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.”