SHOULD RIAs ONLY HAVING FEE WITHDRAWAL AUTHORITY BE EXCEPTED?
In my view, RIAs whose only connection to client assets held at qualified custodians is the ability to withdraw advisory fees do not have true custody. The fee deduction test is an unnecessary regulatory stretch that would adversely affect me and about 6,000 of the approximately 11,000 SEC registered advisors (as estimated at a recent SEC open meeting) in a manner disproportionate to any benefit that may be derived. The SEC estimates in the Release an average surprise audit cost of $8,100 to an RIA. This figure seems very low however, even accepting that figure, the estimated 6,000 SEC registered advisors deemed to have custody only because of fee withdrawal authority would incur total aggregated annual costs of about $48,600,000 ($8,100 x 6,000) to comply with the surprise audit requirement. That represents a very high cost to cover a situation which is arguably a strained interpretation of custody. The low risk of wrongdoing in this limited circumstance coupled with the audit require
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