What I’m Telling Clients Now: Accountability, Transparency, and Full Disclosure
Posted by Mike Patton in UncategorizedAs the fourth quarter (and year) comes to a close, it will soon be time to meet with clients and review their accounts. With this in mind, I’d like to share some of what I will be discussing with them. In the past I’ve always reported on performance. I’ve also discussed their portfolios’ composition and the funds and ETFs they hold. In 2009, I added my fiduciary score for each mutual fund and ETF to the review. This time around I plan to add an additional component to the review that you might call “factors involved in getting to the performance numbers.” In other words, I plan to discuss which trades worked out well and which ones didn’t.
In 2009, I did well with a couple of ETFs but not so well with a bank loan fund I bought in 2008 and sold recently. The client needs to know that I am willing to discuss my failures as well as my successes. I believe clients appreciate an advisor who is honest enough to say, “I missed that one.”
Another issue involves the cost of trading or “transaction costs.” Now some of you might be thinking that discussing the costs of trades may open a Pandora’s box. I look at it differently and here’s why.
We all know that mutual funds come in a variety of share classes and that each share class has a different expense ratio. Let’s say we have the choice of buying an A share with no transaction fee or an institutional share with a $20 fee (that’s the fee with my custodian). Because the A share has a higher expense ratio it will underperform the institutional share. Let’s assume the A share has an expense ratio which is 0.50 basis points higher than the institutional share. If you bought a $20,000 position then the difference in expenses would be about $100. Subtract the $20 transaction fee and you are still $80 ahead. The larger the position you buy, the more advantageous it is to buy the institutional share and pay the fee.
I inform clients that I will buy the cheapest share class available to reduce their expenses. At some point in the future I may decide to pay this fee for larger clients, but at this point, the client pays it.
Thanks for reading!
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Disappointing to read that telling the truth is a revelation to a Registered Investment Advisor. That should be something that comes from the start, from within, almost like an instinctive behavioral trait. Additionally, disappointing to hear that the total costs of investments were not scoped out well. Clients deserve a full disclosure of fees from the start. Finally and equally disturbing is the statement that cheap is good. This is in relation to the comment “I will buy the cheapest share class available to reduce their expenses.” Cheap is not good. It is simply cheap. Good is good. I bet the client would agree to pay more for a better or more suitable strategy than the lowest priced solution.
It has been painful to read these articles written by Mike Patton. The author should focus on learning the business and creating an excellent experience for his clients, not drone on about sophomoric learning experiences. Joint work would do a lot of good in his case, and in the case of many other new advisors. Let’s use this space for something more progressive, more advanced. Publisher: I’ve got a dozen ideas if you are interested.
would love to hear Rich A’s ideas. enjoy Mike’s columns, but also sort of surprised by this recent post. I guess I’m [also ?] sort of surprised by the presumed relevance/value of the topic. Fee discussions are “par for the course” … I’m personally more interested in how advisors managed their business while ALWAYS attaining best execution/price/results for clients.
I am very appreciative of Mike’s posts and a little shocked by Rich’s comments. Frankly, it sounds as if he is disgruntled or just needed to sooth his ego by lashing out. I can’t speak for Mike, but it is clear to me that he was talking about the most cost effective share class to purchase for his clients and not the cheapest. Rich clearly missed the point.
“Not drone on about sophomoric learning experiences”
Learning experiences from someone who took the steps before you is EXACTLY what this blog is about and many of us find it helpful. Not everyone pops out of the RIA womb knowing everything like you Rich.
Thanks again Mike, I hope you have a happy new year.
Just a few comments regarding Mikes post and Rich A’s.
Both of the blog posts create the “ultimate” Registered Investment Adviser. Mikes comments are well taken for someone who is learning the business as well as a reminder to those of us who are experienced regarding full disclosure. Mike has detailed out a professional ,ethical , and regulatorily correct way of doing this. And yes , the “cheapest” way is not always the best way but by explaining the alternatives and the why of what we are recommending to our clients is engaging in full disclosure. The client may very well choose the more expensive strategy because it is the best choice with the best outcome for them. Even within this more expensive strategy/alternative we still will seek out the cheapest way of delivering it to the client. I do not like the word “cheap” but it is clear as to what is meant.
We all know there are many Advisers/Brokers who intentionally or unintentionally practice non disclosure or partial disclosure. Instead they seek that strategy that pays the Adviser or broker the most. Many times they are not even aware that they do this. The regulators are trying to eliminate this negative practice of non disclousre or partial disclsoure but it is difficult to monitor all forms of communication of how this info is delivered (or not) to the client. It really comes down to the incorporating the highest ethical standards and professionalism that each of practices on a daily basis with our clients to make our clients successful and give them that “excellent” experience.
Once the foundation is laid to incorporate full disclosure to clients (which is Mikes post )then the advanced stage of the experienced Adviser is what is practiced( Rich A’s post)…. and full diclsoure becomes an instinctive behaviorial trait.
Even as an experienced Adviser I appreciate the reminders of best practices etc., I consider myself at Rich A’s level but appreciate the reminder of best practices and sometimes in the details of a “sophomoric” discussion I find something that I can improve upon. Thanks to you both for your posts!
Rita V
Glad to see a little interaction, a sense of give and take, on this article. Joe talks about being disgruntled and ego. I can’t figure out where this came from, except that because I have a perspective I must be unhappy. This is incorrect and not worth spending any more time on.
I am reading here that advisors feel entitled to a learning curb; that they must cut their teeth on someone, eventually. Not true. First, no clients want their financial matters or hard earned money in the hands of a novice, except for mom and dad. This should not be a surprise to anyone with any sense of good judgment. So the question is; how do you go from starting into this business to experience while mitigating the risk to clients or yourself? You do it with joint work with advisors who are more experienced. That is the bottom line, and there are no short cuts. You do it as long as it takes. There is no time clock, only a commitment to results.
Allowing this writer to drone on about his learning experiences lowers the bar for beginners and all practitioners in the business. There are better and smarter options than making a go at it yourself. That is why there is no room for this column – it weakens the business and lowers standards. And this hurts clients who come to us for help. I have written to the editor offering to help in this regard, but no reply.
Sincerely,
Rich A.
I had decided not to respond to Rich’s “comments taken out of context,” but since he’s reentered the conversation, I fell I must speak to the issue with the optimistic hope that Rich will “get it.” Rich, When I have decided on a particular mutual fund, I will buy the cheapest share class available of that specific fund. In this case, cheaper is better since the expense ratio is lower, the returns will be higher than other share classes of the same fund. Although this point seemed to be clear in my blog (at least to me), somehow you missed it. While I don’t mind you having a different opinion than I, it would be nice if you would engage the conversation on the issues, not what you may think of me (which you seem to be somewhat of an expert). I think the “ego” comment from Joe may be coming from the fact that in your comments you seem to think very highly of yourself. A normal healthy ego is fine, but overinflated is very transparent to readers. I think that’s what he (and others) see. Well, I think I’ve wasted enough time as time can never be redeemed. I wish you well and hope things work out for you.
Mike, you address only a small part of the message. And it happens to be the smallest of the points made, that cheap is not always good. If you think that cheap is a value proposition, then go with it and see what happens. You will not likely notice anything because you will surround yourself with others who value cheap rather than good. Generally, you cannot have cheap and good. Let’s make you the Captain of that since that is what you responded to. But again, that is the smallest part of my message to you and your reader base.
The real message is how you are holding yourself out there without experience, determined to share your experience learning the business by treating your clients as a laboratory. Yes, there is a nicer way to say that, but why not call it as it really is. This guff about ego… I guess the strategy is when you are defensive and have nothing else to say, attack on ego. Look at what I have written: There is nothing in what I have shared that gives you a sense of my practice, results, prowess or lack of prowess, etc. Absolutely nothing. So grow up and take the feedback or get off the blog, and decide if you will go out and get professional support for the benefit of you and your clients. Or decide to be a defensive hack. I hope you engage the former because getting feedback and deciding on a better strategy is never a waste of time, as you seem to indicate in your response. And besides, the industry needs more well-trained practitioners. I hope that you evolve into one of them.
As the shoe company says, just do it… with some professional help. If you want to speak in person, let me know. I will be just as direct and honest, which may not be to your liking.
Good luck.