Comments on Proposed New Regulations

Proposed November 2, 2011

Received on January 6, 2012:

Comment from Louis E. Conrad II, COMPASS Wealth Management, LLC (PDF)

Received on December 29, 2011:

Comment from Brad Richardson Bradyco Financial (PDF)

Received on December 23, 2011:

To Whom it May Concern

I am writing in response to the new proposals set forth in the custody laws, specifically amending the SEC version regarding invoices and audits. Obviously, full disclosure for clients is an extremely important part of a fair and honest financial advisory relationship. However, it's important that each law/regulation be very carefully thought out and not overly burdensome to the client or the advisor, or too lenient for the client or the advisor. I think that the current proposal can be EASILY improved upon for both the advisor and the client, with very little changes. I'm in operations, and the current proposed law is a logistical nightmare, mostly for the advisor, but very much so for the client as well. Let's examine it and it should become quite clear that something would need to change:

1) COST: If you charge your clients monthly, which is the most common way to charge (or quarterly), sending an invoice to a client every single month is quite costly. Let's say you have 400 clients (small firm), with stamps/paper/envelopes/ink, it's probably around $1 per mailing, so $400 total. Now factor in the staff time it takes to address all the envelopes, stuff them, stamp them, etc, that's several days worth of work for 2 people, so that would average about $480 at two staff people at $15 an hour for two days. So now we are talking about $880 per month, or $10,560 per year, all to send an invoice, that is simply a duplicate of what shows up on the statements. If you choose to instead simply have a surprise audit, the costs range from around $7k - $10k per year - and this is for a small firm!!

2) DOESN'T SOLVE THE PROBLEM: If the argument for providing a separate invoice is that most people don't look at their statements, what makes you think they will look at these invoices? Realistically, even clients who think it's great to send it, are they really going to open it every month and examine the fees? No, overtime the will absolutely ignore it - people are much more likely to examine their client statements to see how much money they have for retirement, education, etc.

3) ANNOYANCE TO CLIENT: From a client's perspective, there is NO doubt that MANY of them will request to opt out of this mailing, as they don't want to receive 12 letters each year that is a duplicate of the statements that they are already receiving. Obviously, we can say, sorry, but the state requires us to do so. This will frustrate them, cut down a lot of unnecessary trees, burn a lot of CO2, all so that the many who want to opt out can simply throw it in the trash. Will there be an opt out system? Even with an opt out system, logistically, that is very hard to track.

4) ANNOYANCE TO CLIENT: Let's say the opt out of regular mailing, and they prefer to have it emailed - which most will do as most people prefer email to regular mail. There are many issues with this.
a)First, the same issue occurs as the mailing as they now start to get 1 email a month, that would probably be set up to go to their junkmail folder, or completely ignored.
b) MOST IMPORTANTLY, once they are trained to ignore our emails (or mailings), which they most certainly will be trained to do, think of how detrimental that is to the client relationship!!!! I would be furious if I kept getting junkmail from my advisor, and would be considerably less responsive to any emails as again, they will be trained to ignore them. So now if it's a very important email, it could be ignored. Perhaps we are trying to get the client to come in for their annual review, or imagine if the client really needs to rebalance their portfolio, update their beneficiary, etc, and the client simply ignores the emails, as they have been trained to do, it could be extremely costly!
c) It's going to be very difficult to email this information to them, because it needs to be done through a secure server to comply with MA security laws, greatly increasing the time it takes to process this, and greatly reducing the likelihood that the client goes and accesses that email.
d) Clients will especially start to ignore secure emails in this way, which are of course, the most important emails since it usually contains statement, financial plans, analysis, portfolio performance - all the stuff that clients pay us for
e) Trying to figure out which clients want it securely, which clients want it regular email, which clients want it mailed, is logistically very hard to keep track of

5) NOT EFFECTIVE: The client seeing the monthly, or quarterly charge, is not nearly as relevant as what the annual charge is.

Simply change the requirement to have an annual invoice delivered to the client, that will include the entire fees for the year.

This proposed solution will solve virtually all of the logistical problems, is more effective for the purpose of the law (to protect the client and fully disclose the fees), and is considerably less burdensome for the advisor. It's very helpful for the client to have this annual number, because they can use this information to provide it to their tax preparer because they can potentially write off some/all of the fees. They also have a much better understanding of all of the fees that are charged for the year and they don't have to perform all sorts of calculations to see what the annual fee actually was. For those that are actually interested in the monthly or quarterly fees, they will be motivated enough to look at their investment statements either online or mailed to them, which clearly state their fees.

Please take this suggestion seriously! The balance of what is the proper regulation and what protects the client is always a difficult and conentious issue. I think if you examine the current proposal, it negatively affects both the client as well as the advisor - while the proposed solution has a much more positive affect on the client. Any new regulation is burdensome on the advisor, however, the proposed solution is much less burdensome, and I think it's ultimately a fair deal. Thank you for considering this and for your continued help with this issue.

Received on December 7, 2011:

Please note that most of our billing invoice or statements can be or are done electronically. In our case, fees are calculated by our portfolio management system and a file is generated and submitted electronically to our custodian Charles Schwab. They deduct the fees from the client accounts and transfer them to our corporate account held at Schwab. So if a separate bill is sent to the custodian it would be redundant and arrive at the custodian after it has already been processed.

Similarly, our portfolio management system generates a billing statement for each client showing all the details of the calculation and the fees deducted. This statement is uploaded to our website where all our client are encouraged to visit for updates and receive all our regular communications. Clients can go to their secure website portal to review their billing details at any time. All our fees are represented on our website in many different formats and levels of granularity. Additionally, our custodian Charles Schwab shows any and all fees that are deducted on a separate line in all client statements. Statement are sent by the custodian monthly or at least quarterly on retirement accounts. So in our case the clients are notified by both our firm and our custodial firm of the actual fees that are deducted.

So hopefully, website postings and/or electronic notification can be used in lieu of what could be interpreted as a paper invoice or statement. Hopefully, some clarification and text will be added to this language that electronic notification would satisfy the requirement for “sending the client an invoice or statement”.

Thank you for your consideration.

Steve Doucette, CFP®
Proctor Financial - Retire Better™
66 Central St, Wellesley, MA 02482
781-235-0405 Fax 781-235-0610

Received on November 3, 2011:

Dear Secretary Galvin,

I am unalterably opposed to Registered Investment Advisers having custody of funds. This is how Madoff made off with billions. In my opinion, all client funds should be held by nationally recognized third-party custodians such as Fidelity, Schwab, etc. who are members of SIPC. This arrangement would prevent the creation of false client statements... the very thing that Bernie the Bum and many like him have done in the past.

We often read about lawyers who have comingled client funds then used them for their own personal purposes.

Thank you.

Robert W. Brimmer, CFP®
59 Finlay Road
P O Box 2806
Orleans, MA 02653

Received on November 2, 2011:

Dear Sirs;

I am an investment adviser in the state of MA and my clients assets are held in custody at Charles Schwab &Co. I take my fees directly from most clients accounts and send the client a detailed invoice. In the past I used to send a copy of those invoices to Charles Schwab & Co. until two times they subsequently charge my client's accounts a second time for the fee which I had to have retracted. I am loathe to do this again since I can excuse one time but not two. I do send a list of the accounts and fee amounts to be withdrawn but currently I do not send the invoice.

I am not against having to do this again but have some reluctance because of past errors. I can not determine a good suggestion for your regulation but I would think that sending a listing of the amount to be deducted for a fee would be sufficient for Schwab to determine if the fee is excessive.

Alan Lachowitz