Yes, it is all about the Benjamins. Unfortunately, during recent examinations, the SEC too often is doing its aggressive best to find ways for advisors to reimburse clients. In fact, in some instances, the SEC is so aggressive that you might think there was a bonus system (I am certainly not alleging that there is, just emphasizing the scope and aggressiveness of the SEC’s review as to fees and reimbursement thereof to clients).
Sadly, there is no room for error, no matter if such error was clearly unintentional or otherwise understood by the client. Rather, all errors will generally be construed against the advisor, resulting is some reimbursement. Here are some examples:
• Mutual Fund Share Class issues: Hopefully there is no need to expand on this. Every advisor should be keenly aware that it should be determining whether the client would be better off with an institutional share vs. a no-transaction fee share. Avoiding a transaction fee is no defense if it clear that the institutional share was more appropriate for the client given the client’s situation (i.e. amount invested, anticipated holding period, etc.).
As a fiduciary, you have an obligation to counsel a client who seeks to avoid incurring transaction fees, as to why such purchases are in his/her best financial interest. If the client still balks, have them acknowledge, in writing, that you explained the expense differential of the two share classes, and the client required that you still purchase NTF funds.
• Fee Schedule Dispersion: Do you generally deviate from your fee schedule? Never charge a client the highest fee? Do you discriminate between clients without clear disclosure on Part 2A as to fee dispersion and discrimination, and under what circumstances you would deviate from the fee schedule? It’s the same issue relative to “minimum fees” — do some pay them and others don’t? How is that determined? At the rep level, or must it be approved by compliance? Is compliance maintaining a record as to why a deviation was permitted?