What You Don't Know Could Sting Your Portfolio - zweig, WSJ
Your financial adviser may have a conflict of interest that you would never even think to ask about.
Advisers are required by law to act in your best interest. They can sometimes be pushed to do otherwise, though. The latest push comes from an unlit corner of the financial industry, and you need to know about it so you can guard against it. To see what I mean, consider what recently happened to Mark Armbruster, chief executive of Armbruster Capital Management, a financial adviser in Pittsford, N.Y. His firm manages about $900 million, mainly for individual investors.
As an investment adviser, Armbruster needs to safekeep its clients’ assets at qualified custodians—the firms that process trades, maintain records, and generate account statements and tax reporting. Custodians are often divisions of financial giants like Fidelity Investments or Charles Schwab.
Late last year, according to Armbruster, a Fidelity custody representative said the financial-advisory firm needed to generate at least $90,000 more in annual revenue. In an email, the Fidelity representative spelled out seven ways Armbruster could make up the shortfall. Several involved what the rep called “asset shift,” or moves into investments run by Fidelity affiliates—which would generate more revenue for the giant firm regardless of whether they were the best option for Armbruster’s clients.
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The “asset shifts” that Fidelity suggested, says Armbruster, would mean some of his firm’s clients might incur trades that could generate taxable capital gains. Worse, the moves would be motivated not by what was in the best interests of Armbruster’s clients, but by Fidelity’s revenue targets for itself.
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Trading fees and other sources of income for custodians have been declining for years. “So the custodians are saying to [advisers], ‘Please do more of the moneymaking things for us,’” says Kitces. “That’s gotten significantly more problematic and challenging over the past few years, and it highlights the pernicious nature of hidden conflicts of interest.”
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Another option Fidelity gave Armbruster was an annual custody fee of $375 per account (or a firmwide fee yet to be determined). That option, which Fidelity says is “standard” to present to advisers, at least makes the cost of custody explicit. I wouldn’t have a problem with that. The custodian is entitled to make a profit. An adviser could pay the custodial cost, then raise its own fees to make up for it. Or each of the adviser’s clients could pay it directly to the custodian.
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