Adviser Failed to Household Accounts and Refund Prepaid Fees
The SEC fined and censured an investment adviser for failing to aggregate household accounts, refund prepaid advisory fees, and purchase the lowest cost mutual fund share classes.
The adviser’s published fees provided breakpoints based on total assets and promised to aggregate household accounts, but, according to the SEC, the adviser did not consistently combine household accounts, thereby overcharging clients. The adviser also charged advisory fees in advance of each quarter but did not provide pro rata refunds in the event a client terminated before the end of the quarter. The SEC also accuses the firm of purchasing higher-cost fund share classes which paid back 12b-1 fees to the firm’s broker-dealer affiliate. The firm agreed to pay over $790,000 in disgorgement, interest, and penalties and retain an independent consultant.
Don’t offer to household client accounts unless you have a system or process in place to ensure that you can, and will, combine accounts, which can be more complicated than it sounds. Also, we counsel against charging fees at the beginning of any fee period in order to avoid this prepaid advisory fee refund issue (and because markets tend to go up over time).
Read SEC order here.