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

February 7, 2018 - Brian Foley

From: Brian Foley
February 7, 2018

Please comment on the proposed fee table’s costs, benefits and economic effects on investment advisers. Would the proposed regulation be unduly burdensome for state registered investment advisers to implement? Approximately how much time and cost would an investment adviser incur to create the proposed fee table?

Comment: Adding a pricing matrix for state registered advisors would likely put us at a further disadvantage with federally registered advisors, and come at too great of cost when compared to the potential benefit realized by the investor. Accordingly, I do not support it in its current form.

State registered advisors already have significantly less resources than federally registered advisors, and this would put us on a more uneven playing field. State registered advisors already have additional regulatory burdens on us in comparison to our competitors who are federally registered. Logic suggests that larger companies (federally registered) should be held to a higher regulatory standard than smaller companies (state registered), but it is the exact opposite in Massachusetts, and certain other states, for investment advisors.  For instance, a state registered advisor in Massachusetts is required by the division to prepare and send out invoices each billing period, but a federally registered advisor is not required to do so. The large advisory firm may simply rely on the custodian statement for disclosure of their fee. Although this may seem innocuous, it takes considerable resources and time for small firms to accomplish the invoice process. I estimate it cost me over $20,000 last year to comply with this state imposed regulation. That’s $20,000 that the large firms I compete with do not have to spend. The rich get richer, I suppose. Furthermore, it would likely cost me $10,000 - $20,000 to implement the proposed pricing matrix (lawyer fees, resources dedicated towards implementing the matrix into our workflow, etc.). This equates to approximately 6% of our total revenue. This would be yet another significant cost, to say the least. 

A regulation like the pricing matrix, although it seems to be designed with a noble intent in mind, will likely have other unintended economical consequences too. For instance, I think it is entirely plausible for state advisors to lose clients to federally registered advisors, due to confusion created over the matrix. The federally registered advisor would simply show the client one fee (likely very similar to the state registered advisor’s total fee), but due to the numerous fees listed on the state advisor’s pricing matrix the client thinks they have several more fees than that of the federally registered advisor. In this instance, the division will not have served the customer well, as the client is further confused on fees and does not have a lower cost investment. In fact, I would not be surprised if certain federally registered advisors attempt to exploit this proposed rule while prospecting for new clients, in the manner described herein. 

If the division were to consider reducing some other regulatory burdens on state advisors, I would be more inclined to possibly support this initiative, depending upon what burdens are lowered. However, I can not support this right now, given the fact that the state already places us at a disadvantage by having additional regulations above and beyond that of our large competitors. 

Furthermore, state advisors already are required to publicly disclose our fees and services in our ADV. Although the division may not like the style in which the ADV discloses said services and fees, our fees and services are fully disclosed and stated in plain English on each of our respective ADV’s. 

As an alternative, I strongly believe advisory firms should be incentivized by the division to further educate ourselves on what it means to be a fiduciary. The benefits of education are never ending. And the education and work on this level should be more at the forefront of initiatives. I firmly believe that increasing the education and standards of what it means to serve in our clients best interest will likely have a greater impact on curing the ills that are trying to be cured with this pricing matrix.

This pricing matrix proposal is simply adding a disclosure, which is disclosing something that is already required to be disclosed but breaking it down into further detail/confusion, and will have little, if any, positive impact on investors. To put it in colloquial terms, I have found that much of the public is numb to disclosures at this point. For example, 401k plans distribute their own version of a pricing matrix each year, known as the 408b2 statement. However, I have yet to encounter a single investor who knows what their 408b2 statement is, and/or how to interpret it.

In conclusion, when you couple my above stated concerns with the current regulatory environment (we’re still grabbling with how best to comply with the DOL Rule), I do not think it is appropriate to move forward with adding the proposed matrix. 

Brian Foley
Managing Director - Financial Advisor
Lighthouse Capital