Transparency, Processes, and Enhanced Communication

Transparency, Processes, and Enhanced Communication

IMCA Article 2010

You’ve read the polls; you get the industry magazines and business press.  You no doubt are aware that consumers have become more than a little disenchanted with financial services companies.  Some might say consumers have expressed downright distrust of the financial services industry.  You also know that Congress and the Securities and Exchange Commission (SEC) are investigating industry practices.

It’s no surprise.  Portfolios have shrunk for individuals and institutions, bailouts have become commonplace in numerous industries, and the housing market has tanked.  Who or what are consumers to believe anymore?  As a result, Congress passed the Dodd-Frank financial-regulatory-reform legislation and the SEC is studying the value of 12(b)-1 fees and whether both investment advisor and brokers should be considered fiduciaries.


Instead of conducting business as usual, we should heed these developments as a welcome opportunity to conduct our business better.  Now, more than ever before, we need greater transparency and enhanced communication.  After all, clients and regulators can see clearly through a lack of transparency.

Transparent consultants are open, accountable, and communicative.  They are upfront about the way they operate and everything they do for a client.  Transparency is especially critical when it comes to identifying the fees that a consultant receives.  No one likes the surprise of hidden fees, and the SEC is getting ready to ensure there is transparency on fees.

A consultant might charge clients a fixed fee or a fee based on a percentage of the client’s assets, or a combination of both.  We should show clients exactly what they will be charged–including the set fee and any other fess that may come from mutual funds or other sources—and show the client what revenues we are receiving.

What I call “double dipping” is when a consultant quotes a hard-dollar retainer fee and, in addition, accepts and keeps 12(b)-1 fees from the client’s mutual fund investments.  This has been a common practice in our industry.  In “SEC to consider putting an end to 12(b)-1 fees,”[i] SEC chairman Mary Shapiro said, “We must critically rethink how 12(b)-1 fees are used and whether they continue to be appropriate.”  She questioned whether the fees, which were first allowed in 1980 to help funds pay for distribution, “result in investors overpaying for services or paying for distribution services that they may not even know they are supposed to be getting.”

Instead of double dipping, and in light of coming regulation, consultants should consider giving credit against the retainer fee for the 12(b)-1 fees.  If excess 12(b)-1 fees exist after the credit, then these should be paid back to the client.  After all, the client presumably hired the consultant based on the retainer fee quoted, not both.  This practice means that the consultant’s revenue from the client may be lower, but in the long run transparency will help prevent the client from leaving over a compensation issue.  Compensation should be exactly what was quoted—not more, not less.  This practice certainly will please the SEC.  Why not be out in front of this issue?  In the current environment, it will give you a competitive edge.

To further the transparency approach, help clients understand fully how the financial services industry operates.  We should peel the onion for our clients.  Show them how money flows from one entity to another in this industry, including mutual fund fees to the broker of record and any subtransfer fees to record-keepers in the case of 401(k) plans.  Consultants should document the percentages and dollar amounts clearly.  Clients should be shown whether recordkeeping fees are reasonable or not.

Transparency—Manager Search

Transparency also is critical in the manager selection process.  Many consulting firms do not show how they arrived at the finalist list that is presented to clients.  In today’s environment, more transparency definitely is needed.  Clients should understand how the search process is conducted and what criteria are used in making a selection.  Ideally, fund managers are chosen through a rigorous, disciplined approach based on quantitative and qualitative criteria.  Very high standards should be consistently applied in an objective, transparent search process, which should be thoroughly documented.  How did you arrive at the finalist in the search?  Every step should be documented in writing.  Too often consultants show the finalists without showing the process.  This “trust me” approach is not transparent.

This approach eliminates what I call the “reciprocity method”.  This is where consultants steer their clients to managers with whom they have a financial arrangement and/or managers who send the consultant clients or revenue.  This practice is not objective and transparent.  It is not in the client’s best interest, but rather, the consultant’s best interest.

Jamison Monroe, CIMA®
Chairman & CEO

[i] Sara Hansard, SEC to consider putting an end to 12(b)-1 fees, InvestmentNews (December 9, 2009), available at


Released: November 11th, 2010 08:55 AM

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