Investment Firms Rise Above SEC's Frequent Issues | Gresham

It has been about a year since the U.S. Securities and Exchange Commission announced a risk alert that “Most Frequent Advisory Fee and Expense Compliance Issues Identified in Examinations of Investment Advisers.” Such inappropriate fee billing and expense practices may violate the Investment Advisers Act of 1940 and the rules implementing it, including anti-fraud provisions. Since the SEC announced the risk alert, there have been numerous fines and penalties charged to firms who have overbilled clients, whether intentional or not.

Although some violations appeared to be the result of blatant fraud, others were clearly the result of client fee billing miscalculations. In the latter case, the main problem likely stems from the fact many firms are still relying on inadequate client fee billing processes, such as spreadsheets, which are often inefficient, error-prone and therefore likely to increase operational, compliance and reputational risks.

The SEC recommended that advisers review their practices, policies and procedures to ensure compliance with their advisory agreements and representations to clients in light of the fee and expense issues noted in this risk alert. A key part of an adviser’s client fee billing operation should be automation to help them increase the accuracy, speed and transparency throughout the process.

Understanding the Most Frequent Issues

The SEC’s four-page risk alert, compiled by the Office of Compliance Inspections and Examinations, detailed the six most frequent issues with advisor fees and expense compliance. These include:

  • Fee Billing Based on Incorrect Account Valuations
  • Billing Fees in Advance or with Improper Frequency
  • Applying Incorrect Fee Rate
  • Omitting Rebates and Applying Discounts Incorrectly
  • Disclosure Issues Involving Advisory Fees
  • Adviser Expense Misallocations

Many advisers manage fee billing in spreadsheets or platforms that fall short on automation, integration and flexibility. As the complexity of portfolios increases, these outdated processes often create miscalculations that can have a negative impact on a firm’s bottom line, especially if inaccuracies result in fines, reputation damage and/or lost revenue.

Improving Fee Billing Operations

How can a firm make sure these issues do not occur again in the future? By streamlining client fee billing operations with automated fee calculations, billing automation, invoicing analysis, accounting and reporting. That means controls and workflows should be in place to help avoid the issues specifically relating to the billing of management fees. Other key capabilities would include:

  • A design that ensures consistent fees are charged while providing the flexibility to make changes based on client needs or shifts in fee schedules
  • A date-based data structure that makes certain that fees are calculated correctly, including any mid-period changes to the fee schedule
  • Consistent and accurate fee calculation for every billing period while also maintaining a history of settings
  • Fee calculation details providing full disclosure of how fees are calculated

The platform should also provide audit and set-up details that report on how the data is set up or has been changed. Through these reports, it is then possible to confirm the set-up complies with the Investment Management Agreements (IMA) in place, and store relevant audit details should they be requested.

Building Client Trust

Automation should also have an invoicing component that provides a detailed breakdown of the client’s fee in a clear, concise document. A customizable display and delivery feature would also provide flexibility to meet the needs of each client and ensure timely delivery of a secure invoice.

Aside from the compliance risks associated with error-prone client fee billing, establishing and maintaining investor confidence is crucial for firms to deliver the best client service possible. For most investment managers, that means delivering consistency, accuracy and transparency across billing, communications and reporting – from the custodian to the end client.

# # #


Decrease time-to-market and scale to growth while reducing risk. Putting you in control of your data, operations and growth.

Related Articles

See All