July 31, 2009
Re: File No. S7-09-09
Custody of Funds or Securities of Clients by Investment Advisers
I am a stockbroker and RIA in good standing. I have been in the industry since 2000. Most of the business that I do is as an RIA through our advisory company with TD Ameritrade as our custodian. I charge a small percentage fee on assets managed, depending on the size of the account. This method of doing business has proved to be very popular with our clients.
The way things operate right now, after I have completed individual quarterly performance reports and a big picture newsletter, the clients are mailed a packet with this material and their bill. They can match this report against the monthly externally generated TD Ameritrade statement that they have already received. We then proceed to have our secretary bill the clients' accounts under the supervision of TD Ameritrade, the custodian. My understanding is that at this point they will flag any amount that might be debited that would seem abnormal in size.
I have only one client out of over 100 accounts that prefered that he send the bill in to us. He has recently requested that we just debit his account for the fee to eliminate work for him. That makes 100% of my clients that prefer to have their fee debited from their account. I would also point out that this good client had been late on paying his fee on occasion. The prospect of this happening with 100 plus accounts is a collections nightmare. This could increase our costs that would then need to be passed on. In the case of one or two clients over the years that have chosen to move their accounts, we very promptly credited their accounts for any refund that might have been due them.
I understand the spirit of your proposed changes. However I think you might be trying to fix a problem where none exists. If there is a limit of say 2% of any account that could be debited for billing purposes, then a special form could be signed and submitted for such a purpose signed by the client, the advisory firm and the custodian for any amount larger than the limit. Our clients have online access to the independant custodian and we cannot come between the client and the independant statements generated by our custodian TD Ameritrade. In every Ponzi scheme I have observed in my life in the media, the problem for the clients was that there was no external custodian separate from the advisor who generated a statement that went directly to the client. To tighten things up, you might require that the custodian generate a statement to the client when an account is debited for a fee.
To require that entire advisory firms undergo expensive audits and to say that they take custody when they really don't take custody, stikes me as a bad idea where the costs far exceed the benefits. If you just put a limit on the percentage amount that can be debited for fees and also generate a specific notification to the client from the external custodian when this happens, you have protected the client with very little cost.
Advisory firms that do not hold assets at an external custodian surely do take custody and they should fall under your proposed change. The lack of both an external custodian and also externally generated statements sent to the clients were at the heart of the Madoff scandal. This is the real problem to fix.