Paglioni