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Avoiding Overbilling Issues through Diligent Compliance Efforts

Wednesday, June 9, 2021

No one likes being overbilled for a product or service, whether you’re talking about something as small as using a coupon code or as large as managing your investments.

When the overbilling involves services provided to advisory clients, the consequences can go far beyond frustration from the customer. Overbilling is sure to attract the attention of regulators and can land you and your firm in some hot water.

At the same time, overbilling is rarely a malicious issue. Instead, it can be an unintentional error that arises from growth or from a firm staying busy with the business of running day-to-day operations.

Why Might Clients Be Overbilled by Advisers?

Overbilling can occur in various situations, generally when there’s an inadvertently missed touchpoint in the firm’s processes. Examples might include:

Missed threshold triggers

When a firm offers a tiered program for investment management, its rates may increase when clients cross certain fund thresholds. As clients’ funds under management increase, the percentage the adviser receives may proportionally decrease. If they don’t have technology in place to trigger a notice, they might miss manually tracking an increase in client wealth and reducing their fee accordingly.

Outsourced fee management

Some firms may outsource fee calculations and management to a third party. If they provide incorrect fee information or fail to send a notification when updates are made to a fee schedule, overbilling may occur. This happened to Citigroup in 2017 to the tune of more than $18 million in fines.

Incorrect performance calculations

Some advisers may have agreements to charge performance fees as a reward for deploying successful investment strategies. If an adviser incorrectly calculates the high-water mark for their performance, they might inadvertently overbill the client.

What are the Consequences of Overbilling?

Overbilling is an issue of serious concern to regulators because advisers are required to serve as fiduciaries for their clients.

This role as a trusted adviser includes a responsibility to ensure processes are in place to prevent accidental harm to a client. Accidentally billing clients, although obviously not intentional nor malicious, will result in regulatory issues.

If overbillings are not discovered, and billing issues continue over a period of multiple billing cycles, regulators are likely to take action. For example, a North Carolina adviser who consistently overbilled was fined more than $500,000 and required to bill only under supervision for a period of three years.

How Can You Protect Your Firm from Accidentally Overbilling?

As with most compliance situations, your first line of defense will be your written supervisory procedure manuals. Most written supervisory procedures manuals contain language regarding the adviser’s requirement to charge fees in accordance with the ADV Part 2 and executed advisory agreement.

What are you offering or promising in your manual, and how closely are you sticking to the guidelines you’ve put in place?

Many manuals contain language indicating that the adviser will conduct quarterly audits to ensure fees are being billed accurately. However, experience indicates most advisers do not regularly audit their fee calculations on a regular basis. Consider auditing your efforts and tracking your documentation to ensure you’re following the steps you’ve outlined in your manual.

Overbilling issues seem to frequently arise from a lack of time to ensure processes are managed properly. To protect your clients from overbilling and your firm from regulatory exposure, focus on ways to make more bandwidth available to your compliance teams and increase the effectiveness of your efforts keeping your firm in line with regulatory guidelines.

About Red Oak Compliance Solutions

Red Oak Compliance Solutions is the global advertising review software of choice in the financial services industry. It is a comprehensive suite of SEC 17A-4 compliant features that are 100% books and records compliant and provides clients with 35% faster approvals and 70% fewer touches or better. We also offer Smart Review(SM), which solves for the storage and maintenance of disclosures, helping firms reduce risk, decrease review times, and increase the speed of distribution of marketing materials. Smart Registration(SM) automates the licensing and registration management process to help reduce regulatory risk and time spent on manual processes. Overall, Red Oak allows firms to minimize risk, reduce costs, and increase compliance review process effectiveness and efficiencies.

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