SEC exam sweep shows advisers overcharging clients

SEC exam sweep shows advisers overcharging clients
In a separate exam sweep, the SEC found that robo-advisers weren't acting in clients' best interests and were misleading in their advertising.
NOV 10, 2021

Investment advisers are charging clients more than they owe as a result of inaccurate fee calculations, the Securities and Exchange Commission said Wednesday.

The agency released a risk alert that outlined problems in how firms bill clients and disclose their fees. The deficiencies, which often led to clients suffering financial harm, included overbilling of advisory fees, faulty determinations of break points, and incorrect charges to households. Advisers also failed to credit fees due to clients or charge them on a pro rata basis for account opening.

The SEC released a separate risk alert Tuesday regarding investment advisers who provide digital advisory services, or robo-advisers. In an examination sweep, SEC staff issued deficiency letters to most robo-advisers, citing shortcomings found in compliance programs, portfolio management — including acting in a client’s best interests — and performance advertising and marketing.

In the fee risk alert, the SEC said advisers were lax in their internal oversight of the way they charged clients for their services. The findings were based on examinations of 130 investment advisers. The typical adviser in the sweep charged fees based on clients’ assets under management.

“Many of the examined advisers did not maintain written policies and procedures addressing advisory fee billing, monitoring of fee calculations and billing, or both,” the alert states.

Alan Foxman, managing director at Foreside Financial Group, said advisers are getting more creative in how they are paid, which creates compliance challenges.

“The more complicated you make things, the more detailed and clearer your disclosures need to be so clients can figure out how they’re being charged,” Foxman said.

The results of the fee sweep indicated that there’s miscommunication within firms regarding fees between people who interact with clients and staff who run the financial operations, said Todd Cipperman, principal at Cipperman Compliance Services.

“What the salespeople are saying is one thing, and what’s being done in the back office is something else,” Cipperman said.

When it comes to robo-advisers, the SEC said that their algorithms were failing to test whether the investment advice they provided matched their clients’ investment objectives and was in their best interests. Other problems the SEC highlighted were a lack of written compliance policies and procedures, failure to disclose conflicts of interest, and misleading advertising and marketing.

“The litany of compliance problems the SEC notes in the risk alert runs the gamut of everything [it] can find wrong with an investment adviser,” Foxman said. “In the near term, we may see them make examples of the worst offenders to see if the rest of the robo-advisers make a concerted effort to focus on those areas the SEC is concerned about.”

The fact that the SEC is on a roll with risk alerts — two in consecutive days — may be an indication that advisers are struggling to comply with rules that can be “dense, complex and esoteric,” Cipperman said.

“It really raises the question of whether the rules are effective if people aren’t following them on a mass basis,” he said. “They need to rethink the rules or their enforcement or both.”

Getting the assumptions right in retirement plans

Latest News

Does a merger or acquisition make sense for your firm? Why now is the perfect time to secure your firm’s future
Does a merger or acquisition make sense for your firm? Why now is the perfect time to secure your firm’s future

While the choice for advisors to "die at their desks" might been wise once upon a time, higher acquisition multiples and innovations in deal structures have created more immediate M&A opportunities.

Raymond James continues recruitment run with UBS, Morgan Stanley teams
Raymond James continues recruitment run with UBS, Morgan Stanley teams

A father-son pair has joined the firm's independent arm in Utah, while a quartet of planning advisors strengthen its employee channel in Louisiana.

Judge OKs more than $90 million in settlement money for GWG investors
Judge OKs more than $90 million in settlement money for GWG investors

Mayer Brown, GWG's law firm, agreed to pay $30 million to resolve conflict of interest claims.

Social Security trustees see one less year in insolvency countdown, project shortfall to start 2034
Social Security trustees see one less year in insolvency countdown, project shortfall to start 2034

New report shows dimmed outlook for benefits to retirees and disabled Americans, creating further pressure for federal tax hikes or more borrowing.

NY Republican Stefanik presses SEC to probe Harvard bond sale
NY Republican Stefanik presses SEC to probe Harvard bond sale

Open letter to SEC Chair Paul Atkins questions whether the Ivy League university withheld material information prior to its $750 million taxable bond offering.

SPONSORED RILAs bring stability, growth during volatile markets

Barely a decade old, registered index-linked annuities have quickly surged in popularity, thanks to their unique blend of protection and growth potential—an appealing option for investors looking to chart a steadier course through today's choppy market waters, says Myles Lambert, Brighthouse Financial.

SPONSORED Beyond the dashboard: Making wealth tech human

How intelliflo aims to solve advisors' top tech headaches—without sacrificing the personal touch clients crave