July 20, 2009
To Whom it May Concern:
Greetings. I write in response to the SEC's proposed changes to the custody rule, Release No. IA-2876.
I am a principal of an SEC registered wealth management firm advising $450,000,000 of client assets. I hold an MBA and a Masters Degree inTaxation. I am a Certified Financial Planner (TM) registrant, and a member of the Financial Planning Association. For approximately 10 years I served as the Legislative Affairs Director for the Massachusetts Chapter.
I am responding to the SEC's request for comments regarding the custody rule for Registered Investment Advisors (RIAs) drafting fees from client accounts. We use Charles Schwab, T.D. Ameritrade, and Fidelity as third party custodians. Other than drafting fees, we have no other qualifications for inclusion in the custody rule. I would think that a majority of wealth manager/registered investment advisors are in the same situation.
To the best of my knowledge, fee drafting has not been a problem for clients or the SEC. In our case, we send a fee calculation as the last page of a quarterly report, and we draft the fees two to three weeks later. The client has the ability to check our calculations with the actual fees withdrawn by comparing the custodian's next monthly statement with our quarterly statement. So, I conclude that there should no problem with fee drafting, and no additional regulation is required. Why try to solve a problem that doesn't exist?
The problem, of course, is that under the proposal, RIAs with custody will be subject to annual surprise audits with estimated annual audit expenses of $8,000 of more. This is a significant additional cost to a small business that doesn't have a problem with compliance in the first place. Multiplied by the 11,000 or so RIAs, a significant amount of money will be wasted for no good reason. The audit costs will come from company profits, or be added to client fees, or a combination of both. In some cases, the very small RIAs will cease doing business, orphaning a number of clients who were very satisfied with their service.
Most importantly, the advisor cases in the news lately, Madoff et all, involve Ponzi schemes, not fee drafting. The checks and balances for fee drafting are "in print" for the client to see, and for the SEC to review during routine audits. I would like to see the SEC's funding increased to be sure it can conduct its proper mission better, rather than the alternative proposed.
Please mark my vote as "against" surprise audits for RIAs whose sole custody inclusion is the drafting of fees.
Thank you for your attention.
Arthur F. von der Linden, CFP®
Wingate Financial Group, Inc.