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

April 7, 2018 - Michael Kitces

Subject: Proposed Fee Disclosure Table - Public Comment
From: Michael Kitces
April 07, 2018

To Whom It May Concern,

I am writing to comment on the Proposed Fee Disclosure Table requirements that the Massachusetts Securities Division may potentially apply to Massachusetts-registered Investment Advisers.

At a general level, I applaud the Massachusetts Securities Division’s effort to improve transparency of advisory fees, including and especially a requirement that the costs of the advisor be clearly disclosed on the advisor’s website. I have long advocated that it is a concerning precedent that advisory firms are required to disclose the details of their fees and costs in Form ADV Part 2, but often do not make such disclosures clearly available on their website for consumers in the first place, instead delaying the delivery of the ADV Part 2 until an initial meeting with the client, and/or requiring them to look it up themselves on the SEC’s Investment Adviser Public Disclosure (IAPD) website. To the extent that most advisory firms have some kind of “Fees” page on their website, the page should be required to actually disclose their fees! See for further comments on this issue.

That being said, while the intention of the Massachusetts Securities Division’s fee disclosure table is laudable, I do have several concerns regarding practical implementation, and the actual effectiveness of the structure for clearly conveying relevant information to consumers, including:

Fee Amount. The column for advisors to disclose their “Fee Amount” is very limited, given the reasonable complexity of advisory fees as they are often structured. For instance, it’s very common in practice for advisors to use a graduated fee schedule, with a declining AUM fee at higher breakpoint thresholds; however, there’s no effective way to communicate this information via the chart, which might simply show an AUM fee of “1% to 2%” without any indication to the consumer of whether they would actually be more likely to pay the 1% fee, the 2% fee, or something in between (which is material, given that the range from a 1% to 2% fee is literally double the cost). For firms that have a more sharply graduated fee schedule, this risks creating even further consumer confusion, and/or could be used in a knowingly misleading way. For instance, what’s to stop an advisory firm that charges 1.6% on the first $1M of assets, and 1% on the next $1M of assets, and 0.8% on the rest of the client’s assets (which is already a substantial 0.8% to 1.6% AUM fee range), from adding a tier of “0.1% on all assets above $100M”. In practice, the advisor may have no clients with a total AUM nearly that high, nor any expectation of getting them; however, by adding a ‘superfluous’ $100M tier, the advisor can now may their fee disclosure look more appealing by stating their range is “0.1% to 1.6%”, even though virtually no client will ever pay below 0.8%. In addition, many other fees cannot even be stated this concrete or succinctly; for instance, an RIA that has an affiliated insurance agency may earn a commission of 2% (of a large lump sum) by selling a single premium immediate annuity, or a commission of 100% of the first-year’s premium for selling a $100/month term insurance policy; yet disclosing “Commissions from 2% to 100%” is not a meaningful disclosure for the consumer (given both the radically wide range, and the fact that there’s an immense difference between a large commission percentage on a very small term insurance premium, and what may seem like a “small” commission percentage on what might be a very large dollar amount).

Services-Based vs Compensation-Based. The fundamental structure of the chart is to disclose fees/costs first, and then associate them with various services. But this is problematic both because: a) the actual column width for describing “services” is far too narrow for what may be a very wide range of services, especially since “Financial Planning” alone can theoretically cover any of 72 topics as defined by the CFP Board’s description of Principal Knowledge Topics for CFP certification (see, or which only 9 are related in any way to investment planning (and even fewer tie directly to investment management). Similarly, the Fidelity 2016 RIA Benchmarking Survey found that advisors bundle together as many as 9 different Services into a single AUM fee (see page 18 of, including not only investment management and “financial planning” but also tax planning, tax preparation, estate planning, trust services, retirement plan servicing, risk/insurance planning, charitable planning, and concierge services. It is simply not feasible in the Proposed Fee Disclosure Table to sufficiently describe the range and breadth of services that may be involved for a fee. The chart may also be confusing to consumers, as relevant services may potentially be charged for via multiple rows (for instance, an advisor that charges an upfront fee for a financial plan, and then is also paid for implementation of the plan via Commissions, would list “Financial Planning” as the Service across multiple rows, which may be difficult for the consumer to piece back together which services incur which combinations of fees). As an alternative, consider whether it may be more practical to require the advisor to list services (for instance, those listed under Item 5, Part G for Form ADV Part 1), or even a required breakout of sub-services in the “Financial Planning” domain (perhaps used the CFP Board’s Topic List), and then specify what fees/costs are associated with each service. After all, when you shop for something at a supermarket, you go into the Bread aisle and then look at the cost of breads, or into the Cereal aisle and then look at the cost of the cereals; one doesn’t typically look at a list that simply shows the cost of every item in the supermarket, and then try to figure out which $4 item happens to be bread, cereal, or something else. In the context of the proposal, this might mean the advisor specifies a service (e.g., Investment Management) and then a checkbox list of the costs (e.g., AUM, hourly fee, subscription fee, commissions, etc.), then another service (e.g., Financial Planning) and another checkbox list of cost options (again, AUM, hourly, subscription fee, commissions, etc.).

“Robo” vs (other) Third-Part Money Manager Fees. To list “Fees Charged By Third Parties” that separately enumerates “third-party money managers” versus a “robo-advisor fee” is redundant. Functionally, “robo-advisors” that provide services to financial advisors either operate as a third-party money manager (in which case they would already be described in the “third-party money manager” line), or they are a piece of technology the advisor uses to execute their own implementation of investments (in which case they are a technology fee paid by the advisor, akin to the costs that advisors already pay to implement investments with software tools, including trading platforms, rebalancing software, etc., and advisors are not being required to list any of their other internal software costs, not is it necessary to do so since those costs will be reflected in the total cost being charged by the advisor anyway). To the extent that third-party manager fees are already required to be disclosed on the proposed Fee Disclosure Form, third-party “robo” managers (e.g., solutions like Betterment) would already be disclosed (and in point of fact, it’s unclear on which line an advisor should list a “robo-advisor” that is acting as a third-party money manager, given the sample Fee Disclosure form as written).

Hybrid Advisors And Non-RIA Costs To Consumers. In the current marketplace, a material number of RIAs operate on either a dual-registered basis as a registered representative of a broker-dealer and under a corporate RIA (typically a separate subsidiary of the broker-dealer), or as a hybrid independent RIA (registered with the state of Massachusetts) and a registered representative of a broker-dealer, or as a state insurance agent who is also an independent RIA (both registered/licensed under the state of Massachusetts, and potentially other states as well). In the current environment, such Outside or Affiliated Business Activities must be disclosed in either Item 5 or Item 10 (or both) of Form ADV Part 2; however, in the spirit of fee/cost transparency, it is vital that such costs be disclosed in the proposed Fee Disclosure Table as well, or consumers risk substantively misunderstanding the nature of the advisor’s total compensation, particularly in situations where financial planning advice is provided at a low cost through an RIA because the broker or agent is substantively compensated through commissions for the implementation. As a result, it is crucial at a minimum that the presence of such outside commissions be disclosed, even if it is not feasible to detail the exact underlying amounts (which may not be known until the time of implementation, anyway).

Disclosing Cost Or Value? Ultimately, I would respectfully suggest that the Massachusetts Securities Division should try to clarify whether the final purpose of the Proposed Fee Disclosure Table is to clarify the advisor’s “value”, or merely (but still importantly) the advisor’s “costs”. The fundamental difference is that if the point is to detail value – what services the advisor delivers, and what they cost – then it becomes necessary to restructure the form to present Services cost, and associated costs… with the risk that the form becomes cumbersome for firms that have a wide range of services, and may necessitate the Massachusetts Securities Division to come up with a standardized list (for which some combination of the CFP Board’s Topic List for Financial Planning, and the services in Item 5, Part G of Form ADV Part 1 could be a starting point). If the goal is to clarify cost and the scope of costs, then the Massachusetts Securities Division should focus more directly on listing the full range of potential costs a consumer might pay – while focusing less on the exact amounts, which often will have wide ranges that aren’t practical disclosures anyway (e.g., AUM fees from 0.1% to 1.6%, commissions from 2% to 100%, etc.). In this context, the goal would be to list any fee that a consumer might actually need to pay, and should capture any/all fees and costs the consumer might incur (as distinguished from the costs that the advisor incurs to operate their own business, including technology costs). Relevant fee/commission categories might include:

- Fees charged by the advisor directly – including checkboxes for the type (and a line to indicate the frequency) for AUM fees, hourly fees, subscription fees, fixed/flat fees, performance-based fees

- Fees charged to the consumer directly by third-parties – including third-party manager fees

- Product commission costs incurred by the consumer – including insurance commission, annuity commissions, and commission on securities products (and thus to the extent that product costs are higher due to commissions paid to brokers, it will be indirectly reflected here)

- Separate additional implementation costs for the consumer (which may or may not compensate the advisor) – including brokerage firm ticket charges (for trade execution), mark-ups, etc.

The above structure would have the added benefit of clearly delineating to the consumer whether the advisor is charging only fees (i.e., is “fee-only”), is compensated via fees and commissions, or is compensated solely by commissions. However, for consumers to have a clear view and understanding of the total scope of advisor compensation, it is important that the advisor be required to disclose compensation either both directly and indirectly via third-party affiliations – a disclosure that is already required in Items 5 and 10 of Form ADV Part 2, but should be required as a part of a Fee Disclosure Table to consumers as well.

In the end, I again applaud the Massachusetts Securities Division for its efforts to clarify costs for consumers and to promote not just fee but total cost and compensation transparency for consumers. However, I would urge the Division to be cognizant of the growing range of not just compensation models for advisors, but the scope of services provided – with the recognition that when there is at least a requirement that costs be clearly disclosed, it may be less necessary for a standardization in how services are described and presented (as once consumers are clear on the costs they may incur, they have a tendency to ask a lot of questions about the value they will receive anyway!). Even mere disclosure that there are costs, and their types, can help reduce the current risk of consumers who believe they pay “nothing” for financial advice, due to the lack of transparency around costs in the current marketplace (which makes it impossible to determine value).

Thank you again for the opportunity to publicly comment on the proposal, and please don’t hesitate to contact me directly if I can provide further comment or clarification with respect to any of these remarks!

- Michael E. Kitces
Publisher, Nerd’s Eye View at
Co-Founder, XY Planning Network