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What can go wrong
- Wrong rate — fee schedule used doesn't match the agreement.
- Wrong tier — tiered fee schedule applied incorrectly to break-points.
- Wrong basis — fees calculated on the wrong asset value (gross vs. net of cash, including or excluding alternative holdings).
- Wrong period — fees billed for a period that doesn't match the agreement (in-arrears vs. in-advance, partial-period proration).
- Excluded fees billed — fees charged on assets the agreement excluded from billing.
- Cash overbilling — fees charged on cash positions when the agreement excludes them above thresholds.
What a defensible reconciliation looks like
- The fee schedule from the advisory agreement is captured in the billing system, with the agreement's effective dates.
- Each billing period, the system calculates the fee from the agreement schedule and the period-end asset value.
- An independent review (not the person who submitted the fee) checks a sample of bills against the agreement.
- Refunds or corrections are issued promptly when errors are found.
- The reconciliation evidence is retained as part of books and records.
What examiners look for
- Sample of bills tied back to the underlying advisory agreement.
- Evidence of periodic reconciliation, not just one-time setup.
- Documentation of any billing errors and the corrections.
- Custodian fee-deduction authority that matches the agreement (custody-rule implication).
Custody rule connection
When fees are deducted directly from client accounts, the firm has custody under the SEC's Custody Rule — narrowly, the fee-deduction-only exception applies, but only if the deduction is correct. Persistent overbilling not only is a fiduciary issue but also can compromise the custody-rule exception, escalating the finding.
How StratiFi thinks about billing reconciliation
Billing is the most visible expression of the firm's fiduciary discipline. The firms that hold up under examination treat reconciliation as a continuous control, not an annual audit — sample reviews each billing cycle, automated checks against the agreement, refunds issued when errors surface. The result is that fee questions during an examination are routine rather than urgent.
Frequently asked questions
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How often should fees be reconciled?
Continuously sampled each billing cycle, with documented periodic reviews at least quarterly. Annual-only reconciliation is too infrequent to catch systemic issues before they accumulate. -
Does fee deduction count as custody?
Technically yes, but the SEC's fee-deduction-only exception means a surprise examination is not required if the deduction is properly limited. Persistent overbilling can compromise the exception. -
What's the most common billing error?
Failure to apply tiered break-points correctly when assets cross a tier — particularly when the system bills on the prior period's tier without checking the current period's value.