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  • Poterack Capital Advisory

You know what happens when you assume…?



There are two points I want you to take away from this article. The importance of expense/fee transparency andhow a firm may have a competitive advantage in the industry.

 

I’ve written about Department of Labor (DOL) regulations regarding my industry working with the public as a fiduciary. PCA Wealth Managers, Alec Quaid and myself, operate as a fiduciary, which means “in the best interests of our clients”. The DOL appropriately wants more transparency and disclosure of fees, expenses and other information for the investing public.

 

I’ve recently had a few very interesting client interactions and want to share the gist of what I learned. The PCA way of doing business has always sought to been very transparent. Our process is thorough and we focus on fees, expenses and taxes because of the impact on our client’s financial planning. Well here’s what I’m driving at…

 

Many investments, most commonly mutual funds and variable annuities, have internal expenses which are not displayed on your monthly statement. These internal expenses may compensate your broker or financial professional who is not working as a fiduciary. Typically, if a client doesn’t see an expense charge they assume there was no expense or fee. This would be an example of “out of sight; out of mind” or a client “sticking their head in the sand”.

 

You would think (I assumed!) a client would benefit from knowing what expenses they are paying so they can make a value judgement regarding performance and a firm’s services. At PCA, our management fee (compensation) is published on our client’s brokerage account statement in dollars and cents so everyone clearly understands what PCA is earning.

 

Here’s where a potential scenario gets interesting. Prior to joining PCA, a client may have worked with afinancial professional (not acting as a fiduciary) and paid far more in expenses than they do now with our firm. However, now that the expenses (albeit lower) are transparent and published by PCA, some clients view us as more “expensive” than their previous firm.

 

In my 33+ industry years I’ve seen many situations. Occasionally we lose a client we don’t want to lose and sometimes the reason is “ABC company is doing what you do without charging us”. Despite our effort to educate through workshops, reviews etc., there are occasionally clients who may leave PCA to pay higher expenses elsewhere simply because they assume an expense they don’t see doesn’t exist!

 

Now for point number 2! Last week I was speaking with a client we’ve worked with for a long time. He was helping his elderly parents sort through their financial accounts (not with PCA), had several questions, and wanted my advice in order to assist his parents. Their accounts are with a very large firm; one all our readers are likely familiar with. Well his parent’s firm did not have access to all the investments we have access to. Additionally, some of the funds their firm used were not the Institutional share class that PCA has access to. In other words, in that situation, PCA had more choices and better asset pricing.

 

This didn’t surprise me, because it is my business to know these things. PCA provides a very strong value offering which is not easily matched, in my experience. However, it did occur to me that this client and probably many other clients of PCA might be surprised or not even aware of our potentially competitive advantage versus the big box shops. To give you a sense of the difference in one fund’s case, the added internal expense of the Retail share class offered by this large national firm was 50% more expensive than the Institutional share class expense PCA had access to!

 

Remember the gross rate of return on a fund is the same, regardless of share class, except you keep the net rate of return after expenses (not the gross rate of return). If we lower your internal expenses, then you keep more money! Any time we can assist a client in keeping more money without more risk, then we have provided real tangible value! Fiduciaries are not compensated by internal investment expenses.

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