A big part of being a fiduciary has always been knowing exactly what your clients are paying for their investments, and making sure they’re getting the best deal. But today, advisors who act as fiduciaries have to keep a closer watch over fees and expenses than ever before, said Fi360, a group that provides consulting to financial advisors on fiduciary issues. Fi360 conducted a webinar on the subject Wednesday afternoon. Thankfully, it’s also gotten easier to monitor fees, because there are so many services today that provide fiduciary benchmarking, Fi360 said.
“Nowadays, the emphasis on fees and expenses is much greater than it was 10 years ago,” said Rich Lynch, Fi360 chief operating officer. “And with regulators putting more emphasis on this area, we need more disclosures, better simplification, to compare apples to apples and oranges to oranges.”
At the end of May, the House of Representatives passed the American Jobs and Tax Loopholes Act, which would require disclosure of hidden 401(k) fees to retirement plan participants. And the Department of Labor has proposed rule 408b2, which says that service providers to DC plans will have to disclose certain things in the written service agreement. Meanwhile, several recent lawsuits concerning plan sponsor fees indicate that the issue is coming under increasing scrutiny: Hecker v. Deere, Braden v. Wal-Mart Stores, Martin v. Caterpillar, and Jones v. Harris.
“In all four cases, there is a similar theme,” says Lynch. “You have a participant complaining that the fees being charged are excessive, and they felt wronged to the point that they decided to bring lawsuits against the plan sponsor. It’s getting more and more attention. Even in the trade and popular media channels.”
Fiduciaries must monitor fees in three areas: client-level, operational and transactional fees. Once an advisor knows what these fees are, he or she must make sure they are fair and reasonable. “This determination of fair and reasonable does not require that a plan sponsor pick the cheapest fund,” he said. “The advisor hired does not have to be the cheapest advisor. Fair and reasonable looks at the fees charged, comparing them against services provided.”
Lynch said an advisor will even benefit if he tries to help the client evaluate the value of his own services versus his competitors. “The respect level from a client goes up significantly when advisors try to help clients find the best deal they can get in terms of even advisor value,” he says.
To make sure retirement plan fees are as competitive as possible for a particular client, an advisor needs to consider unbundling the fees, and then restructuring the plan to cover only those items that are needed, said Mike Limbacher, Fi360’s tools product associate. The expense ratio on a plan includes a number of different components—the portfolio management fee, the 12b1 fee, shareholders fees, transactional fees, redemptions fees.
Advisors can get details on some of these fees directly from the ICI factbook, but there are also a number of services now that consolidate this kind of information, like Brightscope, Ann Schleck and Fiduciary Benchmarks. “The ability to compare expenses a few years ago was more difficult, but today there are lot of people who provide that component in the marketplace now,” said Lynch. If you do use firms that provide benchmarking information, you have to make sure that the information is current.
Fiduciary advisors should also examine the plan’s brokerage costs, which can be found in the statement of additional information on EDGAR’s mutual fund website, or on Morningstar. The bid/ask spread is another crucial element that a fiduciary should periodically review, “especially if you are looking at managers in esoteric or less liquid investments,” said Limbacher.
“For individual client-level information, turn to the client or brokerage level agreement. Perhaps the client or the previous broker has it.” Or you can go to the record keeper or third party administrator agreements, and find out exactly what they charge in these investments. “The most important strategy is simply to ask,” said Limbacher. “If you are an advisor to a plan, you have every right to go to the record keeper and find that information.”
If you’re having trouble getting fee information, how far do you need to go to satisfy that fiduciary requirement to control and account for expenses? There’s no a hard and fast answer, said Limbacher. But you need dig deep enough to the point where you're pretty sure you know where every penny is going.