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252 trading days? 251?

By Isabel Alcántara, Esq.


Investment advisers that direct their qualified custodian(s) to directly deduct investment advisory fees from their clients’ accounts are normally required to adhere to the following safeguards depending on where the adviser firm is registered:


• Send the qualified custodian an invoice of the amount of the fee to be deducted from the client’s account; and


• Send the client an invoice itemizing the fee. Itemization includes the formula used to calculate the fee, the amount of assets under management on which the fee is based, and the time period covered by the fee.


• Provide notification in writing on Form ADV that the adviser intends to use the safeguards provided above.


This post will focus on the fee formula aspect of the safeguards listed above and how one small error in the fee formula disclosures could give rise to consequences that all advisers seek to avoid.


An investment adviser’s fee formula is often disclosed in the firm’s ADV disclosures and investment advisory agreement and may factor in the amount of trading days that occur in a year (averaging 252 trading days). Advisers that rely on large brokerage firms to maintain custody of client assets are urged to doublecheck with the brokerage firm that the proper amount of trading days are being factored into the fee formula. If a broker does not update the fee formula in a given year, the adviser firm is still held responsible for such miscalculation because the broker is acting as an agent of the adviser firm. Whether the broker would be liable is beyond the scope of this post.


In other words, even if the qualified custodian failed to modify the fee formula by the number of trading days from one year to the next, the adviser firm would be liable to its client for the funds that client paid the adviser in excess due to the miscalculation. The consequences may include, but are not limited to, deficiencies, enforcement actions, and returning fees to clients.


I suggest that adviser firm management review their Form ADV Part 2A brochure, advisory agreements, and the firm’s custodian invoices to ensure that the proper amount of trading days have been factored into the firm’s fee calculations.


[This post, and any post published by Alcantara Law, is meant to be general in scope and readers are encouraged to seek counsel instead of taking this blog at face value. Contact us at alcantaralaw@outlook.com if you have any questions.]




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