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November 10, 2021

Division of Examinations Observations: 

Investment Advisers’ Fee Calculations*

I. Introduction

It is important for clients to receive timely and accurate information regarding fees and expenses 

when hiring an investment adviser because every dollar an investor pays in fees and expenses is 

a dollar not invested for the investor’s benefit. Thus, the staff from the Division of Examinations 

(the “Division”) often reviews whether advisers, among other things: have adopted and are 

following policies and procedures that are reasonably designed to result in the fair and accurate 

charging of fees; and have disclosed their fees with sufficient clarity for their clients to 

understand the costs associated with their services.

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The Division recently concluded a national initiative that focused on advisory fees, 

predominantly those charged to retail clients (“Advisory Fees Initiative” or “Initiative”). This 

Initiative assessed the various ways in which investment advisers charge fees for their services,

as well as evaluated the adequacy of fee disclosures and the accuracy of fee calculations.2 The 

staff conducted approximately 130 examinations of SEC-registered investment advisers under 

this Initiative (“examined advisers”) and identified deficiencies related to the advisory fees 

charged during most of these examinations. 

The advisory fee-related deficiencies observed often resulted in financial harm to clients, 

including: (1) advisory fee calculation errors, such as over-billing of advisory fees, inaccurate 

calculations of tiered or breakpoint fees, and inaccurate calculations due to incorrect 

householding of accounts;

3 and (2) not crediting certain fees due to clients, such as prepaid fees 

 * The views expressed herein are those of the staff of the Division of Examinations, formerly known as the Office of 

Compliance Inspections and Examinations or OCIE (the “Division”). This Risk Alert is not a rule, regulation, or statement of 

the Securities and Exchange Commission (the “SEC” or the “Commission”). The Commission has neither approved nor 

disapproved the content of this Risk Alert. This Risk Alert has no legal force or effect: it does not alter or amend applicable 

law, and it creates no new or additional obligations for any person. This document was prepared by Division staff and is not

legal advice.

1 The Division has identified disclosures regarding the costs of investing as an examination priority since 2018 (see Division, 

Examination Priorities for 2018, 2019, 2020, and 2021).

2 Other types of compensation, such as fees received in connection with client investments, were included within the scope of 

the Initiative to the extent that these fees related to the advisory fee calculations (e.g., advisory fees were to be reduced by any 

transaction-based compensation received by the advisers’ supervised persons). The staff also focused on additional 

compensation-based conflicts of interest identified during the examinations, if applicable.

3 See, e.g., In re Retirement Capital Strategies Inc., Advisers Act Rel. No. 5065 (Nov. 19. 2018) (settled) (alleging that the 

adviser inconsistently applied tiered “breakpoints” that reduced advisory fees as the total amount of client assets under 
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for terminated accounts or pro-rated fees for onboarding clients. In addition, the staff observed 

fee-related compliance and disclosure issues. The Investment Advisers Act of 1940 (“Advisers 

Act”) establishes a fiduciary duty for investment advisers.4 Advisers that fail to adhere to the 

terms of their agreement and disclosures, or otherwise engage in inappropriate fee billing and 

expense practices, may violate their fiduciary duties and the Advisers Act, including its antifraud 

provisions.5

The Division previously published a Risk Alert highlighting compliance issues observed by the 

staff related to advisory fees (“Advisory Fees Risk Alert”).6

 In this follow up Risk Alert, the 

Division is supplementing the Advisory Fees Risk Alert by providing greater detail on certain 

compliance issues observed during the recent Advisory Fees Initiative examinations, including 

additional details regarding the staff’s observations in the two areas outlined above.

II. Focus of Advisory Fees Initiative 

All of the examined advisers provided investment advice to retail clients; however, they had a 

wide range of assets under management, business operations, staffing levels, and affiliations. 

The scope of the Advisory Fees Initiative included a review of the examined advisers’ 

compliance policies, procedures, and practices related to advisory or other fees charged and the 

related disclosures provided to clients. More specifically, examiners typically reviewed the 

following areas:

• The accuracy of the fees charged by the examined advisers. The staff reviewed the accuracy 

of the advisory fees charged and whether the advisers overcharged clients.

• The accuracy and adequacy of the examined advisers’ disclosures. The staff reviewed the 

disclosures provided to clients related to the advisory fees billed, including whether certain 

types of assets should be excluded for fee billing purposes.

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• The effectiveness of the examined advisers’ compliance programs and accuracy of their 

books and records. When reviewing advisers’ compliance programs, the staff reviewed the 

 management increased and failed to aggregate or “household” related account balances of the same client and clients within 

the same household for the purposes of achieving the advisory fee breakpoint discounts).

4 An adviser’s federal fiduciary obligations are enforceable through Advisers Act Section 206. See, generally, Commission 

Interpretation Regarding Standard of Conduct for Investment Advisers, Advisers Act Rel. No. 5248 (June 5, 2019) (“Fiduciary 

Interp.”).

5 See Fiduciary Interp. supra note 4 (“The investment adviser’s fiduciary duty is broad and applies to the entire adviser-client 

relationship”). See also, In re Barclays Capital Inc., Advisers Act Rel. No. 4705 (May 10, 2017) (settled) (alleging that the 

adviser violated Advisers Act Section 206(2) by incorrectly calculating the advisory fees based on, among other things, a 

billing methodology that differed from the advisory agreements); In re Morgan Stanley Smith Barney, LLC, Advisers Act Rel. 

No. 4607 (Jan. 13, 2017) (settled) (alleging that the adviser violated Advisers Act Section 206(2) by charging clients advisory 

fees that did not reflect negotiated discounts).

6 Division, Overview of the Most Frequent Advisory Fee and Expense Compliance Issues Identified in Examinations of 

Investment Advisers (Apr. 12, 2018).

7 See Fiduciary Interp. supra note 4 ( “In order for disclosure to be full and fair, it should be sufficiently specific so that a client 

is able to understand the material fact or conflict of interest and make an informed decision whether to provide consent”). See 

also Advisers Act Section 207 (stating that it is unlawful for advisers to make untrue statements or omit any material facts in 

applications or reports filed with the Commission).
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adequacy of policies and procedures or other operational documents related to advisory fee 

billing practices and the calculation of assets under management used for fee billing

purposes.

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 In addition, the staff reviewed policies and procedures related to the valuation of 

unique or hard-to-value assets.

9 Lastly, the staff assessed whether the examined advisers 

made and kept books and records that were true and accurate.10

An adviser that engages in inappropriate fee billing and other fee-related deficient practices may 

have regulatory implications beyond these areas of focus. Therefore, the staff recommends 

reviewing this Risk Alert in conjunction with the Advisory Fees Risk Alert and other SEC and 

staff-issued guidance for a discussion of the legal requirements and helpful resources regarding 

Commission actions and interpretative guidance relevant to this topic.11

III. Staff Observations12

While investment advisers continue to have assorted advisory fee arrangements and use a wide 

variety of calculation methodologies, the staff observed that the typical examined adviser: (1) 

had a standard fee schedule with tiered fee levels based upon assets under management; (2) 

quarterly assessed its advisory fees; (3) deducted advisory fees directly from clients’ accounts; 

(4) calculated fees based on the account value at the beginning or ending date of the billing 

period; (5) used software or third-party service providers to calculate fees; (6) documented 

advisory fees with clients through written advisory agreements or contracts; and (7) combined 

family account values when such actions resulted in lower fees (i.e., householding of accounts). 

Understanding these general characteristics may be helpful when reviewing the deficiencies 

noted below.

 8 See Advisers Act Rule 206(4)-7 (requiring any adviser that is registered or required to be registered under the Advisers Act to 

adopt and implement written policies and procedures that are reasonably designed to prevent violations of the Advisers Act

and the rules thereunder, review those policies and procedures at least annually for their adequacy and the effectiveness of 

their implementation, and designate a chief compliance officer to be responsible for administering their policies and 

procedures).

9 See Final Rule: Compliance Programs of Investment Companies and Investment Advisers, Advisers Act Rel. No. 2242 (Dec.

17, 2003) (noting that an adviser’s compliance policies and procedures should, among other things, address its “processes to 

value client holdings and assess fees based on those valuations”).

10 Advisers Act Rule 204-2 requires every adviser registered or required to be registered with the Commission to make and keep 

true, accurate, and current certain books and records relating to its advisory business.

11 See, e.g., Form ADV Part 2, Item 5 and General Instruction 3 (requiring an adviser to disclose its compensation arrangements 

and reminds advisers of their fiduciary duty and related disclosure obligations, including providing “sufficiently specific facts” 

to allow clients to understand the adviser’s conflicts and business practices and give informed consent or reject them); and 

Division of Investment Management, Frequently Asked Questions Regarding Disclosure of Certain Financial Conflicts 

Related to Investment Adviser Compensation (last modified Oct. 18, 2019) (discussing certain compensation arrangements 

and related disclosure obligations arising from both the adviser’s fiduciary duty and Form ADV).

12 While the staff’s observations focus on advisers’ calculations of retail client fees, many of the principles and disclosure 

obligations also apply to other types of client accounts (e.g., institutional and fund clients) and forms of compensation (e.g., 

direct or indirect receipt of services, fees, or payments from third-parties servicing client accounts).
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A. Notable Deficient Practices

Advisory Fee Calculations

• Several examined advisers charged advisory fees inaccurately. These inaccurate calculations 

were due to a variety of errors, including:

o Inaccurate percentages were used to calculate advisory fees. For example, the staff 

identified examined advisers that, among other things: (1) charged fees that were 

different from contractually agreed-upon rates; (2) used the incorrect fee schedule (e.g., 

used the schedule intended for clients domiciled in a country other than the United 

States); (3) failed to convert all clients to their new or updated fee schedule; and (4) had 

errors in fee percentages manually entered into their portfolio management systems. 

o Advisory fees were double-billed. Such errors were typically due to oversights, such as 

not updating a system following a change in billing practices. 

o Breakpoint or tiered billing rates were not correctly calculated. Often these issues 

related to tiered fee schedules not being applied correctly or applied at all. 

o Householding of client accounts were not correctly calculated. In such instances, the 

examined advisers did not aggregate client or family accounts and/or apply the declining 

fee schedule, as applicable.

o Incorrect client account valuations were used. For example, examined advisers included

in their account valuations: (1) assets that disclosures stated would be excluded from the 

fee calculations, such as legacy positions; (2) stale account balance information as a 

result of the loss of data during transitions of portfolio management systems; (3) incorrect

valuation dates for client billings; and (4) inaccurate account values due to timing 

differences in cash and dividend transactions in electronic custodial feeds compared to 

the available balance at the custodian (e.g., certain pending deposits may be excluded 

from available balance). 

• Several examined advisers either did not refund prepaid fees on terminated accounts or did 

not assess fees for new accounts on a pro-rata basis. The staff identified the following 

issues, among others, related to refunding prepaid fees:

o Inconsistently refunding unearned fees. The examined advisers were obligated – by 

disclosures, advisory contracts, or both – to refund unearned advisory fees, but the 

examined advisers were inconsistent in providing refunds to clients (i.e., provided 

refunds to some clients, but not others) or were unnecessarily delayed in providing such 

refunds, sometimes for several years post termination. 

o Requiring clients to provide written requests to refund unearned advisory fees. In these 

instances, the examined advisers had policies to refund prepaid advisory fees only upon 
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written notice from clients.

13 Thus, the examined advisers kept the unearned advisory 

fees for clients that: (1) terminated the advisory relationship through their custodians, 

rather than notifying the adviser directly; or (2) did not specifically request a refund of 

prepaid fees when terminating the relationship.

False, Misleading or Omitted Disclosures 

• Several of the examined advisers were identified as having a range of disclosure issues. The 

issues identified were related to incomplete or misleading Form ADV Part 2 brochures 

and/or other disclosures, including disclosure that: (1) did not reflect current fees charged or 

whether fees were negotiable; (2) did not accurately describe how fees would be calculated 

or billed; and (3) was inconsistent across advisory documents, such as stating the maximum 

fee in an advisory agreement that exceeded the fees disclosed in the adviser’s brochure. The 

staff also identified examined advisers that did not have any written agreements or 

documentation establishing the client fee amount. 

Examples of issues with fee-related disclosures the staff observed, include:

o Cash flows and their effect on fees. The staff observed disclosures that were inconsistent 

with the examined advisers’ practices or were insufficient in describing how cash flows

(e.g., deposits and withdrawals) may impact client advisory fees, such as how a client 

will be billed for large deposits made mid-billing cycle.

o Timing of advisory fee billing. The staff observed examined advisers that provided

inaccurate disclosures regarding the timing of their fee billing. In some cases, advisers 

disclosed that advisory fees would be billed in advance, but elected to have some or many 

clients billed in arrears (and vice versa). In addition, although some examined advisers’ 

fee disclosures stated that clients would be billed based on the average-weighted daily 

capital balances during the quarter, many of the clients’ advisory agreements stated that 

fees were calculated in arrears based on the value at quarter-end. Lastly, some examined 

advisers did not disclose any information about the timing of advisory fee billing.

o Valuations for fee calculations. Some examined advisers provided inaccurate disclosures 

about the values used to calculate advisory fees, such as using the month end account 

values rather than the disclosed average daily account values. 

o Minimum fees, extra fees, and discounts. Some examined advisers did not fully disclose 

a variety of other fee-related topics. Examples include examined advisers that did not 

disclose: (1) platform administration fees assessed (and that the fees could be avoided if 

clients elected to have their advisory accounts managed without using the platforms); (2) 

actual or minimum asset-based fee rates charged to clients; (3) the negotiability of fees or 

falsely disclosed that fees were not negotiable when they, in fact, could be negotiated; (4) 

the process for implementing householding and eligibility criteria; and (5) fees related to 

participating in wrap fee programs and non-wrap accounts.

 13 See, e.g., Monitored Assets Corp., Advisers Act Rel. No. 1195 (Aug. 28, 1989) (settled) (alleging that adviser violated the 

anti-fraud provisions of the Advisers Act by refunding prepaid advisory fees only to certain clients). 
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Missing or Inadequate Policies and Procedures

• Many of the examined advisers did not maintain written policies and procedures addressing 

advisory fee billing, monitoring of fee calculations and billing, or both. Although some of 

these advisers had informal or unwritten practices in these areas, the staff considered such 

issues to be relevant to the operations of the adviser, and thus should be captured in written 

policies and procedures. Below are some examples of the staff’s observations in this area:

o Policies and procedures that specifically address fee calculations. The staff identified 

examined advisers with policies and procedures that were generic in nature and did not 

address specifics related to the processes for computing, billing, and testing advisory 

fees. In some cases, the examined advisers had no policies for testing or monitoring fee 

calculations. 

o Policies and procedures to address material advisory fee components. The staff 

observed examined advisers’ policies and procedures missing a variety of critical

advisory fee components that were relevant to the firms’ businesses, including: (1) 

valuation of illiquid or difficult-to-value assets included in the assets for the calculation 

of advisory fees; (2) fee offsets, such as those offered for 12b-1 fees; (3) fee 

reimbursements for terminated accounts, where the client prepaid fees; (4) prorating fees 

for additions or subtractions of assets in accounts; and (5) family account aggregation 

(householding) or the application of breakpoints for fee calculations. 

Inaccurate Financial Statements

• The staff observed issues or inaccuracies with financial statements at several examined 

advisers with respect to advisory fees. These issues included examined advisers in potential 

financial distress (e.g., substantial balances on loans or lines of credit)14 and examined 

advisers not properly: (1) recording pre-paid advisory fees as liabilities; or (2) maintaining

their financial statements. Some examples include:

o Not recording all advisory fee income, administrative fee revenue, and compensation 

expenses in general ledgers and on financial statements. These examined advisers did 

not record such gross revenue and expenses in their books and records because they were 

exchanged for other goods and services (e.g., IT support) or did not record advisory fees 

paid directly to investment adviser representatives.

o Using a cash and modified cash basis of accounting, but preparing financial statements 

on an accrual basis of accounting. These examined advisers incorrectly classified client 

advisory fees as “accounts receivable.”

 14 See Form ADV, Part 2A, Item 18 (requiring an adviser to disclose any financial condition that is reasonably likely to impair 

the adviser’s ability to meet contractual commitments to clients if the adviser has discretionary authority or custody of client 

funds or securities or if the adviser requires or solicits prepayment of more than $1,200 in fees per client, six months or more 

in advance).
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B. Staff Observations Regarding Industry Practices 

During the examinations, the staff observed advisers implementing a range of policies and 

practices to address their legal and regulatory obligations related to the compliance issues 

identified above. Recognizing that there is no such thing as a “one-size fits all” approach, the 

staff is providing these observed examples of policies and practices to assist advisers with 

compliance in these areas.

• Adopt and implement written policies and procedures addressing advisory fee billing 

processes and validating fee calculations. The staff generally observed fewer errors when 

the examined advisers had specific written policies and procedures addressing the 

supervision, calculation, review, and billing of advisory fees. 

• Centralize the fee billing process and validate that the fees charged to clients are consistent 

with compliance procedures, advisory contracts, and disclosures. The staff observed that the 

examined advisers with centralized billing – rather than billing that was dispersed throughout 

the adviser with separate, supervised persons preparing and invoicing client billing 

statements – had fewer clients being billed incorrectly or client accounts being calculated 

inconsistent with the advisers’ written policies and procedures.

• Ensure resources and tools established for reviewing fee calculations are utilized. The staff 

observed that checklists and other resources for reconciling client fee calculations with client 

advisory agreements may be useful tools when used consistently by all advisory personnel.

• Properly record all advisory expenses and fees assessed to and received from clients, 

including those paid directly to advisory personnel.

IV. Conclusion

Advisory fee calculation and billing has been, and continues to be, an area that warrants routine 

review during investment adviser examinations. The staff’s observations and examination 

findings often lead to advisers returning money owed to clients due to fee billing and calculation 

errors, or to the improvement of advisers’ compliance programs, policies, and procedures that 

foster prevention of future advisory fee issues. In sharing the information in this Risk Alert, the 

Division encourages advisers to review routinely, refine, and improve, as appropriate, their fee 

billing policies, procedures, and practices and address new risks as they are identified. In 

addition, advisers should review their disclosures regarding such practices to ensure that clients 

are provided with full and fair disclosure of all fees and expenses and related material conflicts 

of interest.
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This Risk Alert is intended to highlight for firms risks and issues that Examinations staff has identified. In addition, 

this Risk Alert describes risks that firms may consider to (1) assess their supervisory, compliance, and/or other risk 

management systems related to these risks, and (2) make any changes, as may be appropriate, to address or 

strengthen such systems. Other risks besides those described in this Risk Alert may be appropriate to consider, and 

some issues discussed in this Risk Alert may not be relevant to a particular firm’s business. The adequacy of 

supervisory, compliance and other risk management systems can be determined only with reference to the profile of 

each specific firm and other facts and circumstances.