Every good salesperson knows that if you’re selling schlock you focus on price; if you’re selling quality, you don’t talk about cost until you’ve “sold” the prospect on the benefits of the product or services you’re selling. That’s because, until people understand what they are getting, they can’t possibly evaluate the fairness of the price.
At the end of June, SEC Investor Advocate Rick Fleming submitted his Office’s “policy agenda” for 2017 to Congress. It’s a lengthy, 55-page document (the 338 footnotes alone take up 12 pages), that tackles issues from disclosure for public companies to exchange access fees; from reforming the municipal securities markets to corporate governance. Of particular relevance to the advisory industry, Fleming and his team also added this item:
“We will begin to consider whether investors understand the fees and expenses they pay for an array of products and service providers, including funds, investment advisers, and broker-dealers. As part of this initiative, we will explore whether the various fees and expenses could be disclosed more effectively.”
The Report doesn’t offer further explanation of what that “initiative” or those “disclosures” might involve, except three-plus pages devoted to a thorough dissection of how various fees and costs of mutual funds, ETFs, and other investment funds can affect long-term investors’ portfolios, including fees charged by “intermediaries”:
“We believe that individual investors should be aware—or should be made aware—of the different types and layers of intermediary fees associated with the management, operation, and custody of their investment or retirement accounts. These may include management fees, custodial fees, transaction fees, and commissions, among a whole spectrum of other potential expenses.”
Conspicuous by its absence in these “initiatives,” and in the Report as a whole, is any discussion of the value provided by the various services mentioned: particularly those provided by “intermediaries” commonly known as brokers versus those offered by investment advisers. Consequently, without concern for the relative value of the advisory services provided, the Investor Advocate is likely to continue the brokerage industry’s tactic of disclosures that favor “advisors” who provide the lowest cost advice, rather than those who, by acting in the best interests of the clients, recommend investment portfolios with the lowest overall costs.
What’s missing in the Advocate’s analysis are the potential costs to investors of recommendations by “advisors” who do not have a duty to offer advice in the best interests of their clients, or those who are required to do so in only a limited part of their client engagements.
At least since the passage of the Dodd-Frank Act in 2010, the brokerage industry has advocated the comparison of the total cost to investors of ongoing, annual asset management fees with those of one-time upfront commissions. And while ignoring that many brokers also collect annual 12b-1 fees, that commissions do cost less.
But what they don’t consider—and apparently neither will the SEC’s consumer advocate—are the additional benefits of advice that’s in the clients’ best interest at all times.
While the Advocate’s Report is right to focus on the total costs to investors in managed portfolios, it’s unfortunate that it stopped there rather than to also consider the many other “hidden” costs to retail investors.