By: Matthew Arndt, CFA, CPA, CFP | August 25, 2010 | Deceptive Sales Practices, Wall Street Ethics
Is your advisor unexpectedly changing his business model or practices? Do you suddenly find yourself in front of your advisor with him telling you all about the virtues of his new fee-based business? Explaining to you the merits of why his managing your portfolio for a fee is beneficial to you? Do you wonder why this is all the sudden happening right now?
The SEC is proposing a new regulatory framework that would require improved disclosure to investors. Part of the proposal includes the replacement of 12b-1 fees. You might be asking, what are 12b-1 fees? These are fees that are charged by most mutual fund companies and are paid to financial professionals. The mutual fund industry likes to call them marketing fees when really what they are is a commission paid to a financial advisor who sells a company’s mutual funds to his clients.
The SEC stated that 12b-1 fees totaled $9.5 billion in 2009 and in the words of SEC Chairman Mary L. Schapiro, “Despite paying billions of dollars, many investors do not understand what 12b-1 fees are, and it’s likely that some don’t even know that these fees are being deducted from their funds or who they are ultimately compensating. Our proposals would replace rule 12b-1 with new rules designed to enhance clarity, fairness and competition when investors buy mutual funds.”
Knowing what regulation is potentially coming to pass; many slippery types are now getting in front of this and approaching their clients explaining all the benefits of their new fee-based relationship and trying to convince their clients that the “old” way was not necessarily the wrong way but this new way is better. All you should be asking yourself is why didn’t my advisor practice this way of doing business throughout our relationship?
3 Responses to “Careful of the Leopard that Tries to Change His Spots”
Georgia Bruggeman
November 22nd, 2010 at 5:18 pm
Fiduciary duty and disclosure of conflicts are still issues for advisors who are not registerd with the SEC. If you are not providing a Brochure document ( old ADV Part II) then you have no fiduciary duty to your clients; you are not required to disclose conflicts of interest and you are not required to put your client’s interests first. Who wants to do business without those requirements? Fee-based is often confused for Fee-Only. They will still be selling high priced annuities and other products but calling their compensation something different.
Matthew Arndt
November 24th, 2010 at 5:59 am
Georgia,
I am an independent, fee-only registered investment adviser. Unfortunately, most investors that I talk to have no idea what this means. They have no idea how the conflicts of interest associated with doing business with a broker who is accepting commissions and 12b-1 fees will impact them financially. Heck, most investors don’t even know the difference between an adviser and a broker. I know this to be true because when I talked to a prospective investor many of them tell me they are not paying anything for the services of the adviser. Yet, when I look at their current portfolio it’s loaded with mutual fund A- and C-shares. Go figure. I find it laughable that the SEC wants to commission a study that is going to cost millions of dollars to determine whether or not investors know the difference between a broker and an adviser. Save the money, I can tell them in two words, “THEY DON’T!”
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Jimmy the Greek
August 26th, 2010 at 7:12 am
Unfortunately, many “advisers” will be changing from a commission model to a fee-based model for their own self interests. That said, the client will be better served and charges become more transparent. What clients really should watch out for is the double dip (advisers charging a fee and using products paying 12b-1 fees thus collecting twice).