Behind the Numbers: The Complex Landscape of Advisory Fee Transparency

Dmitriy Smirnov

January 7, 2025

Securities Law

Transparency in investor advisory fees is not just a regulatory requirement—it reflects integrity. But when disputes arise, defending the legitimacy of advisory fees becomes a nuanced challenge, often hinging on whether those fees were adequately disclosed and justified. Recent cases have brought this issue to the forefront, highlighting both the pitfalls of poor communication and the importance of proactive transparency.

The Stakes in Fee Disputes

At the heart of many disputes is the question of whether clients were fully informed about the fees they were charged. For example, in SEC v. Ambassador Advisors, LLC, the court found the firm failed to explain fees for outsourced investment management. The result? A finding that the advisor breached his fiduciary duty and a court-ordered disgorgement of ill-gotten gains.

The key lesson: transparency isn’t just about avoiding fines—it’s about demonstrating that fees serve a legitimate, agreed-upon purpose. From a defense perspective, this means showing that fee structures were clearly disclosed, tied to clearly defined services, and understood by clients.

Informed Consent as a Defense

Transparency is a powerful defense in fee disputes. In McCaffree Financial Corp. v. Principal Life Ins. Co., the court ruled in favor of the advisory firm because the fees in question were disclosed upfront and negotiated as part of an arm’s-length agreement. The firm’s adherence to its contractual terms was deemed lawful, emphasizing the power of clear, documented consent.

For defense attorneys, cases like McCaffree provide a useful roadmap. If fees are clearly outlined in client agreements linked to legitimate services, firms can demonstrate that they acted in good faith. The result is that the presence of informed consent often distinguishes compliant firms from those accused by the SEC, FINRA, and their state counterparts of blindsiding clients with unexpected charges.

Avoiding Misrepresentation Traps

SEC v. Navellier & Associates further illustrates the importance of transparency. The SEC argued that the firm misled clients by distributing marketing materials with false performance claims. The court found that the omissions and misrepresentations demonstrated reckless disregard for the truth, leading to significant penalties.

For firms facing similar allegations, the defense often hinges on the absence of scienter—the intent to deceive. Clear documentation of client interactions and fee agreements helps firms defend against allegations of recklessness.

Ensuring Written Fee Disclosures and Careful Record-Keeping

A crucial aspect of fee transparency is ensuring that all fee disclosures are made in writing and carefully documented. Written disclosures provide clarity for both the advisor and the client, reducing the risk of misunderstandings. Proper record-keeping, including signed fee agreements and documented conversations, can be instrumental in defending against accusations of misrepresentation or nondisclosure. Regulators frequently scrutinize whether firms maintain clear records showing clients were informed about fee structures and agreed to them in advance. Consistent, organized documentation serves as a strong defense and supports a firm’s integrity and commitment to transparency.

Supervisory Issues and the Need for Policies and Training

To avoid supervisory issues, firms must implement robust policies, procedures, and training programs. Effective supervision involves ensuring that all employees understand and adhere to disclosure obligations and fee transparency requirements. Regular training sessions and compliance reviews can help identify potential gaps and reinforce ethical practices. Supervisory systems should also include mechanisms for monitoring client communications and verifying that disclosures are consistently documented and in alignment with regulatory standards. Proactive supervision not only mitigates risks but also demonstrates a firm’s commitment to upholding fiduciary duties.

Transparency as a Strategic Advantage

The goal is not just refuting allegations but reinforcing a firm’s commitment to transparency and integrity. Proactive disclosure isn’t merely a legal safeguard—it’s a competitive advantage. Clients value advisers who prioritize clarity, and courts respect firms that can demonstrate good faith in their dealings.

When disputes arise, having a solid foundation of transparency can turn the tide in a firm’s favor. Whether it’s through clear client agreements, detailed communication, or proportional fee structures, transparency ensures that advisers not only meet regulatory standards but exceed them.

Conclusion: A Defensible Standard

Advisory fee disputes can be high-stakes, but they are winnable. Embracing transparency as both a legal duty and a strategic advantage enables firms to defend their practices with confidence. Cases like Ambassador Advisors, McCaffree, and Navellier provide valuable lessons, reminding us that clarity, good faith, and proportionality are the keys to navigating this complex terrain.

These issues impact registered investment advisors (RIAs), registered representatives, financial advisors, and others owing fiduciary duties to clients. Professionals serving in these roles should contact Alejandro Soto at Fridman Fels & Soto, PLLC for guidance if they receive an inquiry or subpoena from the SEC, FINRA, or state regulators.

The best defense is a proactive one. By building fee structures on a foundation of transparency, firms can safeguard their reputation, protect their clients, and ensure they’re ready to stand up to scrutiny when it matters most.

SEC Defense Attorneys

For more guidance on corporate compliance strategies, contact our firm today. If you receive a Wells notice, an SEC subpoena for documents or request for testimony, a FINRA 8210 or FINRA OTR, or any similar request from a state securities regulator, contact Fridman Fels & Soto, PLLC to speak with an experienced SEC defense attorney immediately to protect your rights and respond effectively.