Private Wealth Roundup: Investors Cold on “Fee-Based” Advisers
Are you a “fee-based” financial adviser who uses the term with clients and prospects? You’re nodding your head? Uh-oh.
According to the article, “‘Fee-based’ is a Four-Letter Word for Financial Advisers,” this “is not a phrase that warms investor hearts.” At least, that is the conclusion based on a recent study from Sullivan and Northstar titled “Rebuilding Investor Trust.” Respondents were asked whether they had a negative or positive reaction to a number of words or phrases often used in the industry, and about 64% said they had a negative response to the phrase “fee-based,” the article reported.
Here are some other interesting articles from the past month that touched on matters related to private wealth:
- A key distinction among investment professionals is the standard of duty or care they are required to follow — that is, the fiduciary standard versus the suitability standard. A recent research paper, “The Impact of the Broker-Dealer Fiduciary Standard on Financial Advice,” examined “whether a relatively stricter fiduciary standard of care impacts the ability to provide services to consumers.” The finding? According to the authors, there were “no statistical differences” between states with strict fiduciary standards and those with no fiduciary standards in regards to “the percentage of lower-income and high-wealth clients, the ability to provide a broad range of products including those that provide commission compensation, the ability to provide tailored advice, and the cost of compliance.”
- In “How Much Do We Really Know?” Ross Levin pondered the difficulty of distinguishing what he knows from what he believes. “We need to improve our ability to notice things in our clients and ourselves,” he wrote. “Noticing our responses or reactions to issues and the environment can help us better see how we are getting in the way of sound planning.”
- Reuters reporter Chris Taylor wrote a good piece on target-date funds: “Why Bother with Target-Date Funds?”
- In “Do We Need Protection from Trust Protectors?” the authors took a look at two articles “that seem to take opposite sides on the issue of trust protectors.”
- And last, but not least, is it better to realize capital gains now in the lower tax environment, or defer the tax liability and risk liquidating in a higher tax environment? Some answers in Parametric’s new white paper, “Prepare for Higher Tax Rates: Pay Now, or Later? Revisited.”
For more news and trends, visit the Private Wealth Management Community of Practice.
I am not the least bit surprised by these findings. First, on the so-called “fiduciary standard,” rarely has more time been wasted on semantics than the substance of what it means to service the retail investor. The very act of determining proper “suitability” is what provides the moral and intellectual basis for acting in a client’s interests in the first place, and whatever “standard” is chosen, we are talking, or SHOULD be talking, about what is best for the end client, who has endured quite a bit in the past decade.
The second joke being foisted on the retail investor is the true cost of the “fee based” advisor, as opposed to a commission based one. Derided by the RIA community as greedy churn artists, the retail investor doesn’t realize that if an RIA is charging a 1% management fee, and the portfolio has risen by 5% in a year, they have just turned over 20% of their profits to the “advisor.” In fixed income, this is even more pronounced: a commissioned broker is lucky to make 2% on a bond trade even before he splits it with the house- an RIA gets 1% for each and every year that bond is held in portfolio. Which is the more economical outcome for the investor for a bond that could be held for 10 years? You don’t need to be a Level III CFA to figure that one out.
What this all comes down to is a war for the investing public’s assets based on branding: whether RIA, CFP, CFA or ChFC, there is quite a bit of self-aggrandizing nonsense being spewed by each of these chartering organizations, and from where I sit, I don’t see the retail client being served any better than a competent- and I stress that word- commissioned broker. For all of these claimed honorarium practitioners are festooning themselves with, we have wealth managers who do not manage, planners who do no planning, and “experts” who do little more than act as mere conduits for insurance, mutual fund and indexed products to load portfolios with and collect fees. The target date funds mentioned are a prime example of the sloth and indolence being used as a substitute for genuine portfolio management. Its a disgrace, but the industry is quite content to have a conversation with itself regarding the matter.