The NASAA report argues this disparity can cause substantial harm to investors, who often fail to understand the expenses they pay to access and maintain their investments. Researchers go so far as to suggest the widespread use of questionable practices regarding broker/dealer fee markups is likely directing excess compensation to some broker/dealer firms.
“The report raises concerns regarding the transparency and reasonableness of broker/dealer fee practices,” explains Andrea Seidt, who serves as NASAA president, as well the Securities Commissioner for the state of Ohio. “State regulators will be examining these issues more closely … We welcome the opportunity to work with the industry to ensure that fees are reasonable and fairly disclosed to investors.”
Seidt says that, while most broker/dealers are complying with the technical requirements governing fee disclosures, NASAA has concluded that such disclosures are frequently buried in fine print or are imbedded in lengthy operating documents that are difficult for investors to understand. NASAA also feels the widely varied terminology that broker/dealers use to describe their work and expense structures does not always adequately capture the services provided or the prices assessed for those services, making it difficult for investors to ensure they are getting a fair value.
“Fees hidden within pages of impenetrable verbiage is not meaningful fee disclosure,” Seidt says. “Investors should be able to easily compare and contrast fees among the various broker/dealers in order to make an informed investment decision.”
The findings come at a time when other self-regulatory organizations (SROs) and federal watchdogs are considering similar matters. The Department of Labor (DOL), for instance, is currently seeking comments on a proposed 408(b)(2) fee disclosure rule amendment that would simplify the way fee data is presented to retirement plan sponsors and participants. The proposed rule would force broker/dealers, financial advisers and other service providers to provide investors and their fiduciaries with a “fee disclosure guide” when their fee disclosure documentation is overly lengthy or to digest—a suggestion that has caused some ire among industry groups (see “DOL Fee Guide Proposal Misses the Point, Some Say”).
Seidt says NASAA’s recent report was in part prompted by actions taken by state securities regulators in Connecticut involving inappropriate fees charged by broker/dealers. Lessons learned in that case seemed likely to apply to broker/dealers more widely, prompting the investment products and services project group within NASAA’s broker/dealer section to conduct a survey of fee data from 34 prominent broker-dealers.
Some key findings from the survey include:
- There are extremely diverse disclosure methods across the investment markets. Disclosures explaining fees to clients ranged from a single paragraph to seven pages in length. Initial fee disclosures lack uniformity whether by method of disclosure, terminology used, or location of the disclosure.
- Questionable markups on fees charged to investors are widespread. For example, mark-ups on transfer fees ranged from 100% to 280% above the wholesale cost to the broker/dealer.
The report notes that fees imposed by broker/dealers on customer accounts must be reasonable for the services performed. Fees that are not reasonably related to services, or that are excessive, may constitute violations of federal and state laws, as well as the standards maintained by various SROs, including the Financial Industry Regulatory Authority (FINRA).