How to find out what your broker is charging you
A growing number of brokerage firms are starting to disclose various account and service fees to their clients based on a model developed by North American Securities Administrators Association (NASAA).
The fee schedule, according to NASAA, “is designed to help investors better understand and compare various broker-dealer miscellaneous account and service fees and to provide guidelines to make fee disclosure accessible and transparent.
So, what do those saving for or living in retirement need to know about the fee table (see below image) they might see from their brokerage firms?
Expected and unexpected fees disclosed
First, the fee table highlights many expected fees such as annual account fees and minimum balance fees as well as some fees investors might not expect or anticipate such as transfer on death fees and Roth IRA conversion fees.
And that’s a good thing. “I think this is a useful tool for disclosing the many extra fees that may apply to a brokerage account,” says Barbara Roper, director of investor protection for the Consumer Federation of America.
Others agree. “The model fee disclosure is certainly helpful for investors by providing consistency in how account related fees are disclosed, and by informing investors of the types of fees they may be charged,” says Christine Lazaro, an associate professor of clinical legal education at St. John’s University School of Law and director of the Securities Arbitration Clinic.
What’s more, the number of firms using the model fee disclosure now numbers 13, and includes such large firms as Fidelity Investments; Prudential Financial, Inc.; Cambridge Investment Research Inc.; Commonwealth Financial Network; LPL Financial, and Morgan Stanley Smith Barney.
Use the fee table to be an informed investor
Like Lazaro and Roper, Andrew Stoltmann, a lawyer with Stoltmann Law Offices and executive vice president of the Public Investor Arbitration bar Association, says the NASAA model fee disclosure is “a wonderful and sorely needed development.”
He noted that brokerage firm fees are extremely opaque and complicated and that firms and brokers have long reveled in the difficulty for clients in comparing fees and expenses.
“We know how extraordinary of an impact fees have on long-term performance,” says Stoltmann. “Given the massive retirement crisis we face, every dollar counts. Every expense dollar you pay is one less dollar to be amplified to meet your retirement goals.”
According to Stoltmann, investors need to know the information posted in the fee table and be as diligent in reducing fees as they are in other areas of their life. “People spend more time shopping on prices for groceries than they do on their retirement accounts,” he says. “This has to stop and the first step is disclosure of what those expenses are. Investors need to demand this information and NASAA should be applauded for pushing this disclosure so hard.”
Not included in the model fee table
What the fee table doesn’t disclose, however, are commissions, markup, commission equivalents or advisory fees, which may not apply to all account types and some of which might be waived under certain conditions, according to NASAA.
And to some, that’s a problem. “If I have a concern, it is that it may not be sufficiently clear that this does not include the primary costs investors face when working with a broker,” says Roper. “When roughly a quarter of investors think they are getting services for free, at least as many don’t know how they pay for advice, and many more can’t begin to estimate how much they are paying in commissions and other transaction-based fees, that’s a serious concern.”
Lazaro shares that point of view. “Account-related service charges are a small portion of the overall fees an investor may pay when investing,” she says. “The majority of the fees paid are a result of commissions, mark-up and mark-downs, advisory fees and investment related expenses. Other than a disclaimer at the top, that this does not include most of these fees, there is no further information provided about the most substantial fees an investor will pay.”
No internal expenses
Lazaro further noted that NASAA’s fee table does not disclose that investments may have significant internal expenses which may never be disclosed by a firm. “For example, when an investor purchases shares in a non-traded REIT, the investor may pay $10 per share,” she says. “The investment is then listed on the person’s account statement as having a value of $10 per share.”
Unfortunately, she says, $1.50 of that may have been diverted to cover the REIT’s initial expenses, meaning it is probably worth no more than $8.50 — at least that is how much is actually being invested by the REIT). “The investor is not made aware of this until the REIT is revalued, perhaps a year or more into the investment,” Lazaro says. “At that point, the investor may see a substantial drop in the value of the investment, which is primarily related to funds being used to cover expenses. With the cases I have seen dealing with non-traded REITs, I have never seen a case where the broker explained how the internal expenses of the investment worked.”
To be fair, some disclosure, especially that which is transparent, is praiseworthy. But more is needed, says Roper. “While NASAA deserves our appreciation for tackling this less controversial area, ultimately investors need much clearer dollar-amount disclosure of the costs they pay for advice and investments,” she says.
Other experts agree and say investors should demand even more disclosure. “It’s a very small step in the right direction,” says Knut Rostad, president of the Institute for the Fiduciary Standard. “But does not go nearly far enough.”
Investors, he says, should require a written good faith estimate of all-in costs — all fees and expenses — at the outset of the engagement, and annually a written accounting or good faith estimate, thereafter. “This should be a fixed requirement not open to discussion,” he says. Read Six Core Fiduciary Duties for Financial Advisors.
What’s in your best interest?
Many arbitration claims will focus on the fact that the investment sold was inappropriate for the investor or the broker failed to provide relevant information so the investor can make an informed decision, according to Lazaro.
“Investors expect that their brokers are recommending investments that are appropriate for them and often times also that are in their best interest although, of course, there is not always a fiduciary relationship that would require the broker to act in the investor’s best interest,” she says. “Investors are rarely entering conversations with their broker thinking that they have to verify the information they are given by their broker, or even feeling competent to do so.”
Of course, if there is any information an investor does not understand, Lazaro says the investor should ask questions and ensure that the questions have been answered to their satisfaction.
“This does not mean they can avoid arbitration if the broker acted improperly, and to some extent, investors should be permitted to rely on the information they have received from their brokers,” she says.
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Originally published at www.marketwatch.com on May 25, 2017.