How advisors shackle wavering clients (think annuities)

Some advisor-client relationship contracts include termination fees — even steep ones — for clients seeking to take their assets elsewhere, but that’s not the only method advisors use to hold on to unhappy clients.

The ethically questionable practice of a client termination fees got wide attention through Jason Zweig’s most recent column in the weekend Wall Street Journal,which noted that even “fiduciary” advisors imposed duties as high as 1% of the account for clients exiting within a year of the account opening.

Dave Dickinson, co-founder of FireMyAdvisor, a relatively new firm that seeks to facilitate advisor-client divorces and shepherd disgruntled clients into the care of fiduciary advisors, says such termination fees — especially such steep ones — are rare.

“The great majority of advisors we’ve seen don’t use a termination fee,” he toldThinkAdvisor in a phone interview.  Dickinson, who has long run a separate business helping advisors with compliance, says such fees couldn’t pass regulatory muster in most cases.

“Regulators seem much more amenable to fixed fees, like a $200 charge for leaving; they do not like percentages, or language that ‘if you leave, we’ll charge [fees that would have been assessed for balance of the year had the client stayed].’ I don’t think [a percentage fee] has any relationship with costs incurred, I think that’s just a penalty.

“There’s no way you can lock a client in.”

Except, of course, when advisors manage to do just that, as in the cases cited in Zweig’s article. So how could a fiduciary advisor pull that off?

“Regulators often miss things,” says Dickinson, who calls such a practice at odds with the fiduciary standard.

“If you’re a fiduciary,” Dickinson asks, “how can you try to lock someone into your services without the ability to leave when the client’s paying so much in fees? I’d be amazed that trying to keep a client through withdrawals charges matches up with the fiduciary standard in any way. It doesn’t seem to me that you’re acting in the client’s best interest when they may be interested in leaving for any number of reasons.”

The FireMyAdvisor client advocate does acknowledge cases where an advisor might legitimately want to impose a termination fee to discourage abusive clients — but never as a percentage of client assets.

Dickinson said he recently had a case where a client established a relationship with the advisor, then withdrew his assets after just a month, apparently to benefit from the advisor’s asset allocation model.

“Soon afterwards the son of that client wanted to hire him, but the advisor said ‘No thank you.’ So from the advisor side, a termination fee is understandable if very minimal, although I don’t know if it would have much effect [discouraging unethical clients],” he says.

But in the case of an unethical advisor, is there any recourse for the client who’s signed a contract with a termination fee?

Says the FireMyAdvisor principal:

“The first thing he can do is speak with the advisor and ask him to waive the fee,” the FireMyAdvisor principal says. “And I’d put that in writing if I were the client.

“And if I were advising client, I’d tell him to mention the fiduciary standard and tell him [the fee] doesn’t match up with that standard,” he says.

“If the advisor wouldn’t waive the fee,” he continues, “the client could file a complaint with the SEC or state, depending on how that advisor was regulated.