Fee transparency remains a crucial factor for investors when choosing investment advisers.
ACA Group emphasizes that clear fee structures not only build trust but are also rigorously examined by regulators such as the U.S. Securities and Exchange Commission (SEC). The SEC’s emphasis on this issue was prominent in their April 2024 Marketing Rule Risk Alert, which pointed out problems like missing crucial fee and expense information, potentially misleading investors.
The importance of accurate fee disclosures has been underscored by various SEC actions in recent years. For example, in December 2021, an investment adviser faced charges for failing to correctly offset management fees, causing investors to overpay by millions. This focus persisted through 2022 and 2023, with several advisers being cited for not complying with their fund’s agreed terms, highlighting the necessity for precise fee calculations.
Investment advisers are navigating increasingly complex fee arrangements, particularly in private funds that may include performance-based fees such as carried interest. These differ from standard Separately Managed Accounts (SMAs), where fees are usually based on assets under management (AUM). Advisers need to meticulously understand and articulate these terms to prevent risks and guarantee correct fee calculations.
The risks of opacity and miscalculations can impact client satisfaction and trust adversely. It’s vital for investment management firms to ensure that fees are calculated accurately and communicated transparently. This should involve detailed examples and explanations of fee calculations and ensuring that all agreements are explicit and comprehensible to all stakeholders.
To overcome these challenges, firms must establish robust processes for fee calculation and review, including regular audits and clear, comprehensive contractual agreements. Additionally, ongoing training and education for finance and operations teams are crucial to maintain expertise in handling complex fee structures.
By prioritizing thorough and regular scrutiny of fee structures and calculations, investment management firms can improve their transparency and regulatory compliance, thereby fostering stronger trust with clients and mitigating potential conflicts and legal issues.
Source: fintech.global
