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Mentor RIA Consulting

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Fees, Bond Markups and Other Advisor Charges

Posted on May 17, 2018 at 12:15 PM
Advisor charges for the various services they provide investors have always been important to investors, regulators and the advisors themselves. The recent headlines about best interests, fiduciary duty, lawsuits over 401(k) fees, required disclosures to investors and more have had their central focus on how advisors make their money. The most recent development in this area is the new rule requiring brokerage firms to start disclosing some of the fees they charge their clients to purchase or sell municipal bonds. Note particularly the term “some” here – it means that investors won’t get full disclosure and will continue to be taken advantage of by their brokers.
What fees are we discussing? In this case it is the markup (or down) on the price charged (or paid to) clients transacting in municipal bonds. According to one source (Investment Advisor), these charges amounted to about 1.1 percent on investment grade bonds during 2016. Note that these charges were not subject to disclosure to the investors who are often unaware they occur. Investors would likely pay less if, instead, the investor purchased mutual funds holding the same municipal bonds.
How does the markup work in practice? In one case, an advisor for a major firm told his client that although he charged an asset management fee for some of the client’s assets, he would not charge a fee on the large portfolio of individual municipal bonds he had acquired for the client’s account. The client thought this was a bargain. However, the advisor conveniently forgot to inform the client that he was paid tens of thousands of dollars on markups on those bonds he selected. Wouldn’t you think that such an approach should have been disclosed? Clearly this approach would not be consistent with the fiduciary duty standard investment advisers are held to meet and would not be appropriate under the SEC’s new proposed best interest rule. Knowing that this type of activity occurs makes clear that the new rule on bond markup disclosures is not before time and that hopefully it will be strengthened as we move forward. 

Categories: Clients, Compliance, Investing

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