Attorneys are well known for paying close attention to the “fine print” and reading “between the lines.” That discipline is honed over years of practice and serves them well in most instances.
Still, it can be difficult for even the most skilled attorney to make sense of all the fees (transparent and hidden) that many wealth management firms charge their clients. It goes without saying that financial compensation has the potential to align interests ... or create adverse incentives.
Attorneys would be wise to inquire as to whether financial institutions, private banks, wirehouses, or broker dealers truly have their best interests at heart, or whether they might just be “pushing products” to collect additional fees.
Mariia Eroshin shares what attorneys can do to ensure that the fees they are charged are fair and transparent so they feel confident their financial advisers are truly on their side.
Fee transparency in working with a wealth management firm seems like it should be straightforward, but too often it is anything but.
That being the case, attorneys should only work with investment advisers who explicitly outline all fees, charges, and potential additional costs that their clients may incur. This includes management fees, performance fees, transaction costs, and any other expenses related to the overall management of a client’s investment portfolio.
It is especially important to view fees through the lens of conflicts of interest and misaligned incentives. For example, fees should be received only from clients and not from investment funds or products. Receiving compensation from one investment fund and not another could imply an incentive to promote a fee-paying investment.
Personally, my sole source of compensation with Certuity is derived only from my clients and not from any third-party managers. That’s it. I firmly believe in being part of a fee-only wealth management firm, as my fiduciary responsibility legally requires me to act in my clients’ best interests.
I advise any attorney to only work with true fiduciaries who are transparent about fees without any hesitation. Only then can a long-term relationship founded on trust and confidence be established and built.
As stated above, transparency is crucial for building trust. As attorneys are typically laser-focused on working with an adviser who does not have conflicts of interest and is able to provide unbiased, professional advice, transparency around fees is paramount.
An attorney deserves to have a clear understanding of how their adviser is compensated, what services are included in the fees, and any potential additional costs. This transparency allows for informed decisions to be made without any “second-guessing” as to why an adviser recommends an investment. Clarity in the compensation structure also ensures that the client receives fair value for the fees paid.
First, look out for fees associated with certain products. In the wealth management industry, some financial advisers at some financial institutions, banks, insurance companies, or brokerages may be incentivized to promote specific proprietary products or services (such as their own mutual funds, insurance products, wrap free programs, etc.) to clients in exchange for commissions and/or fees.
In addition, advisers may receive additional compensation related to mortgage lending, life insurance, long-term care insurance, or other products that have a financial element. When these products are directly linked to an adviser’s compensation, it can create an inherent conflict of interest that has the potential to put a client at financial risk.
Second, ask how trades are executed and whether any bid-ask spreads are taken out. The bid-ask spread is the difference between the price at which an investment can be bought or sold. In the labyrinth of fees, this bid-ask spread difference effectively acts as a brokerage fee or commission for executing the trade. This is very common at wirehouses.
The reality is that it is more difficult than one may think to find a trusted financial adviser who acts as a fiduciary, which legally obliges that person to act in your best interests.
This underscores the importance of taking time to research the qualifications, experience, and track record of potential advisers to find one who understands your goals and objectives and is able to implement a plan that meets or exceeds them — always with your best interests as the primary concern.
Sometimes big brokerage firms and banks may hesitate to provide their wealth management clients with complete fee transparency, as their compensation structures are highly and intricately complex and different “programs” might compel them to obfuscate the real costs to clients.
Additionally, some of these businesses, or their parent organizations, may not be solely focused on providing fee-only investment advice, which presents conflicts of interest that are often not addressed openly but more likely footnoted and disclosed as minimally as required.
Some of these firms might have entire businesses as securities brokers, investment banks, custodians, lenders, or distribution or placement agents for other investment management groups, which creates pressure for advisers to “promote and push” wealth management clients into those businesses.
The advice from a wealth manager at these types of firms must always be received through the lens of, “How does this advice impact (or profit) other parts of their business?”
When you check an adviser’s Form ADV 2A, which is the uniform form used by investment advisers to register with the SEC and state securities authorities, and find fees listed that haven’t been disclosed to you, that’s a red flag.
As discussed above, it can be difficult to assess investment management fees paid to outside firms, such as a bank, fund, or private equity firm, in addition to your stated advisory fee.
In most cases, advisers receive some amount of the fees paid to these outside entities, with certain “affiliated groups” allowing them to get bigger amounts or shares of those fees than had they selected other fund managers. No surprise, this could invite the potential for adverse investment selection, even among nonproprietary or third-party investment options.
Below are the questions I strongly encourage any attorney to ask of a potential wealth manager. If you don’t receive responses that are unequivocal and transparent, it’s best to keep looking.
Lastly, be sure to ask for references!
To further explore the importance of fee transparency and working with a financial adviser who is a fiduciary, please contact Mariia Eroshin at [email protected].
