June 22, 2009
While I applaud increased scrutiny of investment advisor activities, particularly in the case of advisors which are in physical custody of client funds, the proposal to treat advisors utilizing third party custodians but which bill those accounts for fees on a fully disclosed basis as though they had full custody appears to me to be a waste of resources. Worse, the added, and in my opinion, unnecessary expense will create a greater expense for investment advisory clients and discourage objective, fee based advice from being provided for lesser net worth clients.
We are based in a small town, far from large metropolitan areas. The CPAs in our area have universally indicated that they do not intend to take on the expense and liability that will be associated with such surprise audits of SEC registered investment advisers. As a result we will need to contract with a firm which will require at least a full day plus travel time of as much as two days for an auditor. My research has indicated that we will need to pay $15,000 to $20,000 per year at a minimum for an audit in addition to the $15,000 we are already paying for an annual announced audit from the broker/dealer with which we are contracted.
Our total compliance related expenses under the proposal would rise to between 15% and 20% of revenues. Such expenses would require us to either limit our services or raise client fees. Primarily it would result in our no longer being able to accept clients with a relatively low invested net worth. In essence, the mandated audit requirements may push us into the position of having to direct lower invested net worth families to the offices of brokers who often will sell them high commissioned, proprietary, and often illiquid financial products, but who are not subject to independent, unannounced audits or a fiduciary responsibility to the members of the public.
We do not have custody of our clients' funds and they receive a statement from the custodian each month as we bill their accounts. I am completely at a loss to understand how an annual surprise audit would improve on that system.
Jeffrey W. McClure, CFP