Many RIA firms dread SEC audits, particularly unscheduled ones.
But there’s a new auditor in town who may be looking over your shoulder unbeknownst to you—whether you’re an RIA or wirehouse advisor, and his recommendations could prompt the departure of $20 million from your book of business in a day’s work.
Meet Phil Fragasso, founder of Audit Your Financial Advisor, a new service targeted to individual investors who may harbor doubts about their advisor’s investment strategy, portfolio performance or fees.
The former advisor and veteran financial services industry marketing executive came up with the unusual line of work—now his main occupation in addition to courses he teaches at Boston College—when he was the principal of RIA firm I-Pension and some of his high-net-worth clients asked him to review their portfolios held at other firms.
The client had $300,000—a small portion of his over $20 million portfolio with the other firm—set aside to pay taxes and the advisor put that portion of ostensibly safe money into a highly volatile currency fund and lost it all.
The investment decision was so egregious, Fragasso said in an interview with ThinkAdvisor, that the firm—a national independent broker-dealer—agreed to pay the client the entire loss.
Another client who had over $20 million with a swanky national wealth management firm hired Fragasso and his I-Pension partner to help him understand how the other firm was investing his money.
The two advisors went to meet their client’s other advisors at the high-end firm.
“It was all doublespeak,” he recalls. “They used propriety funds and structured notes. It was hard to understand what the returns were or [precisely determine] its liquidity. We checked the performance and it was terrible.”
The private wealth office “didn’t like us being at the meetings,” asking them pointed questions, Fragasso says.
But what especially galled him was that the advisor “didn’t seem too interested in the account. I was shocked by the lack of concern for the client. It was almost like the account was grandfathered to him. Maybe for him $20 million was a small account.”
The client ended up leaving the highfalutin firm, giving Fragasso’s firm $2 million to manage (I-Pension’s client accounts ranged from $100,000 to $2 million, he says), and divided the rest among two RIA firms.
But those two experiences and many more Fragasso has had with friends and family members for whom he has performed similar services for free left him feeling there was a need for a formal business dedicated to auditing advisors.
That is because the investors he has dealt with were typically clueless about their investments, often despite the fact that they were highly educated and intelligent people.
Both clients with the $20 million accounts, for example, were doctors. And among the many other investors he has helped he has found that their answer to the question, “What are you invested in?” is something like “Fidelity,” “Vanguard” or “American Funds.”
No one says “a large-cap fund, a real estate fund and commodities,” he says.
Clients are similarly clueless about what fees they’re paying and do not describe their advisors in meaningful professional terms, but instead say things like “he’s a nice guy.”
“One guy came to us and said the advisor is ‘my friend.’ I said ‘No he’s not, you have B shares,’” referring to a broker-sold share class that feature higher investor fees over the long-term.
“What we’ve seen across the board,” Fragasso sums the matter, “is terrible asset allocation strategy, egregious fees, and no effort to educate the client.”
The former RIA, who no longer manages money himself, insists that he is not anti-advisor.
Though he co-authored a book (Your Nest Egg Game Plan) with Craig Israelsen geared to do-it-yourself investors, he understands that many investors want the involvement of a professional.
“I’d tell my clients, ‘You don’t need to pay me, just read the book,’ but a lot of them want hand holding,” he says.
That includes his wife. While Fragasso manages the family’s investments, he already has an LPL advisor lined up to assist his family as part of his will.
“I have no problem with advisors as long as they put the client first,” he says.
But too often that seems not to be the case. He cites the example of a 71-year-old widow about half of whose money is in an IRA managed by an advisor she says is “a nice guy.”
The $173,000 account is half invested in equities, but spread out over 21 different individual stocks, meaning positions are quite small. The widow did not know whether she was paying commissions to buy and sell the securities, and in any case there were no small or medium-sized firms among the lot, so she’d have been better off with an S&P 500 index fund or well diversified large-cap, Fragasso says.
Fragasso boils down his review and recommendations to something like two pages, saying the large tomes advisors produce are a big part of the obfuscation that confuses investors.
“People would come in with reports 50-pages long with 20-year projections. You can’t project 20 years out that you’re going to get 8% returns on the S&P,” he says.
“I help clients understand enough of the basics so they can manage their money on their own, or if they want to work with an advisor,” he says, adding that “I know a lot of reps who really do put their clients first, so I am not trying to move people away from their advisor. I will not recommend another advisor. I’ll just say, ‘these are the kinds of questions you should ask.’”
He charges 10 basis points, so $100 on a $100,000 portfolio and $500 on a $500,000 portfolio, with a mutually agreed smaller fee on accounts of $1 million or more. His goal is build up the business and then train others to do the evaluations, saying at this stage of his career he just wants “to give back.”
Fragasso, who mainly served in financial services marketing positions prior to becoming an advisor, traces his impulse to audit advisors in part to the marketing ploys he was tasked with employing to draw investors to poor performing products.
“I worked for a number of years for firms whose funds I would not recommend to family and friends,” he recalls.
“A lot of products were very expensive and not just underperformed but greatly underperformed,” he says. “They were all commissioned products; it was hard for me to work for companies whose products I never owned.”
While Fragasso wants to look over your shoulder, advisors with a will to do what’s right and address potential problems probably have little to fear.
“Most people don’t want to change advisors [even when you] show them horrible stuff,” he says.
“I’m not trying to get people to change their advisor. I just want to make sure that either on their own or with their advisor they’re going to reap the maximum reward with the money they’ve worked so hard to save,” he says.
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