Regulation and Compliance Federal Regulation SEC

RIA Hid Fee Hikes From Clients, SEC Says

News September 06, 2024 at 10:57 AM
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What You Need To Know

  • The former RIA charged fees that were higher than clients had expressly agreed to pay, the SEC says in a lawsuit.
  • The firm failed to timely deliver summaries of material changes and did not generally provide monthly billing statements, the suit says.
  • In all, the suit states, these higher fees exceeded $1.36 million.
Fees on wooden blocks

The Securities and Exchange Commission is suing a former advisory firm for failing to adequately disclose to clients, over a multi-year period, that it was charging financial planning and investment management fees that were higher than clients had expressly agreed to pay.

According to the lawsuit, filed in the U.S. District Court for the District of Arizona, Raskob Kambourian Financial Advisors Ltd. was registered with the commission until October 2023. The firm "owed a fiduciary duty to its advisory clients, who paid Raskob Kambourian fees in exchange for the firm's investment advice," the suit states.

Beginning in at least 2018, Raskob Kambourian "periodically increased its financial planning and investment management fees," the lawsuit states.

Although the firm disclosed these fee increases in its annual amendments to its Form ADV Part 2A, known as the Brochure, "these increases constituted material changes to the Brochure and Raskob Kambourian had an obligation to disclose them in the Brochure's summary of material changes," the suit states.

Raskob Kambourian "also had an obligation, at a minimum, to timely deliver any summary of material changes to each of its advisory clients," the suit continues.

In 2019, the firm failed to deliver its summary of material changes, and from 2020 to 2021, "it failed to both disclose the fee increases in a summary of material changes and deliver any such summary to its clients," according to the suit.

In 2022, while the firm "disclosed its past fee increases in its summary of material changes by filing a new amendment to its Brochure, Raskob Kambourian still negligently failed to timely deliver its Brochure or the summary of material changes to its clients within the allotted period, as it was obligated to do."

Raskob Kambourian's "persistent and inadequately disclosed overbilling was both negligent and in violation of the firm's fiduciary duties," the SEC's lawsuit states.

In all, the suit states, these higher fees exceeded $1.36 million.

Raskob Kambourian was registered with the SEC from 1985 until October 2023, when it withdrew its SEC registration.

According to Raskob Kambourian's last Form ADV, the firm has 75 clients and approximately $77 million in assets under management.

Failed to Adequately Disclose Higher Fees

During the relevant period, Raskob Kambourian clients who sought financial planning and investment management services signed a "comprehensive financial planning agreement," while Raskob Kambourian clients who sought only investment management services signed an "investment management agreement," according to the suit.

The firm generated, on a monthly basis, "a Billing Summary for its clients, which set forth the calculations that ostensibly supported the fees that Raskob Kambourian charged to a particular client in a particular month," the suit states.

The fees reflected in the Billing Summary were debited from the client's custodial account at the beginning of each month.

"As a general practice, Raskob Kambourian did not send these Billing Summaries to its clients," according to the suit. "Instead, the only account statements that clients received were from third-party, brokerage account custodians who were not affiliated" with the firm.

"These statements merely noted the fee amounts debited as a single line item, with no explanation as to how those amounts were calculated," the SEC suit states.

In May 2019, Raskob Kambourian charged AUM fees and planning fees that "were greater than the amounts expressly authorized under the schedules of fees in its clients' respective agreements."

For instance, "a client with AUM of $500,000 or less who had agreed, in 2012, to pay an annualized FP Fee of $1,500 and an annualized AUM Fee of 0.75% of AUM, was, in May 2019, charged an annualized FP Fee of $3,000 and an annualized AUM Fee of 0.95% of AUM," the suit states.

"Raskob Kambourian failed to act with the level of care that a reasonable investment adviser would have under the same circumstances and was thus negligent when it failed to properly disclose to its clients that it was charging higher FP Fees and AUM Fees than were allowed in their respective CFPAs and IMAs," the SEC contends in the suit.

"A reasonable SEC-registered investment adviser would have advised its clients of such revisions to its fee schedules," the suit states.

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