This is my second week of substituting for Frank who claims that he is too busy to write his blog. I have not seen Frank for a while so I assume he is buried under paper in a closet sized office performing an audit for an RIA. While I am sure this is the truth, I cannot stop picturing Frank at some beach in the Caribbean laughing at me. Picturing Frank in a bathing suit is not something I recommend!
I’ve spent the last week interviewing money managers with a client who is inheriting a significant amount of money in the next month or so. The client is looking for a quarterback or, in more technical terms, a Chief Investment Officer, to allocate the funds to various investment classes and to pick investment managers.
There are a number of things that disturb me about this process, but the main item is the lack of transparency in disclosing and charging the amount of the investment fee.
Here is what I find:
- The amount of the fee is never volunteered, the client must ask. I wonder if they would ever discuss it or if it will continue to be a “secret” throughout the relationship.
- Once the investment advisor discloses his fee, he does not mention that the fund managers he allocates to also have a fee.
- There is no discussion as to whether the fee charged by the fund manager is a factor in the decision process. In other words, does the fund manager “kick back” some of their fee to the investment advisor?
- There is no discussion as to negotiating the fee. For example, if the funds will be in cash for an extended period of time waiting for investment opportunities, should the fee be charged on the cash? Also, should the fee be charged on legacy holdings that for some reason cannot or should not be sold?
I learned long ago that it is best to discuss fees at the beginning of a relationship. This prevents surprises later on and, more importantly, alleviates discounting your fee after the work is performed.
Investment advisors have an advantage over other professionals in that they withdraw their fee directly from a client’s account. Most clients do not even look at their monthly statements and do not see the charge. Poll your clients and ask how much their investment fee is and when does it get paid. If I had a $1 for every client who responds with a blank stare, I could have a nice steak at Peter Luger’s.
I work with a client who prevents his investment advisors from withdrawing fees from his account. Instead, he requests a quarterly invoice. I was surprised how this small change in practice makes the investment advisor more aware of the fee and also forces him to discuss the fee.
I recommend this practice to my clients. There is definitely a psychological difference between automatically withdrawing the funds from the account and sending an invoice.
After all, if I have to clearly disclose my fee, why shouldn’t investment managers? I know, it is always about me!