Bungled Family Account Aggregation Can Cause Compliance Aggravation for RIAs

As they attempt to save money on cell phone bills that are larger than their mortgage payment, many consumers purchase a family plan from their carrier. Similarly, family account aggregation, commonly known as householding, can help clients to save money on their investment advisory fees. Clients are harmed, however, if a Registered Investment Advisor (“RIA”) fails to apply tiered breakpoint discounts that reduce advisory fees as their household account balances increase to a specified level.

Householding of accounts can help clients to save money

Many RIAs offer advisory fee schedules that provide for a lower charge when household accounts are aggregated and reach a certain level. When an RIA agrees to household clients’ accounts, the firm must ensure that they correctly calculate their fees on those assets under management.

On March 4, 2022, the SEC brought an enforcement action against an RIA that marketed its services primarily to teachers. The RIA charged clients a fee based on the gross value of clients’ assets under management. Those fees were supposed to be reduced when clients’ household assets reached a specific breakpoint.

Among other violations, the SEC alleged that the RIA acted inconsistently when aggregating the value of all accounts held by family members living in the same household. This failure caused certain clients to pay a higher advisory fee than they should have.

The RIA’s fee schedule, which was disclosed in its Form ADV Part 2A and incorporated by reference in the firm’s advisory agreements, incentivized clients to deposit more assets to reach the next breakpoint. Once clients attained the next breakpoint, they were entitled to receive a lower fee rate.

To determine the gross value of the client’s assets under management and the appropriate advisory fee, the RIA’s policy was to aggregate the value of all accounts held by family members living in the same household. The household for fee calculation purposes included family members sharing the same address.

The SEC claimed that the RIA did not consistently aggregate the value of all accounts held by family members living in the same household. As an example, in situations where two spouses each held an individual retirement account, the RIA did not always include both accounts when determining the advisory fee. Because of this mistake, the RIA did not consistently charge a lower advisory fee when the aggregate of clients’ household accounts satisfied the threshold to pay a reduced fee. Therefore, certain clients paid a higher advisory fee than they should have.

Aside from its household account miscalculations, the RIA purchased, recommended, or held mutual fund share classes for clients that charged 12b-1 fees instead of using the available lower-cost share classes of the same funds. The RIA also failed to refund pre-paid advisory fees after clients terminated their advisory relationship. In addition, the RIA failed to adopt and implement written compliance policies and procedures that were reasonably designed to prevent violations of the Investment Advisers Act and its rules governing billing practices.

The SEC’s enforcement action can be found at https://www.sec.gov/litigation/admin/2022/ia-5976.pdf

Risk Alerts help RIAs avoid potential compliance problems

In a Risk Alert published on November 10, 2021, the SEC warned RIAs about the importance of correctly aggregating household assets for purposes of fee calculations. Among other observations, examiners identified calculation errors, such as over-billing advisory fees, inaccurate calculating of tiered or breakpoint fees, and mistakes arising from incorrect householding of accounts.

The Risk Alert criticized advisors for not fully disclosing their process for implementing householding and eligibility criteria. Certain RIAs lacked policies and procedures pertaining to family account aggregation or the application of breakpoints for fee calculations.

The Risk Alert is available at https://www.sec.gov/files/exams-risk-alert-fee-calculations.pdf.

Conclusion

Aggregating all of a family’s accounts for fee calculation purposes can benefit clients, as well as RIAs. Clients potentially pay a reduced rate for advisory services. They may decide to consolidate all of their assets with the RIA in order to spend less on advisory fees.

The RIA may be able to build a relationship with other members of the household. If this occurs, surviving members of a family may not take their assets to another firm after one client dies, which is a common occurrence. It might even help RIAs to build a relationship with younger family members who may remain with the firm for decades to come.