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SEC Finds Widespread Advisor Fee Calculation Errors

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What You Need to Know

  • Regulators found fee-related deficiencies in most of the 130-plus exams conducted under its Advisory Fees Initiative.
  • Errors included overbilling, double-billing and failing to properly calculate tiered fees.
  • Examiners also found deficiencies related to incomplete or misleading Form ADV Part 2 brochures.

The Securities and Exchange Commission’s exam division released Wednesday a Risk Alert detailing deficiencies found in advisors’ fee calculations and fee-related compliance and disclosure issues.

The Risk Alert supplements an earlier Advisory Fees Risk Alert by providing greater detail on certain compliance issues observed during the exam division’s recent Advisory Fees Initiative exams.

Examiners conducted approximately 130 exams of SEC-registered investment advisors under the initiative and identified deficiencies related to the advisory fees charged during most of the exams.

The advisory fee-related deficiencies observed often resulted in financial harm to clients, including:

- advisory fee calculation errors, such as overbilling of advisory fees, inaccurate calculations of tiered or breakpoint fees, and inaccurate calculations due to incorrect householding of accounts;

- not crediting certain fees due to clients, such as prepaid fees for terminated accounts or pro-rated fees for onboarding clients.

SEC examiners also observed fee-related compliance and disclosure issues.

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Examiners found advisors charged advisory fees inaccurately, making a variety of errors.

Inaccurate percentages were used to calculate advisory fees. For example, the staff identified advisors that, among other things: charged fees that were different from contractually agreed-upon rates and used the incorrect fee schedule (e.g., used the schedule intended for clients domiciled in a country other than the United States).

Advisors also failed to convert all clients to their new or updated fee schedule and had errors in fee percentages manually entered into their portfolio management systems.

Also, advisory fees were double-billed. Such errors were typically due to oversights, such as not updating a system following a change in billing practices.

Breakpoint or tiered billing rates were also not correctly calculated. Often these issues related to tiered fee schedules not being applied correctly or applied at all.

Householding of client accounts was not correctly calculated. In such instances, the examined advisors did not aggregate client or family accounts and/or apply the declining fee schedule, as applicable.

The examiners also found deficiencies related to incomplete or misleading Form ADV Part 2 brochures and/or other disclosures, including disclosure that did not reflect current fees charged or whether fees were negotiable and did not accurately describe how fees would be calculated or billed.