Question

A Registered Investment Adviser has established an enviable track record and decides that it should increase its asset management fee to reflect the increased value of its services. The Adviser amends its contract to include a fee equal to 5% of assets under management, charged each month to the client. This fee structure is disclosed in the Form ADV Part 2 filed with the Administrator and each customer signs a new advisory contract. Which statement is TRUE?
A. This action can be taken because the Administrator was notified of the increased fee
B. This action can be taken because each customer signed a new contract that disclosed the increased fee
C. This action cannot be taken because advisory fees cannot be charged monthly
D. This action cannot be taken because the compensation to the Adviser is excessive

Answer 1

Answer:

D. This action cannot be taken because the compensation to the Adviser is excessive

Explanation:

A Registered Investment Adviser has established an enviable track record and decides that it should increase its asset management fee to reflect the increased value of its services. The Adviser amends its contract to include a fee equal to 5% of assets under management, charged each month to the client. This fee structure is disclosed in the Form ADV Part 2 filed with the Administrator and each customer signs a new advisory contract. Which statement is TRUE?This action cannot be taken because the compensation to the Adviser is excessive

Charging excessive fees is prohibited and a fee of 5% of assets per month is a 60% annual fee which is clearly an unbelievably high fee! The fee cannot be justified by including it in an amended Form ADV Part 2 filed with the Administrator so it would likely not be picked up by the Administrator unless there was a customer complaint.