In a world that’s filled with marketing messages, how can a firm set itself apart from others? Every firm would like to say they provide outstanding service and have experienced professionals working on behalf of their clients.
There can be a temptation to try to differentiate from other firms/advisers based on fees; however, according to regulatory examiners and compliance consultants, choosing fees as your area to stand out can create potential hazards for your organization.
Not accurately disclosing or calculating fees is the most serious of all the compliance issues that could affect a financial service provider. Even if not intentional, failing to adequately disclose all fees, charges, and/or overbilling can result in catastrophic regulatory issues.
The SEC has focused even more diligently on ensuring fees are appropriately calculated and applied to clients’ accounts during the past year. Ensuring you’re staying on the straight and narrow when it comes to fees is more critical than ever and a crucial part of your fiduciary responsibility to your clients.
How Can You Protect Your Firm from Fee-Related Compliance Issues?
Mishaps with fees, even if unintentional, can have a devastating effect on a firm.
Along with regulatory fines, firms hit with compliance violations will also suffer from negative public opinion. A recent Harris Poll showed that 56 percent of consumers would likely move their business if their financial services provider was cited for non-compliance.
How, then, can you make wise decisions about fees and protect your firm?
1. Keep fee structures simple.
Some firms in the financial services industry utilize complex fee structures in an attempt to set themselves apart from competitors. Their reasoning relies on the idea that complicating their fees can give the impression that the fees they’ve set for their services are a good deal compared to others in the industry.
The tiered fee structure is the most common approach in providing “discounted” fees. This approach can be attractive to clients because the more they invest, the lower the fee.
What’s the problem? When accounts organically grow, advisers often forget to adjust the fee per tier. If a third-party service is being used to calculate fees, there is also the possibility that the tiered fee structures have not been adequately relayed to the service provider.
And finally, if a third party is being used to calculate fees, the adviser often assumes the service provider is accurately calculating fees and not conducting ongoing fee audits. It is not unheard of for a service provider to fail to implement the tiered fee to accounts as they grow and overbill clients.
2. Stay aligned with your disclosures.
When calculating fees for clients, use your disclosures as your north star for both calculations and audits.
For example, the ADV and agreement might state that the adviser will calculate fees based on the billing period ending balance. The firm needs to ensure they follow these guidelines rather than another method, like using an average daily balance.
Using the average daily balance might seem like a fairer way to calculate fees because it focuses on an overall period of time rather than a single day’s snapshot. However, if it’s not in the disclosures, it’s not the right way to make it happen.
Suppose the client is overbilled because fees were not being billed in accordance with the ADV and agreement. In that case, there will be a requirement for reimbursement when regulators find the issue, as well as a potentially permanent loss of trust with impacted clients.
3. Clearly disclose all fees.
Your fees aren’t necessarily the only fees your clients see. It’s important that you also disclose all fees associated with managing clients’ accounts (i.e., those fees charged by your third-party service providers).
Per the ADV instructions, advisers are required to disclose that additional fees will be charged by the custodian, mutual fund companies, insurance companies, etc. A failure to make appropriate disclosures will generally result in some type of reprimand from the regulators.
4. Update your fee information in your written procedures.
Finally, as you ensure you’re following all the steps noted above, you must also take time to document the processes your firm is following. All your fee-related information should be addressed in the written supervisory procedures.
Compliance procedures should require the adviser to adequately disclose all advisory and third party fees within the ADV, accurately disclose the fee the client will pay the adviser in the agreement, for the adviser to calculate the fees according to the disclosed and agreed upon fees and verify fees are being accurately calculated on a regular basis.
Fee disclosure and calculation of fees are not areas to take lightly. Fees and written supervisory procedures are two areas where they focus heavily during regulatory audits. Even if unintentional, overbilling clients and/or forgetting to disclose all fees will result in regulatory action and will make an impact on your relationships with your clients.
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.