Last month, the North American Securities Administrators Association (“NASAA”) released its 2017 Investment Adviser Coordinated Examinations Report. The biannual report is a must read for registered investment adviser (“RIA”) firms. As RIA compliance consultants, we recommend that the Chief Compliance Officer (“CCO”) of all investment advisory firms review the regulatory exam summary report to determine if any compliance changes need to be implemented at their firm.
In this week’s installment of our break-down of the new 2017 report, we focus on one of NASAA’s most common RIA regulatory compliance deficiency categories: fees. Of the 1,227 investment advisory firms examined in 2017, 27.2% of all firms examined with regulatory assets under management (“AUM”) had at least one fees-related regulatory deficiency. In total, there were 309 fees-related deficiencies cited across all firms which were audited. In general, about one quarter of firms audited had a fees-related deficiency.
Like registration-related deficiencies, fees-related deficiencies are up compared to the 2015 report by 6%. The table below highlights the changes over the last 10 years of reports:
In 2017, the top 5 fees-related deficiencies were:
- Fee charged doesn’t match contract or ADV (29.4%)
- Charging miscalculated fees (overcharging) (26.2%)
- Other Fee Iissues / concerns (19.4%)
- Adviser unable to provide evidence of work product to justify asset management fees (8.1%)
- Insufficient net worth charge > $500 and > 6 months in advance (6.8%)
In 2015, the top 5 fees-related deficiencies were:
- Fee charged doesn’t match contract or Form ADV (54.8%)
- Unreasonable or excessive fee (17.5%)
- Charging miscalculated fees (overcharging) (12.7%)
- Charging undisclosed fees (5.4%)
- Preferential fess without reasonable justification or disclosure (4.2%)
Comparing the most recent 2017 summary to the 2015 results, it’s clear that inconsistency between the actual client advisory fee being charged with what is stated in the client contract or Form ADV remains a very common fees-related regulatory compliance deficiency. This inconsistency also continues to be the most common fee-related issue we see as RIA compliance consultants. It’s essential that the CCO of every investment advisory firm regularly review and reconcile the client advisory fees being charged to ensure that the fees are consistent with the stated advisory fee in all other documents including the client contract and Form ADV.
It’s also a bit concerning to see the increased frequency of RIA firms overcharging clients. The vast majority of these types of mistakes are unintentional, but nevertheless advisory firms need to consider investing in software and systems that will automatically calculate advisory fees to reduce such mistakes given the potential client and regulatory issues.
And lastly, while not directly noted in this most recent NASAA report, it’s vitally important for all state-registered RIA firms to remember that many states require RIA firms to send separate billing invoices (in addition to the custodian statement) to clients when a fee is charged. This is an operational challenge that many newly registered investment advisory firms often do not fully appreciate. Once again, firms should consider investing in technology that helps to automate the creation and distribution of client fee invoices.
Be sure to also check out our past blog post on the top investment adviser registration compliance deficiencies from the 2015 NASAA report.