In a recent conversation with my friend Knut Rostad, the founder and CEO of the Institute for the Fiduciary Standard, I had one of those “I wish I’d thought of that!” moments. We were talking about the current debate about whether brokers should have to disclose to their clients the recruiting bonuses they receive from their B/Ds (as chronicled by AdvisorOne’s Gil Weinreich in “Should Brokers Be Forced to Disclose Their Bonuses to Clients?” and my Oct. 31 posting and subsequent Nov. 13 blog).
The points we were discussing:
- Ron Rhoades’ contention that because recruiting bonuses create a financial pressure to recoup them (through higher fees, excessive commissions, hidden costs, etc.) they create a material conflict which should be disclosed.
- My response that many things create financial pressures on both brokers and RIAs, but disclosing them all is a slippery slope that I doubt either group really wants to go down.
After listening to my position, Knut thoughtfully responded: “Sure, that’s all well and good, but isn’t the real point that all fees, commissions and costs should be disclosed to the clients, who could then decide whether they are excessive for whatever reason, including just plain greed?”
Hmmm. Good thought. In general, I’m not a big fan of disclosure to protect financial consumers. For one thing, in practice, most financial disclosures I’ve seen are written so as to obscure as much as possible what’s really being disclosed. Even when disclosures are relatively clear, few retail clients have enough knowledge or understanding to correctly evaluate the information they’re being given.
With that said, Knut may well have hit upon one of the few instances when full disclosure could prove to be a tremendous benefit to clients. Of course, retail investors probably don’t have enough perspective to know whether a 2% (or 3%) AUM fee is excessive; or if a 5% commission plus a 1% trail competitive; or that 160 bps to manage a bond fund might be a tad high; or that a $10 spread on a principal trade may be too much. But if all those costs which are born by the client were disclosed in one place—on one simple document—rather than buried in multiple statements and prospectuses (prospecti?—see note below-Ed.), then they could relatively easily use the power of the Internet to compare what they are paying with what other investors pay for similar products and advice.
It’s not a perfect solution: It would require some effort on the part of financial consumers. Moreover, many retail clients simply trust their “advisor” to take care of them, whether or not they actually have a legal duty to do so. Still, I suspect the act of visibly publishing all the fees and costs that a brokerage firm charges its clients would have a substantial dampening effect on some of the most egregious practices, at the very least.
In addition, by focusing on the result, rather than the cause, cost disclosure would avoid the need to tell the clients about all those business costs—from rent to company cares to owner’s income—that create a pressure to overcharge clients. Good idea, Knut.
Ed.: Sorry to interrupt here, Bob, but since “prospectus” is a fourth declension masculine noun in Latin, I believe, not first declension, the plural should be “prospectuses” in English, though perhaps “prospectuum” or “prospectibus” depending on the case, in Latin. Happy to hear from any better Latin scholars who might dispute my interpretation.—Jamie Green)