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Signs Your Firm Is Nickel and Diming You


Paying more and getting less. This unfortunate trend hits our wallets at the grocery store, doctors’ offices and restaurants. And while not new, we now see it more often among wealth management firms, especially in the independent broker-dealer (IBD) space.

Inflation can account for some rising costs; however, some wealth management firms may be trying to maximize profits by tacking fees onto as many mission-critical services as possible. 

Higher fees and fewer services hurt advisors looking to drive growth in their businesses. But it isn’t always so obvious that these practices are taking place, as firms are doing more to hide these costs. From increasing revenue split and other fees resulting in a lower total value to the advisor to annual reviews and introductions of new fees, many wealth management firms are always taking more. Advisors need to ask what they are getting in return.

Mind the Gap

Payout models between firms and financial advisors can vary widely, but many hover in the low 90% range. While numbers are not supposed to lie, the math in these fee splits may not always add up. That 90/10 agreement doesn’t always guarantee the financial advisor a 90% payout.

A firm offering a 92% payout always sounds more lucrative than one offering 90%. But is that really the bottom line? Not if the wealth management firm is frequently adding or raising fees, or both. A firm offering a 90% payout, but only costs 4% in fees is going to be a better financial proposition than one promising a 92% payout and is secretly charging 10% in fees.

Look beyond the simple numbers and do the math.

Fee-For-All

Aligning with a wealth management firm can provide better access and pricing than going it alone. A one-stop shop for registration, audits, technology, affiliation, email and platform access can streamline business operations, but each of those services comes with a cost. And new fees are now piling on including changes on basis points on assets in addition to the payout spread. Those line items contribute to a larger expense that can escalate fast if the firm conducts a fee review every year.

Be aware of unnecessary mark-ups. Errors and omissions (E&O) insurance seems to be a popular target for wealth management firms seeking a quick profit. Advisors might have better pricing by getting their own E&O coverage if it’s permitted.

It’s always a good idea to conduct due diligence on service fees and review periods. While many look to make money on these fees, there are firms that don’t charge for every service or conduct yearly fee hikes.

Other Considerations

There are more subtle ways an independent wealth management firm can extract payments from advisors. Consider the funds being offered. If the least expensive share class is not available, the firm could be deliberately steering advisors and their clients to more expensive funds that carry higher fees. That’s less money in the advisors’ pockets and more in theirs. It can also mean the difference between earning 4% instead of 5% on a fund and that shortfall compounds over the time the fund is held in a client portfolio.

And during such turbulent market periods, this kind of sleight of hand may destroy an advisor client relationship.

These practices aren’t going unnoticed. Regulators are starting to pay attention to the menu of fees and they are looking for markup abuse.

Understanding wealth management firm fees and why they are rising is a good first step but knowing what to do next is a bit more complex. Some advisors may feel they lack the leverage to speak up about the fees and reaffiliating is not a feasible option.

An individual advisor must decide if these fees are the cost of doing business with a recognized wealth management firm. Always calculate the bottom line when deciding if these fees are a necessary evil or a business burden.

There are other options in our industry.

 

Mark Contey is senior vice president of business development for LaSalle St. Securities LLC, a family of wealth management firms encompassing independent broker/dealer and registered investment advisor (RIA) platforms.



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    Signs Your Firm Is Nickel and Diming You – Finance Essence

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