Ethics in Practice: Valuing Assets and Calculating Fees. Case for Week of 7 May and Analysis
What course of action did you choose for the wealth manager in this week’s case (7 May)? Read the analysis below to see how your choice compares.
The way an investment management firm calculates its fees may evolve over time. Read this week’s case and join the conversation to let us know what you think is the best choice for the wealth manager and which CFA Institute Standard of Professional Conduct may be involved.
Maalouf works in a branch office for a large wealth management firm. The firm’s fees are based on a percentage of the value of the assets managed in each client account. The firm has a standard method for valuing assets and calculating fees for all of its clients, which is disclosed to each client at the outset of the relationship. Over time, the firm transitions to (1) using the market value of client assets at the end of the billing cycle instead of the average daily balance of the account; (2) including assets in the fee calculation, such as cash or cash equivalents, that were previously excluded; and 3) charging clients for a full billing period rather than prorating fees for clients that start or terminate accounts mid billing period. Maalouf
- cannot use end-of-cycle valuations, include cash equivalents, or charge full fees for a full billing cycle for partial cycle accounts.
- can change the valuation and fee calculation methodology as long as actual fees charged to clients are lower.
- must notify clients of the changes in the valuation and fee calculation methods.
- cannot change fundamental elements of the client relationship, such as valuation and fee calculation methodology, once it is disclosed to the client.
This case involves Standard V(B): Communication with Clients and Prospective Clients, which requires CFA Institute members and candidates to disclose to clients the basic format and general principles of the investment process. Advisory fees are a critical part of the investment management process. Developing and maintaining clear, frequent, and thorough communication with clients allows them to make well-informed decisions about their investments, including about whether to engage or retain an investment adviser. Any changes to the methods for valuing assets or calculating fees that are different from the process set out and agreed to by the client must be disclosed. It is improper to change fee calculation methodology without disclosure even if it results in lower fees. Using end-of-cycle valuations, including cash equivalents, or not pro-rating fees for newly acquired or terminated clients are possible methods for calculating fees as long as those policies are disclosed and agreed to by the client. It is also permissible to change valuation and methodology and fee calculation policies overtime for existing accounts. Maalouf and his firm can negotiate with their clients about changing the methods for calculating fees that were originally disclosed. So, the best answer is C, Maalouf must notify his clients of the changes in the valuation and fee calculation methods.
This case is based on a recent US SEC Office of Compliance Inspections and Examinations Risk Alert.
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More About the Ethics in Practice Series
Just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. The Ethics in Practice series gives you an opportunity to “exercise” your ethical decision-making skills. Each week, we post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions. We then encourage you to assess the case using the CFA Institute Ethical Decision-Making Framework and through the lens of the CFA Institute Code of Ethics and Standards of Professional Conduct. Then join the conversation and let us know which of the choices you believe is the right one and explain why. Later in the week, we will post an analysis of the case and you can see how your response compares.
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