Preliminary Request for Public Comment on Proposed Fee Table for State-Registered Investment Advisers

February 7, 2018 - Eric W. Bright

Subject: Fee Table comment
From: Eric W. Bright
February 7, 2018

Increased fee transparency would help investors better evaluate advisors’ fees.  Both advisors’ services and fee models must be shown in a table to communicate how value is delivered.  Really, many investors are confused, not knowing how to value, let alone compare among advisers, financial planning and investment management services.  Many accept whatever fee structure that the adviser they “like” charges.  A table that defines these nuances would spark conversations and considerations between investors and their service providers.

First, the table must differentiate among services more broadly.  Many advisers offer asset allocation, which is really a precondition for investment management, and many among these offer asset allocation services only but call this their complete “financial planning” package.  Financial planning itself encompasses a wide spectrum, from light to heavy in its scope, depth of analysis and recommendations.  Divide financial planning services into three buckets within the table and require advisers to check the box on which they provide.  If financial planning or investment management is available as a stand-alone service, disclosing these fees would aid investors to evaluate the cost of financial planning only vs investment management only services.

Second, it would be misleading without further explanation to compare investment management fees among advisers who invest via ETFs, mutual funds, and other sub-advisors (when clients pay for these expenses) versus those advisers who manage portfolios of individual securities.  At the least, the table might show a range of these expense ratios, if such third-party management represents a greater than some percentage (half) of the adviser’s managed assets.  The most relevant fee figure for clients is a total one, all inclusive of the many possibilities which impact clients’ expense payments, whether they are hidden inside investment products or are separately paid.

Third, it would be misleading without further explanation to compare investment management fees between advisers who passively allocate and those who actively manage.  Passive management can be automated at very low cost once the investment allocation or risk budget has been established.  The latter has different opportunities to generate alpha, and also a wider range of associated human and technology-related costs to support active investment decision-making.  In a table, checking boxes for passive with rebalancing only versus active management would raise awareness of the value of these different investment approaches.

A table that describes real differences in services for fees, offering opportunities to compare across similar services and advisers, would increase transparency for investors.  What the proposed fee table shows as currently written is much less valuable, a reformatting of what is already disclosed in current narrative format.

Eric W. Bright, CFA  
Pennyfarthing Investment Management, L.L.C.