“It is difficult to get a man to understand something, when his salary depends on his not understanding it.” Upton Sinclair

In the world of financial services, fee schedules are a critical component of the client-registrant relationship. However, what you pay for advice may be more than another investor with the same firm, the same advisor, and similar invested funds.  Why?  Because the dealer and advisor got away with it.  

The Problem with Multiple Fee Schedules

What causes this problem?  The starting place is that most investors are confused by dealers not identifying the having different or multiple fee schedules that the dealers charge.  Different fee schedules for similar work is a material conflict of interest.  Why? Because you pay more is in your advisor's and the dealer's own interest.  Not your interest.

Depending on how this is done, the fees can influence both the decisions made by the investor and the services or products offered by the registrant.  Higher fees should dissuade you from an investment - consider it a drag on your earnings or the equivalent of the compounding drag on earnings of paying the equivalent of an additional tax. It also can incent the advisor to sell you higher priced, higher risk, lesser disclosure products like private equities.  

Charging an investor more than others for the same or substantially similar products or services breaches the dealer’s duty to treat clients fairly, honestly, and in good faith.  This may seem obvious, but remember, dealers and advisors pay is increased by hiding this tactic from you.

The Regulatory Expectation

Regulators expect firms to demonstrate how the material conflict of interest associated with the fees charged to investors has been addressed and how the dealer’s standard of care has been met. Simply disclosing this conflict is not sufficient to address it in the best interest of the investors, nor does it demonstrate that the dealer has met its standard of care.

Inadequate Controls and Unfair Practices

Regulators have observed and criticized several common practices related to fees charged to investors by dealers and concluded that there were inadequate controls to address the material conflict in the best interest of investors.

For instance, some dealers had a standard fee schedule but allowed some investors to negotiate fees or deviate from the standard fee schedule. In other cases, dealers allowed financial advisors to use different fee schedules with different investors when the same products and services were received by those investors.  Tricks of the trades that trick investors.  Is this dealing in good faith? Acting honestly? Acting fairly?

Suggested Controls

To address this material conflict of interest in the best interest of investors, dealers must implement targeted controls for fees charged to investors. This can include setting up standard fee schedules based on measurable criteria such as the investor’s account size and type, and the types of products sold or managed.

Conclusion

While fee schedules are a necessary part of the financial services industry, the investor's best interest must be prioritized. Unless dealers implement targeted controls and maintain transparency, dealers fail in their duty to treat investors fairly, honestly, and in good faith. Unless dealers implement targeted controls, advisors will continue to take advantage of investors like you.  

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