July 28, 2009
While I applaud the Commission's efforts to strengthen the safeguards of assets overseen by investment advisers, the current proposal (File Number S7-09-09) is too broad in regard to advisers who use independent, third parties to custody their clients' assets. For such advisers, the current regulations are sufficient as they require advisers who withdraw their fee directly from clients' accounts to provide such clients with an invoice detailing the fee calculation, as well as an indication on the custodial statements that an adviser fee has been deducted. Under current law, a client must first authorize the withdrawal of adviser fees from their account.
The cost of an annual audit by an independent public accountant outweighs the intended benefit. Especially for smaller advisers, the cost of an annual audit would have a material, detrimental impact on their business that could result in a reduction of staff to offset the added financial burden of an audit. Reduced staff levels are not in a client's best interest, nor would an increase in fees charged to clients, which could be another response that investment advisers employ should the rule be finalized as proposed.
The benefit is obviously to safeguard client assets from fraud. However, I am not aware that any of the massive frauds that have been uncovered recently were related to fee deduction by an adviser from assets held by an independent, third party custodian.
Unfortunately, as long as humans have existed so has fraud and negligence, neither of which will disappear with overreaching regulations. The approach that I employ in my practice is to educate and inform clients in order to arm them with the knowledge they need to improve their financial lives and, yes, protect their assets. Those who hire an investment adviser should take an active role in their relationship with their adviser, including asking questions whenever clarification is needed or education is sought.
My suggestion to the Commission's proposal is to create a downloadable brochure that outlines how those who hire investment advisers can protect themselves from fraudulent adviser activity. It would be a requirement that this brochure, created in a partnership between the investment adviser industry and the U.S. Securities and Exchange, be provided by investment advisers to any new client, as well as existing clients on an annual basis, perhaps concurrent with the dissemination of the firm's privacy policy. Such an approach would arm the client with the information necessary to protect themselves and their assets.