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

May 9, 2018 - Stephan Shipe, PhD

Subject: Fee Table Comment
From: Stephan Shipe, PhD
May 9, 2018

To Whom It May Concern,

We are glad that the Massachusetts Securities Division is attempting to remedy a part of what we consider one of the most important issues in financial services: the lack of clear communication regarding services and fees that an advisor provides to a client.

The Form ADV is by no means an easy read. This is disappointing due to the wealth of important information it contains.  A client needs these details before entering and maintaining an advisory relationship. Any change that makes the disclosure of fees more clear and concise is a win for the individual investor.

There are some that have argued that fee information is already disclosed in the Form ADV brochure in plain English. The SEC definition of plain English is vague and is not measured by the advisors or SEC, making the entire requirement useless. Without any checks on the brochure readability, advisors are left without guidance and the SEC has no way to ensure compliance. This leads to more difficult to read brochures that are not in “Plain English”.

We invite you to read through recent research we have completed regarding the compensation structures included in and readability of financial advisor disclosures. Both papers have been published within the last year. We have added the citations below, but please feel free to contact us for a copy.

One of our main concerns with the fee table is the total fee. The fee total is very misleading for advisors that offer different service combinations. For example, an advisor providing both financial planning for individuals and financial planning for businesses will list two separate fees, but the fee total will not be applicable to either client type.

Unfortunately, this issue is not restricted to this table. The Form ADV brochure has a similar problem in that individuals are provided relevant disclosures buried among irrelevant and likely more complicated disclosures for more complex services that the advisor provides.

Since the goal is to be concise, there should be a way for investors to be provided only the relevant information for their situation. For the fee total box to work, the advisor would have to provide a unique fee table for each service. This is not impossible, but an added burden. It would make more sense to drop the fee total box and instead require that investors clearly know which boxes apply to them, preferably on the same form.

We also fear that advisors who charge assets under management (AUM) fees based on a declining percentage as investor assets decrease will be able to provide a misleading fee range. This can be done by either including a range where the low fee is used to lure investors, but is highly improbable.

We believe sub-advisor fees that are charged separately should be included in the table. This should also include a range of mutual fund expenses of funds that the advisor uses.

While creating something as simple as a fee table from the complex and ranging environment of fee structures is difficult, we are glad that you have decided to take on the task. Please feel free to contact us if you have any other questions or would like to speak further.

“Readability of Financial Advisor Disclosures”, Journal of Empirical Finance (2017)
“Compensation of Investment Advisors”, Journal of Investing (2018)

Stephan Shipe, PhD
Assistant Professor of Finance
Peter T. Paul College of Business and Economics
University of New Hampshire

Kyre Lahtinen, PhD
Assistant Professor of Finance
Mitchell College of Business
University of South Alabama