Compliance professionals serving RIAs have observed that the SEC is paying particular attention to the fees advisers charge compared to what they relate to their clients through ADV disclosures and other investor communications.
From planning and consulting fees to onboarding fees and many other common classes of fees, if they aren’t accurately described in your ADV Part 2 disclosures and advisory contracts but you’re charging for them, that’s a major problem for you.
As with other compliance issues, the clarity of your language in your ADV and contract will be scrutinized along with the results of your policies. As a fiduciary, an ambiguous fee schedule in your contract can cause confusion by your clients, and fee disputes arising from poorly worded disclosures will always be interpreted in your clients’ favor. If that causes you to be viewed as having overcharged, you’re in breach of your fiduciary duty.
The devil is very clearly in the details of this situation, and unfortunately, fee structures and billing practices not matching contract language or disclosures in ADV Part 2 is a common mistake. Important details include, but are not limited to:
- the timing of your billing,
- fee percentages matching what’s in the advisory contract,
- correct application of rebates, discounts, and breakpoint billing rates,
- properly managing refunds for existing clients or prorating billing for new clients…
…and the list goes on.
As I said, the devil is in the details, but a good starting point is to make sure your billing details match across your ADV Part 2 disclosures, the fee structure in your advisory agreements, and your documentation regarding what your clients were actually charged. These are just the table stakes of getting billing right, but there are many firms that have made mistakes in this area.
If you get any area of your billing operations wrong, refunding overpayment of fees could be the least of your problems. Incomplete or inaccurate fee communications leading to overbilling of your clients may be viewed by the SEC as a violation of anti-fraud provisions of the Investment Advisers Act of 1940. Regulators can impose fines and other sanctions on your firm, and once they have found deficiencies in your compliance program, you’ll be more likely to see them again sooner than later in the form of a follow-on examination.
Parting Thoughts
Remember that the advisory fees and expenses information you’re communicating to your investor clients has a significant impact on how they decide who they want to work with. Pay keen attention to getting all the details in your billing communications and practices right to make sure you’re properly protecting your firm from compliance risk and clients who feel misled.
Invest the necessary resources to build robust policies and procedures for your firm to make sure you’re handling all aspects of client billing correctly. Schedule recurring reviews make sure you’re correctly supervising all billing processes and making sure the calculation of advisory fees matches your ADV Part 2 Disclosures and advisory contract, and that your actual billing results match your communications.
Following this critical process of reviewing client billing will help you to find problems early. If you do find discrepancies, take action immediately to make effected clients whole and take all the time necessary to understand what happened, determine if your policies and procedures are working as expected, and revise as appropriate to make sure the same mistakes don’t happen again.
If this sounds like a lot to keep in mind, you can easily use a robust RIA compliance management platform like Smartria to streamline these recurring and situational processes so it’s easy for you to document, track and report on your results.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.