July 27, 2009
We are very concerned with the recent proposal regarding the surprise audit requirement. This will pose a very large unnecessary expense on small and entry level RIAs who have been given prior authorization by clients to deduct fees from a third party custodian (i.e. Schwab).
If your goal is to protect a client from the fee issues (i.e. charging more than advisor and client agreed) that may harm the clients investments and livelihood then we are also in agreement to that end achievement. Most of the advisors we have met entered this business because of the abuses clients were getting at other institutions and thus are very interested in seeing our industry reputation being upheld to be trustworthy and honest.
With that being said, this new proposal would build more expense for the advisor who would in turn be forced to pass on the expense to the clients and that would not, in my opinion, serve the client better. Surprise audits would only discover the issue after the damage has been done with quite a bit of time in-between incident and discovery.
Every quarter we send out invoices to our clients stating the amount of fees being charged and fees pulled from the clients accounts is reflected on the third party custodians monthly statement for the relative month. Currently, we believe between the invoices and third party custodian statements the client can already reconcile the fees being charged.
However if this is not enough, we propose that for those advisors using a third party custodian (ie Schwab, TD Ameritrade) that some operational checks and balances between the third party custodian and advisor are implemented. We do not see Schwab or a Fidelity having any reason to hide an advisors bad fee behavior and thus you would have the third party verification needed. Reports from these checks in balances could be much quicker, cheaper and more accurately indicate advisors for further investigation than what is currently proposed.
There has to be a better way. It could be as simple as having the client sign a third party custodian agreement form that states the necessary fee maximums and when a fee aggregately goes over this amount (% or $) the third party custodian denies the request until the client submits another signed updated form. A error and reconciliation report could be generated from the third party custodian each year that could be kept on file with the advisor for SEC examiners to see.
Thanks for your time in reading our opinions.