The Case Against Fee Disclosure: Good Idea; Bad Timing

I, too, was prepared to buy into the notion of “dollar amount” disclosures. That is, until I started seeing a growing body of “studies” and articles involving the brokerage industry, which purported to show how “one-time commissions” are way better economically for clients than paying annual asset management fees. And I began to smell the proverbial rat: playing yet again, on an unlevel field. 

While full fee disclosures are certainly the right thing to do, this is the wrong time to change the disclosure rules for RIAs alone. Without a corresponding quid pro quo disclosure of all the ways that brokerage firms generate revenues from the “products” they sell (commissions, fees, expenses, markups, management fees, account fees, trading costs, overhead, marketing and due diligence fees from product companies, etc., etc.).

And that doesn’t even scratch the surface of “proprietary products.”

But without a full disclosure of every dollar that comes out of brokerage firm clients’ portfolios and into the coffers of their BD, an apples-to-apples ‘cost’ comparison with RIAs is impossible—and very misleading. 

It’s almost as if the brokerage industry thought up the whole ‘dollar amount disclosure’ thing as a marketing strategy.

In fact, it kind of makes one wonder why brokerage firms bother to charge commissions at all. Then they could say they are giving away “free” financial advice. But, of course, without the commissions, it would be harder to argue that brokers are “only salespeople” rather than fiduciary financial advisers.

Commissions create the illusion that clients pay a small amount for their services; while BDs can exert control over their brokers by varying their payout percentages.

It’s really quite an ingenious system. I guess that’s why brokerage execs make the big bucks. Let’s not give them any more help with ill-timed changes in fee disclosures.