The Securities and Exchange Commission on Wednesday warned investment advisers to step up their monitoring of wrap-fee accounts and put more thought into whether they should recommend them to clients.
The agency has been focusing for a number of years on conflicts of interest surrounding the vehicles, which charge investors a consolidated fee for advisory services and investment transactions that is usually based on the amount of assets in the account.
Wrap-fee programs are touted as a way to provide certainty about costs regardless of how often an adviser adjusts investment strategies or makes trades in the account. But the SEC has been zeroing in on conflicts related to putting predominantly buy-and-hold clients into wrap-fee programs.
The risk alert the SEC released Wednesday outlined problems the agency found in examinations of more than 100 advisers who served as portfolio managers or sponsors of wrap-fee programs or who advised their clients’ accounts through third-party wrap managers.
The agency found that advisers fell short on monitoring trading in the accounts, determining whether using the accounts was in their clients’ best interests and making disclosures related to the accounts, among other deficiencies.
“The staff observed that many examined advisers’ compliance programs could be improved,” the alert states. “The most frequently cited deficiencies were related to compliance and oversight, including policies and procedures regarding the tracking and monitoring of the wrap fee programs; and disclosures, including disclosures regarding conflicts, fees, and expenses. In some instances the staff questioned the appropriateness of recommendations of wrap fee programs for clients, particularly when the clients had no or low trading volume in their accounts.”
The advisory firms’ internal controls also were found lacking.
“The staff frequently observed that the examined advisers had weak or ineffective compliance policies and procedures relating to their wrap fee programs,” the alert states.
The advisers involved in the exam sweep paid attention to what the agency discovered.
“In response to the staff’s observations, advisers elected to amend disclosures, revise compliance policies and procedures, conduct suitability reviews of wrap fee clients or change other practices,” according to the alert.
The SEC provided several best practices for advisers to follow to stay in compliance when using wrap-fee accounts, including periodically reviewing them to ensure they’re in the client’s best interests and highlighting the costs that aren’t covered in the accounts.
“Provide clear disclosures, when recommending wrap fee programs to clients, about whether certain services or expenses are not included in the wrap fee,” the alert states.
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