“Sunlight is said to be the best of disinfectants”
-Louis D. Brandeis
Although Justice Brandeis wasn’t addressing investment fees, his observation is relevant to the topic.
Over the past few months I have discussed Trustee and Investment Management services with a number of families. Many of the conversations were with prospective clients who felt compelled to explore their advisor options. A common thread to these discussions is revealing; until recently forced to do so by the Department of Labor (“DOL”) “Fiduciary Rule”, many financial advisors have not clearly discussed their fees with clients. Prompted by the new rule, many fee discussions haven’t been well-received. They’ve brought to light practices which might have been “suitable”, for clients, but not necessarily “in their best interest”. Corporate trustees have worked within (and often beyond) the disclosure rules for years, but the rule now covers many advisors without prior fiduciary experience.
The DOL rule (which requires a much broader group of advisors to act as fiduciaries) faces an uncertain future. Although implementation became effective on June 9, 2017, the rule remains under review pursuant to a February memorandum from President Trump. But unless the DOL says otherwise, full compliance will be required on January 1, 2018.
Naturally risk-averse (at least in compliance-related matters), the advisor community has already adopted a new fiduciary paradigm, leading to the new client conversations around fees and services.
To be fair, advisors and clients often avoid fee discussions. Discussions about a money exchange are often awkward and stressful, so avoidance is natural.
Big picture, these discussions are bringing a greater awareness to pricing practices in financial services. The lesson is; make darn sure you know how your advisor gets paid. Be wary of ANY service provider who is hesitant in that discussion. Simple tends to be good. Hidden is almost always bad. Conflicts of interest (being wedded to a single fund family, for instance) rarely benefit the client. And for heaven’s sake, run away quickly if you hear some variation of “I have to feed my family too”, from an advisor (No kidding - I’ve heard stories of this sort).
Ask your advisor (or prospective advisor) whether they have experience acting in a fiduciary capacity, and whether they will be acting in that capacity on your behalf. If not, pay particular attention to how they are compensated.
Long story short, if your current advisor hasn’t already clearly outlined how they get paid (not to mention any potential conflicts of interest), now is a good time to ask. Bottom line; your advisor should be able to clearly articulate how you pay for their services. It is the very least you deserve, and in many cases to which you are legally entitled. The lowest cost option may not always be the best for a given client, but if an advisor isn’t able to defend the cost of a recommended strategy, you shouldn’t blindly accept it. Let the sunlight in.
Matthew M. Black, JD