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If you’re an investment advisor, one of the quickest ways to run afoul of the Securities and Exchange Commission (SEC) is to make statements in your Form ADV that you fail to execute. When this happens in connection with investment-advisory fees, the SEC will be especially unhappy with you. To motivate advisors to not play games with their fees, the SEC recently published a Risk Alert detailing the most frequent advisory fee and expense compliance issues they encounter.

Based on a review of 1,500 examinations and resulting deficiency letters over the last two years, the SEC’s Office of Compliance Inspections and Examinations identified the most common compliance issues that arise out of sloppy or deceptive advisor billing of consumer fees and expenses. They include:

  • Inflating the value of an account in order to generate higher fees. This results from practices such as using a different valuation metric than what was defined in the advisory agreement; calculating the account value at the end of a billing cycle rather than using the average daily balance; or including asset types such as cash equivalents, alternative investments, or variable annuities in the value calculation in violation of the agreement.
  • Manipulating the timing and frequency of fee billing in order to benefit the firm. For example, advisors may bill advisory fees on a monthly basis instead of the required quarterly basis or bill new clients in advance for an entire cycle rather than making a pro-rata adjustment.
  • Applying an incorrect fee rate. This tactic may include applying a higher rate to the calculated account value than is stated in the advisory agreement or Form ADV or charging a non-qualified client performance fees based on a share of capital gains in violation of the Advisors Act.
  • Omitting rebates and applying discounts incorrectly. Here, OCIE staff said advisors sometimes fail to aggregate account values as promised for multiple family members in the same household or never reduce the fee rate when the account value reaches an agreed-upon benchmark. They also may charge clients brokerage fees when they are in the advisor’s wrap fee program.
  • Making disclosures in their Form ADVs that conflicted with actual practices. For instance, advisors sometimes charge a fee rate higher than the maximum promised in their advisory agreements. Or they may bill for expenses unmentioned in their agreements (example: billing for third-party execution and clearing services that exceed actual fees charged by an outside clearing broker).
  • Misallocating expenses to clients rather than to advisors. This occurs in connection with distribution and marketing expenses, regulatory filing fees, and travel expenses that advisors charge to clients rather than properly allocating to themselves.

What should you do with this information? The OCIE provides three pieces of advice:

  • Assess one’s advisory fee and expense practices (and disclosures) to make sure they comply with the Advisor’s Act and related rules.
  • Based on this review, change or enhance your practices and procedures to assure compliance.
  • Reimburse clients for the overbilled amount of advisory fees and expenses.

This may not be what you want to hear, but it’s good advice. Full compliance with the law and if not, mitigation of any problems, including refunds paid to consumers, will always be the smartest strategy. Questions? Contact your compliance officer or attorney as soon as possible so you can avoid problems in case the SEC comes calling.


To read more on ethical business practices, visit the Ethics Center at the National Ethics Association, sponsor of EOforLess. 

A federal court has vacated the Department of Labor’s fiduciary rule for retirement accounts. But the fiduciary principle is far from dead. Not only are state jurisdictions adopting their own fiduciary standards, but the Certified Financial Planner Board of Standards has just approved a new Code of Ethics and Standards of Conduct. The code requires CFP® certificants to uphold a fiduciary standard when providing financial advice to clients. The Board’s prior code only required advisors to act as fiduciaries when performing comprehensive financial planning.

After a two-year process, the CFP-granting organization decided to move to a more comprehensive fiduciary standard that will assure that its 80,000 planners serve the public interest.

“(The) CFP Board took a bold step more than a decade ago in requiring a fiduciary duty when CFP® professionals provide financial planning services. We are raising the bar even higher now with a fiduciary standard that will apply anytime a CFP® professional gives financial advice,” said Richard Salmen, CFP®, Chair of the CFP Board of Directors. “This is a monumental step forward in the evolution of not just the CFP® certification, but also of the profession of financial planning. Consumers, advisors, and firms alike will all benefit from these new standards.”

According to Salmen, the CFP Board spent more than two years working on the revised Code. Starting with the December 2015 formation of the Commission on Standards, the Board held more than 17 public forums and multiple comment periods and received more than 1,500 written comments and hundreds of oral comments. It also conducted a survey and provided multiple opportunities for the public to provide input.

The new CFP Code of Ethics and Standards of Conduct, which will take effect on October 1, 2018, requires CFP® holders to;

  • Place the interests of their clients above their own interests or those of their firms.
  • Strive to avoid conflicts of interest (or if they can’t be avoided, to fully disclose them), to obtain the informed consent of clients regarding the conflicts, and to properly manage the conflicts.
  • Act without regard to the financial or other interests of the CFP® holder, of that person’s firm, or of any individual or entity other than their clients.
  • Perform their duties with integrity, which must transcend personal gain or advantage.
  • Provide professional services with competence, which means with relevant knowledge and skill.
  • Do their jobs with diligence, which entails responding to reasonable client inquiries in a timely and thorough manner.
  • Exercise sound and objective professional judgment, refusing any gift, gratuity, entertainment, non-cash compensation, or other consideration that might compromise a financial planner’s objectivity.
  • Treat all clients, colleagues, and others with dignity, courtesy, and respect.
  • Comply with the laws, rules, and regulations governing the financial-services industry.
  • Keep confidential any non-public personal information about a prospective, current, or former client.
  • Provide sufficient information to all clients confirming the scope of all financial-advice and financial-planning engagements.
  • Provide accurate information to clients in a manner and format that fosters understanding.
  • Refrain from making false or misleading statements regarding methods of compensation, especially regarding claims of operating on a fee-only or fee-based basis.
  • Exercise reasonable care and judgment when selecting, using, or recommending any software, digital advice tools, or other technology to clients.
  • Refrain from borrowing or lending money to a client.

The Code also defines the financial-planning process, applying standards to its seven underlying steps, which include:

  • Understanding the client’s personal and financial circumstances.
  • Identifying and selecting goals.
  • Analyzing the client’s current course of action and potential alternative courses of action.
  • Developing the financial planning recommendation(s).
  • Presenting the financial planning recommendations(s).
  • Implementing the financial planning recommendation(s).
  • Monitoring progress and updating the client.

Finally, the new code reviews a CFP® planner’s duties owed to firms and subordinates, as well as to the CFP Board.

To learn more about the CFP Board’s new Code of Ethics and Standards of Conduct, read the complete document here. You can also review a commentary version, a redline version, and a side-by-side document comparing the new and prior documents.


Continue to keep up to date with ethical practices by reading the latest news on  National Ethics AssociationFor information on affordable E&O insurance for low-risk insurance agents, investment advisors, and real estate broker/owners, please visit EOforLess.com.

Financial technology (FinTech)—which delivers innovations in banking, investing, and insurance—has had a large impact on America’s financial-services consumers. But it is also posing risks to the public, especially to millennial consumers, according to a new survey of securities regulators from the North American Securities Administrators Association (NASAA).

NASAA’s recent Pulse Survey of state and provincial regulators in the United States, Canada, and Mexico revealed that one-third (34 percent) believed the rapid development of financial technology is a positive development for investors. However, 20 percent expressed concern over the potential negative impact on investors.

Roughly one-half (46 percent) of regulators said it was too early to know for sure, but cited benefits such as lower costs and greater accessibility to investments among clients not previously accessed via traditional methods. Still, they believed it was crucial to have strong investor protections in place so that greater access does generate greater fraud risks.

According to Investopedia, the FinTech landscape is especially wide-ranging. It includes:

  • Cryptocurrencies and digital cash.
  • Distributed ledger technologies (blockchain).
  • Smart contracts (using computers to automate contracts between buyers and sellers).
  • Open banking (joining banks to third-party providers such as Mint).
  • InsurTech (streamlining the insurance industry).
  • RegTech (applying technology to regulatory compliance).
  • Robo-advising (using algorithms to deliver investment advice without face-to-face human involvement.
  • Unbanked/underbanked (providing financial access to populations that traditional banks and insurers ignore).
  • Cybersecurity (assuring that fintech applications and data are protected against cyber-criminals.

Other findings from the NASAA survey are as follows:

  • Millenials have the greatest risk of fraud. The regulators viewed Millennials (consumers reaching young adulthood in the early 21st century) as the most likely consumer group to use FinTech products (84 percent). But they also believed they are the most likely to become  fraud victims (41 percent). Meanwhile, Baby Boomers were seen as the least likely to use FinTech, but the second most likely to become victims (37 percent).
  • Some FinTech is riskier than others. Regulators viewed financial technology as having a high (28 percent) or moderate (72 percent) chance of fraud. But risks were perceived to be high for specific applications, including initial coin offerings (ICOs) and cryptocurrencies (94 percent) and low for others (3 percent for robo-advising).
  • Fraudsters have the edge. Not surprisingly, more than half of regulators (56 percent) said fraudsters were the most knowledgeable about FinTech and that consumers were the least knowledgeable (94 percent).
  • Regulators and law enforcement have their work cut out for them. Three-fours of survey respondents (75 percent) said they believe preventing FinTech fraud is getting more difficult.

“The survey results show that our members are focused on the potential for fraud when it comes to new technologies and products,” said Joseph P. Borg, NASAA President and Alabama Securities Commission Director. “But the results also reflect recognition that these innovations may benefit investors, which makes appropriate regulation and investor education critical.”

Are your customers heavy or light users of FinTech? In either case, now may be a good time to warn them about the dangers of using such tools without sufficient understanding of the risks involved.

For complete survey results, go here.


Continue to keep up to date with ethical practices by reading the latest news on  National Ethics AssociationFor information on affordable E&O insurance for low-risk insurance agents, investment advisors, and real estate broker/owners, please visit EOforLess.com.

Rogue Advisors on Parade

A Dover, Massachusetts life broker is going to jail for filing fraudulent tax returns. The broker, Anthony J. May, 62, was sentenced to eight months in prison and a year of supervised release after being convicted for failing to disclose commissions and other income on his federal tax returns. May owned two businesses: a life insurance agency and a life settlement brokerage, both operated out of an office suite in Hingham, Massachusetts. According to IRS investigators, May filed false income tax returns from 2006 through 2009, concealing $735,000 in income from insurance commissions, broker fees, and lease rental payments.

A former life insurance agent from Lubbock, Texas has received a life prison sentence for scamming his senior clients out of hundreds of thousands of dollars. According to investigators from the Texas Department of Insurance, Joseph Gaines sold annuities to a number of West Texas senior citizens only to confiscate their payments and use them for his own purposes. One of his victims was a 94-year-old woman who gave Gaines a $700,000 check in return for annuity coverage. However, when her family became suspicious, they called the insurer, which advised them they had no record of the woman’s purchase.

A San Diego life insurance agent submitted a guilty plea in February 2018 for stealing $1.5 million from senior citizens and other clients. The agent sold them various investment funds, but instead of passing their checks to the appropriate investment firms, he used them to buy personal items such as a luxury car, jewelry, and three rental properties.  The agent, Shawn Heffernan, 43, is facing a nine-year state prison sentence after his sentencing on March 7, 2018. According to authorities, Heffernan began his scams by selling clients annuities. However, before the policies expired, he would persuade them to replace the policies with new ones, generating new commissions for himself and surrender penalties for his clients. He also persuaded other clients to cash out their annuity policies and give him the proceeds for investing in other instruments. However, rather than making the promised investments, he pocketed the money, using it to buy a Maserati sports car, jewelry, and real estate. He also used Ponzi techniques to fulfill redemption requests from prior clients with new-client money.


To read more about ethical business practices, visit the Ethics Center at the National Ethics Association, sponsor of EOforLess.