Independent turnkey RIAs are going one step further, as they bundle everything (the 100% payout, compliance, operations, the technology stack, E&O insurance, advisory billing and performance reporting) into a single cost as low as 10 basis points on client assets. If there is one thing that gives broker-dealer RIAs an arrhythmia, this is it.
Markups On Third-Party Money Manager Management Fees
Broker-dealers use markups on third-party manager fees to help themselves pay for their large forgivable transition notes. But this costs clients dearly. The markup (which the firm may refer to as a “marketing reallowance”) can overrun the original manager’s charge by as much as 10 to 50 basis points. Advisory departments may claim the charge is for ongoing due diligence on the money manager, but the reality is that it’s all profit. The markup, after all, is not charged on the firms’ proprietary asset management platforms—only on non-proprietary ones. And that’s a conflict of interest. Not all broker-dealer RIAs do it, but an increasing number have added the fees, which are more pronounced at larger broker-dealer RIAs.
Advisors are often unaware of these extra fees—sometimes they find out about it through happenstance. One advisor told us he was exploring Fidelity IWS as a custodian. He asked Fidelity out of curiosity if it contracted with a particular money manager and what the management fee was. He discovered he was paying 20 basis points more for the money manager’s management fee than what Fidelity IWS was quoting.
It's hard to adhere to a fiduciary standard when dealing with such opaque costs. You don’t know what the large checks being waved in your face represent—since how they are being paid for is muddled at best. You don’t know what your alternative options are in the marketplace. But it’s imperative to know what the conflicts are if you want to adhere to the standard, especially if you are a CFP with a legal obligation. That standard has been required by the CFP Board for client investments since June 2020, and those who run afoul of it risk disciplinary action by the board. In the future, you must be hypervigilant about these conflicts and the better options available to you and your clients.
Jon Henschen is founder of Henschen & Associates, a recruiting firm placing advisors to independent broker-dealers and RIAs.