New SEC rule prompts advisers to rethink acting as trustees

Investment advisory firms that act as trustees and have some form of asset custody are weighing whether to continue offering the services in light of new SEC rules that include mandated surprise audits and go into effect March 12.

Investment advisory firms that act as trustees and have some form of asset custody are weighing whether to continue offering the services in light of new SEC rules that include mandated surprise audits and go into effect March 12.

The surprise audits — to be conducted annually at the advisory firm’s expense — will involve independent accountants reviewing financial records, verifying the existence of client funds and affirming that client assets and trades are as the adviser reported them.

The audits are part of a package of new rules adopted by the Securities and Exchange Commission in December in response to the Ponzi scheme perpetrated by Bernard L. Madoff Investment Securities LLC.

With the first audit required by year-end, the more than 1,300 SEC-registered advisers who serve as trustees now must gear up to comply.

“A lot of advisers who serve in that capacity do so as a service to clients,” said Valerie Baruch, assistant general counsel of the Investment Adviser Association, which represents SEC-registered advisers. “They do it at low cost or no fee. They’re trying to figure out whether they can still continue to serve in a trustee capacity.”

Trust services typically involve managing and distributing assets under trusts created in wills, or handling trust accounts for families or charities.

Officials at Mintz Levin Financial Advisors LLC, a registered investment adviser that manages about $950 million, are assessing whether the firm will continue offering its trustee services, said president Robert Glovsky.

“We’re trying to understand the impact of the audit, what that actually will entail and what the costs will be, and then make a judgment as to whether it makes sense to continue serving as trustee,” said Mr. Glovsky, who is also chairman of the Certified Financial Planner Board of Standards Inc.

Mr. Glovsky and Cary Geller, executive vice president and chief compliance officer of the firm, serve as trustees for 10 to 15 of the firm’s 340 clients.

Offering trustee services is not a big money-maker for Mintz Levin, Mr. Glovsky said.

“In our case, it is individuals acting as trustees when a long-standing client asks an adviser to be a trustee,” he said.

If advisers choose not to continue as trustees, clients likely will have to go to bank trust departments for the service, which could be more expensive for the client, said Christopher Casdia, compliance and operations manager at Homrich & Berg Inc., an advisory firm that manages $1.9 billion.

Such a move, however, could pose a dilemma for advisers.

“Now another firm is serving as trustee, and you don’t know what their motivations are,” Mr. Casdia said. “They could try to get the whole relationship.”

In addition to trustee services, advisers who provide family office services will come under the new SEC restrictions and be subject to surprise audits if they pay bills for their clients, he said.

The risk of offering bill payments is that an auditor might question how many employees have access to a customer’s bank account, Mr. Casdia said.

Homrich & Berg, which offers family office services, is searching for an auditor in order to comply with the requirements by the effective date.

While the new rules impose greater costs on many advisers, they may create opportunities for custodians since it prohibits advisers from holding trustee assets in omnibus accounts. Such accounts, which aggregate an adviser’s trust holdings at a custodian and allow only the adviser to know the identity of the account owners, will have to be replaced by individual accounts.

In fact, some advisers and law firms that provide trust services and hold trustee assets in omnibus accounts have contacted Fidelity Institutional Wealth Services about moving those assets into individual accounts, according to executive vice president Scott Dell’Orfano.

While the Fidelity advisory custody unit does not charge fees to set up new accounts, “the internal costs for advisers would vary firm by firm,” said Fidelity spokesman Stephen Austin. “In many cases, they may save money. In other cases, it may be more costly.”

Fidelity Institutional Wealth Services, which oversees nearly $400 billion in assets, is already being contacted by many of its affiliated advisers, as well as some who use other custodians, he said.

“Right now, we have $7 billion of prospects in our pipeline,” Mr.Dell’Orfano said.

E-mail Sara Hansard at [email protected].