The SEC has been on an examination streak, boosting the number of audits by an incredible 137%
July 17, 2019 | Product News
A good rule of thumb has always been that because the U.S. Securities and Exchange Commission (SEC) examines less than ten percent of RIAs, the odds of your firm being chosen for an audit in any given year were pretty low.
Recent trends have blown that idea right out of the water.
Over the past six years, the SEC has been on an examination streak, boosting the number of audits by an incredible 137%, according to their 2018 fiscal year annual report. In 2018, the SEC’s Office of Compliance Inspections and Examinations (OCIE) audited 17% of RIAs (2,312 firms), which is more than double the 8% audit rate in 2012.
One area that regulators have been paying special attention to is billing practices. The SEC has issued multiple letters stressing that billing operations must now be held to higher standards. The U.S. Department of Labor (DOL) has also chimed in, demanding that industry participants focus on providing fee transparency to clients.
Our research has found that the OCIE is most focused on these issues:
We’ve previously discussed the functionality that your billing software needs in order to avoid being tripped up by incorrect billing valuations, billing fees in advance and not ensuring correct fee rates. In this article, we focus on regulatory compliance and describe the steps that every firm should take to ensure that their billing practices can withstand regulators’ scrutiny.
To start, it’s helpful to look at a few specific areas where wealth management firms can get tripped up to illustrate the general principles behind regulatory-compliant billing practices.
The two main causes behind most of the billing errors listed above are operational issues and software shortcomings. To optimize your processes for regulatory compliance, both should be addressed.
Operational Issues. These can include poor inter-company communications and inaccessible paperwork which leads to billing errors. For instance, if sales staff aren’t fully apprised of your firm’s billing policies, it can result in discrepancies between what was on the client agreements and what the clients are billed. Errors can also arise when the billing department does not have easy access to the formula for determining client fees is described.
Software shortcomings. All billing software is not created equal. Some solutions work well when handling relatively simple billing tasks but fall short when it comes to more complex processes. For instance, billing software that is unable to handle asset exclusions can lead to inaccurate fee calculations from assets that should not have been included in billing.
To avoid errors caused by structural or communications issues, it is important to analyze how your billing system fits into your firm’s overall operational structure. If one department is responsible for entering fee information from the client agreement while another is running the billing, verify that both departments are on the same page when it comes to policies and procedures.
Thought should also be given to how the fee information from your firm’s Form ADV is entered into the billing system. Even if the proper formula for determining fees is selected, if the information is not accurately transmitted to your billing solution, it can lead to errors.
Another area to monitor is the ability of the sales department to alter or determine fees. If they do have discretion in this area, make sure that they have been fully briefed on what is allowable within the context of your billing procedures. While a firm’s sales staff is generally well informed as to the company’s competitive advantages, the regulatory aspects of your company’s operations are no less important, making it prudent to provide your sales staff with a comprehensive understanding of its fee practices.
In cases where the sales department has the ability to alter or determine fees, your billing solution should support fee schedule overrides at the account level. This will avoid operations having to track these side deals outside of the billing system or worse, not tracking them at all. Further, by capturing these overrides within the billing system, broker-dealers can ensure that no advisors are overly discounting fees and cutting into the firm’s revenue.
As mentioned previously, billing software that is unable to perform complex operations can lead to errors in the billing process. A leading-edge wealth management billing solution will help your firm stay in compliance and also accelerate the billing process so that you get paid quicker.
Some billing solutions lack the ability to export the relevant data needed to respond to inquiries from regulators. This includes individual fee calculation and the attributes of accounts and sleeves, which will need to be manually compiled if the system cannot provide them.
Hybrid firms and mergers
The need for sophisticated best-of-breed billing software has increased over time as many firms have started their own broker-dealers or added hybrid broker-dealer functionality. Rather than be restricted by the limited billing functionality inside a wealth management platform, a stand-alone package is often preferable.
This is because platform billing modules may not support all the data that is needed to respond to regulator requests and often don’t support security level billing exceptions. Support for exceptions is important when hybrid firms merge or are acquired since any errors can lead to merged accounts being incorrectly coded or defaulted to the firm’s standard fee even though a lower fee had been previously negotiated. This functionality also allows clients to assign security identifiers that can be used for calculating special asset fees and fee exclusions.
Handling rep teams without spreadsheets
The best billing solutions support split-rep logic across all system functionality. This should apply both for the calculation of fees (using each advisor’s individual aggregated book of business) and with the allocation of each advisor’s fees (correct allocations based on each advisor’s percentage of the rep relationship).
This is more efficient than relying on a spreadsheet for regulatory purposes, given the inaccuracies that can result. This type of billing functionality helps ensure that your billing system will be accurate as well as auditable.
The Redi2 Wealth Manager Enterprise platform is a scalable and high-performance billing solution for managed accounts that was designed to solve the complex billing and payout challenges facing modern wealth management firms. Our solution has the requisite functionality to help keep your billing processes compliant with applicable regulations.
We provide a robust workflow and data model that understands the business of broker-dealers, RIAs, asset managers, overlay managers, sponsors, service providers, custodians, and TAMPS across the UMA/SMA advisory landscape. The Redi2 Wealth Manager Enterprise solution is the leading wealth management billing and revenue management platform in the industry. We encourage you to see a demo to test its capabilities for yourself.
If you are looking for a billing solution that can accurately calculate advisor fees in a wide variety of situations while also helping your firm maintain regulatory compliance, email our team at firstname.lastname@example.org for more information.