Proper disclosure of the costs of investing, including disclosure of all fees and their potential effects on the value of investments, is critical for all firms. However, despite a focus, for years now, on this issue by the SEC, FINRA, and other regulatory bodies, some firms still do not adequately disclose to retail investors how the fees and expenses associated with particular types of investments will affect their returns.
The SEC has made the disclosure of the costs of investing a primary focus for 2018, and it is likely that we will see this issue remain an SEC priority well into the future as it dovetails with another critical issue - providing services to aging investors.
This focus on adequate fee and expense disclosure is not so much a result of firms deliberately avoiding proper disclosure as firms having, "practices or business models that may create increased risks," which include (but not necessarily limited to) the following:
- "Certain advisory personnel that may receive financial incentives to recommend that investors invest, or remain invested, in particular share classes of mutual funds where the investors may pay higher sales loads or distribution fees and the conflict of interest may not be disclosed to investors";
- "Accounts where investment advisory representatives have departed from the firms and the accounts have not been assigned a new representative to properly oversee them";
- "Advisers that changed the manner in which fees are charged from a commission on executed trades to a percentage of client assets under management";
- "Private fund advisers that manage funds with a high concentration of investors investing for the benefit of retail clients, including non-profit organizations and pension plans." [Source]
At the root of the matter is a simple problem - fees structures, when not carefully managed, can become complex and include unexpected risks. Sometimes, these structures become too complex for the average retail investor to understand. A minor adjustment to how fees are charged can have a major impact on the performance of an investment, but the details of such a change may not come across clearly in disclosure documents.
The issue of proper, clear disclosure of the costs of investing is of importance to all investors, but it is increasingly important to the aging Baby Boomer population. As the Baby Boomer population continues to leave the workforce and age, they will have increased difficulty properly understanding precisely how fees will impact their retirement savings, making proper disclosures more important than ever.
The SEC's 2018 Examination Priority theme of "matters of importance to retail investors, including seniors and those saving for retirement," includes such a focus on proper disclosures. This is not simply to ensure that firms are covering all their bases or avoiding questionable practices, but also to ensure this aging population is properly protected.
There's No Time Like the Present to Reexamine Your Fees and Disclosures
Generally, most firms try to follow the rules and doing their best to disclose fee structures properly. That being said, it's not uncommon for firms to neglect their disclosures over time. As an adviser's practices change, stale information introduces potential regulatory and legal issues, making the regular review of disclosures more important than ever.
Being accurate, up-to-date, and consistent on disclosures makes good sense - and is good business. Though it can at times seem burdensome, it will more costly to the firm address the issue with regulator's examination or enforcement staff. Contact us to learn more.
Robert Conca has over 19 years of experience advising businesses and financial professionals. He has acted both in legal counsel and senior executive capacities for companies spanning all stages of development. From start-ups to ...
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