Problems with Shareholder Services Fees

Blog_Confusion graphicHistorically, there’s been significant confusion over the issue of fees and investment advice. Perhaps that’s because there are so many fee models to choose from — fee-only, fee-based, commission, hourly, etc.  Of course, the root of the problem may be, as a recent State Street Global Advisors (SSGA) Survey reported, that clients just don’t remember discussing fees with their financial advisors. SSGA found that the vast majority (92%) of advisors responded that they discuss their fees with clients, but about one third of investors said they didn’t remember having a fee discussion. That’s a significant disconnect that can present a roadblock to a rewarding client relationship.

It’s this simple — Consumers of investment advice must know and should know how their advisor is getting paid. Anything less than full disclosure and complete understanding is just not acceptable.

Unfortunately, this seems to be getting more difficult, rather than easier. For example, a recent Investment News article discussed how some Registered Investment Advisers (RIAs), generally seen as being on the side of investors, are quietly accepting money from custodians in exchange for recommending particular mutual funds that are more expensive for investors. This payment is made to the adviser as a “shareholder services fee.”

The Investment News piece reports that “Charles Schwab & Co. and Fidelity Investments, the nation’s No. 1 and No. 3 custodians for advisers, respectively, pay advisers up to 0.2% of assets held in certain no-transaction-fee mutual funds.”

In my view, this payment is a commission most consumers understand that a fee-only RIA does not accept commissions. And that can only exacerbate confusion over fees. Advisors who accept shareholder services fees are required to disclose the arrangement in Part 2 of their Form ADV, which is filed with the Securities and Exchange Commission. However, few clients will likely read those disclosures.

I agree with Ron Rhoades, a professor and expert in fiduciary duties of registered investment advisors, who was quoted in the Investment News article. Of these shareholder services fees, he said, “It’s legal if it’s disclosed properly, but that doesn’t make it right. It could affect somebody’s judgment in terms of the products that they select for the client.”

To be clear, our firm does not accept shareholder services fees. Nor would we accept any payment or make any decision that would put us in conflict with our clients’ best interests.

Leave a Reply

Your email address will not be published. Required fields are marked *