In response to my last, not completely serious, blog (11 Reasons Why Putting Brokerage Clients’ Interests First Is a Bad Idea), financial advisers Jon Lindberg and Greg Jones posted comments on LinkedIn that raise an important, yet not widely discussed, issue relating to fiduciary standards for RIAs and brokers: increased fee disclosures.
(Feel free to join the ongoing LinkedIn conversation.)
While this issue seems like a no-brainer on its face, I believe that it needs to be handled with care lest the brokerage industry turn it around into a substantial marketing advantage over registered investment advisors.
Mr. Lindberg wrote: “But what gets me is there is currently no real push to disclose ALL costs/fees in dollar amounts. Clients do not mind paying for asset management services. What they do not care for, however, is paying costs that they are not aware of.”
And Mr. Jones responded: “Correctly said, Jon. I agree. Fiduciary must not only disclose costs, but comparison shop for the best cost deal. Why do brokers object to this? (This comment is rhetorical.)”
Let me say right up front: I was for fee disclosure before I was against it.
Of course, full disclosure of what each client pays for advisory services should be a part of the disclosures that every retail advisor/adviser is required to make and in whatever form is deemed to be best understood by the clients.
The folks at the Institute for the Fiduciary Standard agree, as evidenced by their proposed Best Fiduciary Practice #4:
Provide at least annually a written statement of total and fees ands expenses paid by the client, and services rendered to the client.
What’s more, many fiduciary advocates, including some members of the Institute, believe that fee disclosures in annual dollar amounts (in addition to the percentage of AUM) are more readily understandable by most clients.
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.