On episode 93 of the CCO Buzz podcast, we’re joined by Sr. Compliance Consultant Maggie Tavares to discuss the importance of adequate and accurate Advisory Fee Billing.
CCO Buzz: Hello and welcome back! Happy New Year and happy new season of the CCO Buzz. Today we are joined by one of the newer members of the Core Compliance Team, Senior Compliance Consultant Maggie Tavares. Maggie is joining us to discuss the 2021 Risk Alert on Advisory Fees. She’s here to help us understand and unpack the main considerations, best practices and how they impact firms when assessing the latest guidance in today’s regulatory compliance landscape.
With that, let’s begin…
First off, thank you for joining us Maggie and welcome to the team. You made a splash of an entrance at the end of last year and authored December’s Risk Management Update titled, “Regulatory Focus on the Accuracy and Adequacy of Advisory Fee Billing and Disclosures.” In the article you dive deep into some key points about the SEC’s Risk Alert. Would you mind sharing a bit of background on the risk alert for our listeners before we dive in?
Maggie Tavares: Of course! Thank you for the warm welcome!
In November of 2021 the SEC Division of Examinations issued a Risk Alert outlining deficiencies found during their national exam initiative on advisory fees. Take note that this was supplementary to a previously issued Risk Alert in April of 2018 covering a comprehensive breakdown to advisory fees- including the accuracy of charged fees, the adequacy of adviser disclosures, and the overall effectiveness of the firm’s books and records for the same.
CCO Buzz: Wow, I can see how the deficiencies can be common throughout the industry and how this may be a curious pain point for firms. In your article you highlight the key issues for firms, mind if we unpack your insight and provide listeners with a few snippets of the article?
Maggie Tavares: I guess I could impart a few nuggets, but — “full disclosure” — they’ll have to check out the article for a more comprehensive understanding of the Risk Alert.
CCO Buzz: Great! Let’s start with Advisory Fee Calculation – as I feel many firms may think that they already have it handled, but based off of this Risk Alert – it may be something they want to revisit.
Maggie Tavares: Alright. From the Alert we learned that some of the common deficiencies found within the exam initiative included the implementation of new or updated fee schedules without converting all existing clients to the same. This in turn often results in double billing and thus a breach in the adviser’s fiduciary duty to the client. There were other deficiencies found, but listeners can check out the article for additional areas of concern.
CCO Buzz: You know me too well, Ms. Maggie – I love a good article tease. But speaking of those deficiencies, how do you recommend Firms approach these vulnerable arenas?
Maggie Tavares: We encourage our clients to regularly perform compliance testing, which would be a more wholistic and comprehensive approach to the deficiencies within the Risk Alert. We recommend for example, a review of invoices from each billing cycle comparing the fee percentage/rate used to calculate the fee, with the fee percentage/rate outlined in the client agreement.
CCO Buzz: Understanding that Core Compliance recommends regular compliance testing, how would firms navigate deficiencies surrounding missing or inadequate Policies and Procedures?
Maggie Tavares: Great question. Within this Risk Alert, the Staff found that vague or generic policies and procedures did not address specifics related to a firm’s processes for computing, billing, testing and advisory fees. They also found that firms failed to disclose material advisory fee components, such as valuation of illiquid assets included in the assets for the calculation of advisory fees, fee offsets, such as those offered in 12b-1 fees, fee reimbursements for terminated accounts, where the client prepaid fees, prorating fees for additions or subtractions of assets in accounts, and family account aggregation or householding for fee calculations.
Now, in order to address these within a firm’s regular compliance testing, an in-depth review of policies and procedures would be necessary surrounding advisory invoices, the monitoring of fee calculations and billing, or both, to ensure that they have been formalized as current and in practice.
CCO Buzz: Thank you for the insight, but I need to ask a poignant question- as a Firm, how will I know what to review and how will I be able to determine that what we’ve established is “adequate enough”?
Maggie Tavares: That’s another great question, and I’m pretty sure RIAs throughout the industry are asking themselves, “How do I know – what I don’t know?”. I encourage our clients to leverage the insight of a third-party. Constantly reviewing your own systems in place and the routines that have become second nature – make it very difficult for firms to distinguish accuracy and adequacy of advisory fee billing.
As advisers, they must perform periodic testing so they can refine, and improve their fee billing policies and procedures, as appropriate, and address new risks, as identified, to include assurances that clients are provided with full and fair disclosure of all fees and expenses and related material conflicts of interest. To that end, one needs to leverage a partner that is well versed in this area, like Core Compliance, who can assist with the assessment of your advisory fee billing practices.
I invite listeners, if you have any questions regarding your compliance program, advisory fees, or how to further unpack the latest guidance – please call us at 619-278-0020 or visit us at our website www.corecls.com for more information to connect with our team directly.
CCO Buzz: Thank you so much for joining us today Maggie, we really appreciate it.
Well that’s it for this week’s episode. If you’d like additional information, please check out our website at www.corecls.com. You can also follow us on Facebook, LinkedIn, or Twitter @CoreCls. Thank you, and we hope you tune-in to next week’s episode of the CCO Buzz.