June 3, 2009
Our small (AUM $30 mil) firm has been a SEC registered investment advisor for over 25 years.
My understanding is that the proposed rule would require all investment advisers who have custody of clients funds or securities, SOLELY because of their authority to withdraw fees from clients custodial accounts, to undergo the surprise examination, regardless of whether the qualified custodian provides statements directly to clients.
A 20 year review of complaints by new clients and our investigation of new client's prior billings by former RIA's has NEVER uncovered wrongdoing in this area. We occasionally point out excessive billings, but the client knew them. We have uncovered many unsuitable and unethical actions but never in the area of account deducted billing.
Frankly, we are barely hanging on financially as a firm in the current investment environment. The cost of a surprise accounting examination is a flat rate additional expense and not based upon assets under management. Thus, it would affect a small firm like ours very severely.
It is my and my firm's position that the proposed rule would impose unnecessary expenses on our small investment advisory firm and would not significantly increase any safeguards.
A better solution would be a requirement for RIA billing to be in arrears and requiring a copy of the RIA's invoice be sent to the client prior to receiving a statement from the independent custodian showing the management fee deduction. The client would then be able to compare the RIA invoice with the statement from the independent custodian showing the management fee deduction.
Our firm has used this method successfully for about 25 years.
Another solution would be to exempt RIA firms from this rule with assets under management of less than $100 million. This would relieve a significant financial burden on smaller RIA firms.