By Cyril Tuohy
There are 100 ways to skin this cat, but a little back-of-the-envelope math shows how much registered investment advisors might be expected to pay if Congress passes user-fee legislation to charge advisors for exams.
Total cost: about $310.65 million annually.
Those are the most recent calculations to come from a recent blog post on the website of RIA in a Box Consulting Services, a consulting firm that supports state and Securities and Exchange Commission-registered investment advisors (RIAs).
If $310.65 million sounds like a lot, it is. But some companies will shoulder a much greater burden than others, so the “vast majority” of the 32,000 RIA firms “would be faced with little or no expense,” the blog post claims.
Vanguard Group, with $2.3 trillion in assets under management or 4.3 percent of all assets under management by the RIA industry, would face an annual user fee of about $13.2 million, according to the blog post.
Advisory firms with $100 million in assets would pay far less.
Of the 32,000 investment advisory firms in the United States, only 11,500 are SEC-registered and would be subject to user fees as outlined in the Investment Advisor Examination Improvement Act of 2013 sponsored by U.S. Rep. Maxine Waters, D-Calif.
OK, so now expenses of $310 million are spread among 11,500 advisors who collectively control $55 trillion in assets under management.
Divide $310.65 million by the 11,500 SEC-registered advisors and the average annual cost per SEC-registered advisory firm comes to $27,013, the blog analysis concludes.
Since fees are based on assets under management, asset managers like Vanguard and Pacific Investment Management will pay more and smaller firms will pay less.
The annual cost per $1 million of assets under management comes out to about $5.65, RIA in a Box estimates in blog post.
An advisory firm with $250 million in assets under management earning $2.5 million in annual revenue, or 1 percent of assets, would face an annual examination user fee of $1,412 or the equivalent of 0.056 percent of revenue.
An advisor with $2.5 billion in assets under management would pay a user fee of $14,121, still well below the average user fee paid by all SEC-registered advisors.
“This is because the average cost per firm is being driven up tremendously by the largest firms,” the blog post said.
Because the top 100 SEC-registered advisors combined — wirehouses, banks and asset managers — have more than $31.1 trillion in assets under management, they will be responsible for more than 56.5 percent of total annual user fee costs, or $175.42 million annually, according to RIA in a Box.
User fees have been proposed as a way to pay for an increase in the frequency of examinations conducted by SEC examiners of SEC-registered advisors.
The proposal has garnered widespread industry support as a way to monitor advisors and maintain the fiduciary standards of service required of them.
The Dodd Frank Wall Street Reform and Consumer Protection Act called for the expansion of the SEC’s oversight of financial advisors. The sweeping law left it up to the SEC as to how best to the implement broader oversight.
SEC officials have proposed hiring 316 new employees within the Office of Compliance Inspections and Examinations for the 2015 fiscal year. The blog post estimates the OCIE has about 450 examiners to check on registered investment advisors.
Even with a $271 million budget, a number which has increased 30 percent since 2009, only 9 percent of all RIAs were examined in 2013, according to SEC officials.
“This equates to a frequency of approximately once every 11 years, a rate that many observers find unacceptable,” Investor Advocate Rick A. Fleming told a securities industry conference in Dallas last month.
The growth of the SEC’s budget “has been dwarfed by the number and complexity of registrants,” leaving SEC examiners with a low overall coverage rate, Fleming said.
In the past 11 years, the number of SEC-registered advisors — 11,500 — has grown by 40 percent and the amount of assets managed by those advisors has more than doubled to $55 trillion. In comparison, the OCIE staff has grown only about 10 percent over the same period.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
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