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March 18, 2015 at 10:53 AM
Here are three follow-up comments about my March 4 blog, The Case Against Fee Disclosure: Good Idea; Bad Timing, which explore the issues surrounding the selling of securities and how that might be handled in more client-centric ways.
The first comment, from Teresa Vollenweider, was posted to my blog on ThinkAdvisor.com, while the other two were posted on our blog discussion on LinkedIn.
If a client asks a broker masquerading as an advisor, what his/her ALL-IN fees are, will the client get a truthful answer? Or is the modus operandi of the B/D disguised as an RIA to never truly disclose the total amount of fees paid by their so-called clients?
This issue was also raised on LinkedIn by Greg Jones, the retired founder and managing principal of Altavista Wealth Management, Inc.:
All fees, transaction costs, bond mark-ups, sales loads, internal management fees, etc. should be transparent and comparison-shopped for by a broker ‘advising’ any client.
To my mind, this is the key question in the current “fiduciary standard for brokers” discussion. It’s one of those issues that seems both obvious and simple, on the surface. Yet in actual practice, I wonder if it would even be possible to execute effectively.
Part of the reason for this is the vast difference between a broker/client relationship and a client’s relationship with an independent RIA. In an RIA relationship, the advisor (and his/her firm) gets paid one way: a clearly stated fee on a regular basis (whether hourly, retainer, or a percentage of AUM). In return for this fee, the advisor is responsible to meet their clients’ financial needs with the best possible financial products and services for the lowest possible costs. Yes, the highest quality vs. the lowest cost is a judgment call: one that the advisor is paid to make in the client’s best interest.
A brokerage relationship is very different. For starters, the client pays the brokerage firm, and then the firm pays the broker. And the firm gets paid many ways: commissions on sales, fees on AUM, trading commissions on securities, mark up on principal trades, loads and overhead on proprietary products, due diligence and marketing fees on mutual funds and annuities, etc. etc.
What do you think the chances are of BDs disclosing all those costs and fees that come out of client portfolios one way or another? And how could anyone monitor whether all the costs were disclosed?
What’s more, because a broker is an employee of the BD, their firm pays the broker a percentage of the commissions and fees generated by their clients, which range from 30% to 95%. That’s a pretty big swing; and a pretty big incentive to recommend the products that the firm wants recommended.
