As part of our ongoing commitment to assist you with compliance solutions, we have enhanced our policies and procedures with respect to wrap fee advisory accounts.
The SEC continues to examine and focus on risks in wrap fee advisory accounts. This attention is based, in part, on the continued growth of investor assets in programs offering such accounts. A key element of their focus is whether the investor has the choice of other programs where a non-wrap fee option may be available.
As detailed below, our enhanced policies and procedures help meet our regulatory and fiduciary obligations by ensuring that wrap fee accounts are properly selected and in the best interest of the participating clients.
Consideration of Trading Levels for Wrap Accounts
A client with a wrap fee account, such as those offered through the Contour and NEXT Select programs, is charged a single “bundled fee” or “wrap fee” that covers the investment advice provided to the client as well as the trading costs generated by transactions placed in the account. Because a client in a wrap fee account incurs embedded transaction charges even when there is no trading in the account, the client could be viewed as paying for “services” the client is not receiving.
Wrap fee accounts should only be considered in those circumstances where the level of trading is appropriate for the account’s strategy. For instance, an appropriate strategy might be where an advisor-managed account has a justifiable level of expected trading activity. Such strategies are expected to be rebalanced or reallocated periodically, but no less than annually.
New Policy Effective December 31, 2023
While no specific trading level solely determines the appropriateness of a wrap fee account, for advisor-managed wrap fee accounts, we are implementing a new guideline whereby a wrap fee account should have five or more trades over the prior 24-month consecutive period. We will perform ongoing evaluations of the trading activity in all wrap fee accounts at the end of each quarter and will provide follow-up inquiries and direction as to account handling, where appropriate.
How the Procedures Will Work
21-Month Reviews
To identify wrap fee accounts at risk of policy violation, the Compliance Department will review all advisor-managed wrap fee accounts quarterly and notify financial professionals and their supervisors via email of any accounts with fewer than five trades over the prior 21-month consecutive period.
Upon notification, the financial professional and assigned supervisor must review each account and determine whether the wrap fee account remains suitable and appropriate for that client. In order to continue with this advisory relationship, the financial professional must promptly implement one of the following three (3) alternatives based on which best suits the client’s needs and objectives:
24-Month Reviews
Beginning December 31, 2023, at the end of each quarter, for those accounts that have not had five trades in the prior 24-month consecutive period, we will terminate the advisory account relationship and the associated advisory fee billing. The Compliance Department will notify the financial professional and assigned supervisor via email of any wrap fee accounts in continued violation of this new firm policy and the pending termination of those accounts. The client will receive a letter notifying them that the firm is terminating the advisory account and relationship and that the account is now client-directed. This termination may also result in a pro-rated credit of advisory fees to the client for any fees collected after the noted policy violation.
How to Prepare for the New Policy
15-Month Reviews
To help financial professionals identify advisor-managed advisory accounts that may require extra attention, the Compliance Department will send quarterly notifications to financial professionals and their assigned supervisors for any account with fewer than five trades over the prior 15-month consecutive period.
Once you receive the notification, review each account and determine whether the advisory arrangement remains suitable and appropriate based on documented evidence, which includes but is not limited to:
If the financial professional’s supervisor, in collaboration with the Compliance Department, does not find adequate proof of the client meetings and the suitability of an advisory account, the supervisor ensures that the advisory relationship (including the advisory agreement and the advisory fee billing) is terminated promptly and the account becomes client-directed.
We appreciate your attention to the upcoming changes. If you have questions or would like more information, please contact your supervisor.