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Securities regulators have a lot on the go. Among the many proposed regulations is the requirement for financial advisers to show clients how much they pay in fees and the amount of commissions they collect from the client's investments. I applaud regulators' efforts because all of these initiatives are aimed at increasing transparency for clients. But a recent exchange with a prospective client indicates that many clients may be signing on for money management services before fully understanding all of the applicable fees and expenses.
Our prospect – let's call him "Charlie" – wrote to us saying that one of Canada's larger wealth management firms – let's call it "Big Wealth Management" or "BWM" – would manage his money for 0.6 per cent per year. We were suspicious of the low all-in cost so we asked Charlie if he'd be willing to send us a copy of what BWM had given him to support his impression. While the summary was very brief, our careful review yielded important discoveries.
Selective discount
The first thing that jumped out was that BWM was offering Charlie a discount from its standard fee schedule. This may sound fine at first blush but put yourself in a client's shoes. How can you extend a discount to one client but not to another? (Registered charities are a notable exception; but even in this case there should be fairness in extending discounts to all charities.) The client paying full fees will feel that her business isn't as valued. In my opinion, it makes more sense for investment counselling firms to put their best foot forward with respect to fees rather than charging most people standard fees while offering selective discounts.
From a regulatory standpoint, securities commissions may scrutinize the fairness of this practice; asking for rationale for offering fee discounts. Then again, it's quite possible that BWM plays the game of showing one fee schedule while routinely offering discounts. Either way, neither is a very client-focused practice in my view.
Fees for "services" extra
More significant was a footnote that I didn't notice when first scanning the document. BWM's one-page summary proposal for Charlie's portfolio noted that the aforementioned 0.6 per cent fee for advisery "services" would be in addition to fees and expenses charged within the investment funds. Once I took the time to read this through, it jumped off the page. And it took Charlie by surprise.
The real fee
In fairness to BWM, this one-pager was more focused on fees. It was not a full investment proposal or investment policy statement. But it's the document Charlie was given on which to base much of his decision. So it should be clearer. If clients make a mental commitment they are less likely to back out so late in the process if they only learn of the full investment costs just before signing official documents.
Only after our review – and with our help – could Charlie ballpark the real cost of BWM's services. Adding the advisery fee of 0.6 per cent per year to estimated costs of security selection (e.g., fees for BWM's portfolio management services) now cast BWM in a very different light. What appeared at first blush to be a cost leader turned out to be a premium-priced offering with only proprietary money management. Charlie's decision suddenly turned to questions of independence, the level of customization, service, regular reporting and other disciplines (e.g., rebalancing methodology).
I doubt if any of the regulatory initiatives underway will address this more subtle form of misleading marketing. But heightened awareness will help to flesh out the real cost, allowing investors to meaningfully compare their options early in their search for investment counselling services. To help in this regard, see an older blog post by our President & CEO Mark Barnicutt: What's The Real Cost Of Investment Management?
Dan Hallett, CFA, CFP, is director of asset management for HighView Financial Group and a contributor to thewealthsteward.com.