Fee transparency trumps structure: readers

Our mailbox continues to fill with opinions on the fate of trailer commissions, following a story we ran earlier this week on 12(b)-1 fees in the U.S.

With all the fuss over how an advisor is compensated, one reader pointed out that un-advised investors are frequently still paying the fee for advise to their execution-only online trading platforms:

The other thing that I wish was talked about was the fact that with “no load funds” sold from a discount broker, the trailer is paid to the dealer for NO advice. It’s a shame that’s overlooked, and few have even mentioned it.

One reader felt the topic itself should be off the table, saying the market will decide if an advisor’s compensation structure is fair or not:

“I find the entire discussion about mutual fund service fees to be morally revolting.

Any advisor should be free to charge any fee he wants, in any way he wants, as he will only obtain and keep those clients who attach value to him and are freely willing to pay the fee.

Some advisors can charge next to nothing and others a thousand dollars an hour. The highest fee imaginable harms no one as long as he is not forced to pay it.

When government initiates force in the marketplace, both consumers and service providers are harmed as their choices are overridden, reduced or even eliminated.

Let those who dislike service fees make their own free choices but it is immoral to allow them to force their preferences on the rest of the population.”

This could work, assuming all clients understood and agreed to the compensation structure in question. Time and again, a large minority of investors have told pollsters they pay no fees for the financial advice that they receive.

What is needed, though, is transparency, which was on the mind of one senior advisor and portfolio manager from a bank-owned firm who asked:

“What do we have to hide, and why should we hide anything? If we want to be considered true professionals along the lines of lawyers and accountants then why are we hiding fees? When I go to my lawyer I get a breakdown of every photocopy, phone call and such. What is it we are afraid of?

All fees should be transparent! I agree that the trailer and the deferred sales charge need to go. I also believe that any fee, whether it be on structured products, mutual fund management fees and so on should be deducted from the client’s account or fund every month.

Another independent planner agreed:

The discussion is simple: Break down for the consumer what the fund company charges and what the advisor fee or income will be added on top of that, if any.

So it will not matter if the fund is a bank fund, a wrap account, an independent fund, an insurance company fund, etc. A simple statement is all that is required.

The investor knows what is being charged and what the fees are — what the advisor gets is not as important as what total fees are and the services received.

On each KYC form a simple fee description should be provided — it is just three or four boxes with a tick mark or client initials beside it.

What is the big deal if done right?

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(08/13/10)