A recently released whitepaper studied the real cost of fees. Lost amid the findings, which the U.S. Department of Labor estimates cost investors as much as $17 billion, is the fact fee-based advisors much like their commission-based brethren have some serious work to do when it comes to disclosure around costs.
“Financial institutions often downplay the role of fees within an investment by hiding the details in fine print and using generalized language to describe fees,” the Personal Capital whitepaper wrote in the executive summary. “It is important to note that mutual funds regularly embed fees within the fund, obscuring high costs on potential investment returns.
“The report uncovers what financial institutions actually charge in advisory and funds fees and how those costs impact the earning and return of retirement investments.”
The whitepaper examined both the advisory fees and mutual fund/ETF fees for 11 brokerage firms in the U.S., some full-service, some online, some hybrid. Not surprisingly it found that fees significantly impeded an investor’s long-term performance.
With CRM2 set to put a spotlight on the fees clients pay to advisors, a major finding of the report has fee-based advisors on the hot seat because it reveals that the embedded MERs of mutual funds and ETFs add significantly to the overall cost of their advice – something often portrayed as a commission-based problem almost exclusively.
Take USAA for example.
The report found that USAA had the lowest total fee of all 11 financial institutions at 1.06%. ETF and mutual fund fees accounting for 24% of that total. Merrill Lynch, whose total fee was the highest of the bunch at 1.98%, had ETF and mutual funds fees that represented 34% of the overall total. Put another way, the ETF and mutual fund fees increased a client’s overall cost by a whopping 52%.
“The end-user client always pays for both the cost of advice and the cost of the products used to implement that advice,” said John DeGoey, a portfolio manager at Burgeonvest Bick Securities Ltd. “Telling clients only about the cost of advice is, in my opinion, only telling half the story.
“In that regard, regulators have massively dropped the ball.”
As post-CRM2 implementation approaches this report highlights why commission-based advisors aren’t the only ones that will have to have a frank and honest discussion with clients about fees. Be prepared for some angry conversations.