June 24, 2009
I am providing herein my comments regarding the proposed requirement that advisory firms would annually undergo an external accounting review.
Although I absolutely agree that all reasonable steps necessary to protect the consumer should be taken, I feel that this new requirement, as it applies to advisors that are deemed to have custody (based only on the fact that they deduct management fees from client accounts), would be detrimental to the advisors and would not result in any significant benefit to the consumer.
If the underlying concern is the potential for abuse of the fee deduction process, I would assert that there is full and effective disclosure of fees to the client. If the advisor is deducting fees in this manner, the client has entered into a Limited-Power-of-Attorney relationship, authorizing the advisor to deduct these fees from his/her/their account, and has signed an Investment Advisory contract, so authorizing.
Further, since the accounts are held by a qualified custodian, clients are receiving regular statements (monthly in our case) that detail the fee deduction. This allows the clients to monitor and supervise the deductions to their accounts. Also, most of our clients have established online access to their accounts which provides real-time transparency of all activities in the account, to include trading and fee deduction.
Our firm, as I am sure is the case with most firms, also takes additional steps to ensure adequate education and disclosure for clients regarding fees deductions. Our fees are detailed and discussed in our annual review with each client, and we also provide, at the clients option, a additional year-end summary of fees. We also counsel each new client regarding the various aspects of their monthly custodial statements (in our case through Charles Schwab), to include the fee deduction which is prominently displayed on the statement summary as well as within the statement details.
Thus, I feel that the possibility for abuse through the fee extraction process within this limited custody access is extremely remote.
Beyond this limited access, our firm has no authority to remove funds from to a client account (other than through pre-established transfer authorizations to an account registered in the client's name) or via checks made payable to the client-of-record mailed to their address of record. Again, within this limited access, there is really no meaningful risk of asset mis-appropriation.
On the other hand, I do agree that advisors who have true custody of client assets (that is, beyond a limited fee-deduction authorization) should be subjected to a higher level of scrutiny, such as surprise audits.
Please note that my objection to this new requirement only applies to advisors for whom custody is limited to the fee-deduction authorization and not to advisors who may take full custody of client assets.
Further, the cost of this type annual audit would clearly place an undue hardship on most small advisors. They would be forced to either pass on this cost in the form of increased fees or decreased services to their clients, or they would be forced to scale down other important aspects of their operation, to include other aspects of compliance.
Clearly, this appears to be a lose-lose for the advisor and for clients.
Thank you for your consideration of my comments and concerns.
Donna L. Jordan, CFP®