Some financial advisors may be overcharging for their services. Fortunately, a client can take action to safeguard themselves. Several inaccuracies were discovered during a recent Securities and Exchange Commission examination into advisor fees, resulting in clients overpaying. According to the SEC alert, advisors charged fees that were different from their contractual rate, double-billed clients, or assessed costs based on an erroneous account value in some cases.
Furthermore, the agency discovered that some advisors provided investors with inaccurate or misleading fee disclosures. They didn’t always have any disclosures.
According to the Securities and Exchange Commission, getting overcharged or receiving false fee information is especially harmful to financial advisors’ customers “since every dollar an investor pays in fees and expenditures is a dollar not spent for the investor’s advantage.”
This isn’t to argue that all or even the majority of advisors make charging mistakes. (The SEC notice is based on data from 130 advising firms examined by the SEC.) And the faults could not be intentional; they could just be a result of human error.
“There’s intentional fraud and there are mistakes,” said Andrew Stoltmann, a Chicago-based attorney who represents consumers in fraud cases. “Both can be rectified by verifying [account] statements, and not just taking the word of the advisor.”
Customers should review their financial advisors’ annual statements at the very least. Check that the costs and fees indicated on the statement match those quoted by the advisor, according to Stoltmann.
Checking more regular statements, whether monthly or quarterly, is also a good idea, he says.
This may seem obvious, yet many clients do not take these safeguards, according to Stoltmann.
However, evaluating a financial statement isn’t always straightforward. Depending on the firm, financial advisors have a variety of fee arrangements, some more sophisticated than others.
For example, in the past, advisors charged a set percentage of a client’s investment account value (say 1%). (An advisor who manages $1 million in a client’s account is paid $10,000 per year.) Advisors frequently deduct fees from a customer’s account rather than having the client submit a check.
Other, more sophisticated techniques, like “tiered” or “breakpoint” invoicing, in which advisors charge different fees at certain client asset levels, may be used by advisors.
Average investors may find it difficult to check the statistics on financial statements. According to Stoltmann, finding the necessary information might be difficult because account statements can be as long as 30 pages.
Put your counsel to the test
To avoid a difficult-to-understand account statement, he suggests asking your advisor for a full explanation of the fees on your account statement at least once a year.
“If in that process you’re not getting the full [rundown] about what you’re being charged, why you’re being charged it and what the effect on the account might be long-term and short-term — and if [the advisor] is not willing to have that discussion with you in enough detail to make you feel comfortable and fully informed — perhaps that’s a red flag about your investment advisor,” Bruce said.
Similarly, clients can also request a detailed fee breakdown in letter or spreadsheet form directly from the investment advisor, Stoltmann said.
“That’s a legitimate request,” Stoltmann said. “If they don’t follow it, that’s a huge issue.”
There are also additional options available to investors.
For example, investors may seek out advisors with simpler fee structures.
Some businesses have switched to hourly pricing and monthly subscriptions for their services, giving them more control over the money they’re spending. (Of course, this may not be appropriate for all investors, particularly those who prefer that their advisor manage their investments.)
Investors can also ask for advisors to bill them directly for their services rather than deducting fees from their accounts. Of course, it won’t stop advisors from charging erroneous fees, but it might make investors more aware of and knowledgeable about how much they’re paying.