More On Legal & Compliancefrom The Advisor's Professional Library
- Books and Records Rule Thorough and complete books and records enable RIAs to demonstrate that they have fulfilled their fiduciary obligations to clients and complied with applicable rules and regulations.
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
TD Ameritrade (AMTD) has asked the Securities and Exchange Commission to allow it to automatically offer rebates of fees to clients of its Amerivest portfolios.
The arrangement would only affect new clients and existing clients who make a new deposit of $25,000 or more. The current advisory fees for its model portfolios are roughly 0.3% to 1.25%, according to a spokesperson.
This news comes about nine months after rival broker Charles Schwab (SCHW) rolled out an accountability guarantee to its investment-advisory service clients. The firm said clients could “request a complete refund of their program fees from the prior quarter if, for any reason, they are not happy.”
But while such programs aim to increase investor loyalty and trust, one expert says they do little to address investors’ key needs.
“I see this as an irrational reaction to [the Government Accountability Ofice's] 2014 analysis on managed accounts and fees, which was issued this summer, after the GAO studied [the issues] for a past couple of years,” said Lou Harvey, president of mutual fund consultancy Dalbar Associates, in an interview.
“The pressure is on the industry in terms of [being transparent on] fees and raising awareness,” he added. “We need strategic, forward thinking. But this is just a knee-jerk reaction to the here and now.”
Another expert, though, doesn't see the situation so negatively.
“It’s plus for consumers, who — if they’re unhappy with their results — can get their money back” for fees, said Michael Kitces, partner and director of research for the Pinnacle Advisory Group in Columbia, Maryland, in an interview.
“But will it affect their decision on who to work with and invest with?" Kitces asked. "The jury is still out.”
In an Aug. 18 letter to the SEC, TD Ameritrade’s attorneys explain that the proposal should be permitted under Section 205(a)(l) of the Investment Advisers Act of 1940.
The proposed fee arrangement is “designed to further align Amerivest's interests with those of its clients because — to put it simply — if the client does not make money, Amerivest does not make money. The result is that the proposed fee arrangement protects the interests of clients both when performance is positive and when it is negative,” the letter stated.
“The offer is still in development but will help us test new ways to deliver value to our clients. In short, if the Amerivest Portfolio model that an eligible client is invested in doesn’t make money for two consecutive calendar quarters (before advisory fees), Amerivest will rebate the clients’ advisory fees for those two quarters, automatically,” TD Ameritrade said in a statement. “We’ll provide more details once the offer is ready to launch.”
Schwab’s program includes those using Schwab Private Client Investment Advisory services, Schwab Managed Account Connection Strategies (Windhaven, ThomasPartners Dividend Growth Strategy and Charles Schwab Investment Management Strategies) and Schwab Managed Portfolios.
“The guarantee provides that if for any reason a client is not happy with one of our participating investment advisory services, we’ll refund the program fee from the previous quarter,” the company said in a press release. “While it's no guarantee against loss, and other fees and expenses still apply, we stand by our word and will work with the client.”
“We believe that lasting client relationships are those with open communication at the center,” said Charles R. Schwab, founder and chairman of Charles Schwab Corp., in a statement. “People deserve more than a ‘just trust me’ approach. Investors hold themselves accountable for achieving their goals in life, and deserve a financial services provider who is equally committed to helping them reach their goals.”
(Six years ago, Ameriprise Financial pledged $33 million to "protect clients" who had invested and lost money in the Primary Fund, a money market mutual fund managed by Reserve Management Co.)
Fund, Advisor Focus
Dalbar’s Harvey says investors are “not likely to go to TD Ameritrade or Schwab because of a rebate” that’s tied to a down quarter or two. “Our work on investor behavior does no see that as part of the equation.
Research conducted recently by the GAO, he notes, found that “fees bear no relationship to the service provided, generally speaking.”
What investors are looking for is a new arrangement that clearly states fees in dollars and cents, not basis points. “The real answer," Harvey said, "is to express fees in absolute terms, i.e. you paid me $4,023, or the estimated fee is $3,200 — in dollars, not basis points.”
The industry “thinks of basis points as currency,” he says, “but the public does not.”
As for advisors, Kitces says rebates are “a mixed bag at best.” They represent a potential channel conflict between these institution’s advisory programs and advisors who custody assets with either TD or Schwab, he notes. Plus, they put financial advisors at a possible marketing disadvantage, since FAs can’t match institutions on such rebates.
“They may make things harder on the advisor end, with the caveat that Schwab’s rebate is already out there and is not being marketed too intensively," Kitces said. "So, it isn’t yet an overt channel conflict for the FAs; and we don’t yet know if TD will visibly market its rebate. It could be blatant or subtle. We’ll just have to see what the firm does with it.”
Related on ThinkAdvisor:
- Managed Accounts Could Be Made Safer for 401(k) Investors: GAO
- Managed Accounts: Next Up for Reform?