July 2, 2009
Comment to Proposed Custody Rule (IA-2870)
My comments are intended to address the proposal to require audits when Advisorís custody is limited to debiting fees from an account held at a qualified custodian.
The proposed rule is unduly burdensome, especially to small firms.
An audit may double their overhead cost and either place them at a competitive disadvantage or put them out of business. And if a small firm is forced out of business, the consumer will have fewer choices from which to choose. The survivors will necessarily be more expensive due to the audit requirement.
I can not see how having thousands of annual audits nationwide that inhibits the little firmís ability to enter the industry or to compete against the large firms can serve the investing public. The requirement would greatly diminish the services available to the public and the number of choices they now enjoy.
Smaller firms can not absorb the significant and unpredictable cost. Most small firms operate with minimal staffing and profit margins and to add a layer of inspection or review is redundant and costly not only to the firms, but to the Client as some of the cost will be passed along to them.
Clientís agree, voluntarily, to have fees deducted as a value added service. TD Ameritrade serves as my custodian and checks each charge to ensure it does not breach a preset percentage. Further, the Client gets a monthly statement that clearly states the charge and to whom it was paid.
What is the purpose of the audit? Has there been widespread systematic abuse in debiting fees? If it is to prevent or catch fraud, it will not serve that function well. Who is going to audit the auditor? Who is going to certify that an individual or firm can conduct an audit? What about firms located in remote areas or small towns, how do they get an auditor or audited? How many reams of paper will needless be used to comply?
Clients are very sensitive to fees and can readily and do review them now. They have a vested interest in the fees and can already complain to the Advisor or directly to governmental agencies, if needed. Audits can be warranted when there is cause, but to cast a wide net across the entire industry is overkill.
A firm with billions of dollars under management can absorb the cost with minimal extra cost to their client as there a numerous clients across which the cost can be passed. But for a small firm, even small costs are a important and an audit would not be a small cost. The cost of an audit would represent a significant increase in the cost of doing business for which there is no significant problem to cure or benefit provided the investing public.
Safeguards now in place are sufficient to protect the investing public. The proposed rule is unduly burdensome and would inhibit or deny the investing public access to choices in Advisors and to close, person service that a smaller firm can offer.
Steven Erickson, JD, MBA, CFP(r)
President, Erickson Financial Solutions, LLC