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  • Writer's pictureRichard DeSalvo

So Much Reform, So Little Change

Why legislate when you can eliminate?

Recently, I’ve noticed that the SEC feels many clients are overpaying in prospectus-based fees for a product that does not fit their needs while broker dealers continue to be fined for share class mutual fund problems. The SEC went even further in 2018 and enacted a self-reporting initiative where investment advisors agreed to compensate investors to ensure adequate fee disclosures. This resulted in $125 million being returned to clients while advisors that participated gained amnesty.

The financial planner community needs to look in the mirror. Self-enforcement is evidence that advisors are not disclosing compensation properly and various share classes have differential compensation and varied cost for the client. We are responsible for our actions and must stay focused on our clients’ best interests in every decision we make.

We also have to look at the manufacturer, in this case mutual fund companies. They build products that reflect the needs of the advisor instead of the end-user. Compensation models and share classes reflect their preferred pace of payment, either more upfront or more ongoing.

For example, selling a $100,000 C share with a 1% trail allows an advisor to stay in a brokerage account, avoid fiduciary behavior/liability, and make the same money as if had opened an advisory account and charged a 1% wrap with no advisory licenses required. Simply put, the advisor got paid the same advisory fee and shirked fiduciary responsibility. The client got a suitable transaction under FINRA but could have been offered a product under the SEC’s fiduciary criteria. These criteria are part of bigger solution, set up to help the client gain access to true planning and long-term guidance.

Why are the mutual fund companies still offering such varied share classes? If they eliminate share classes, stop new purchases, or convert to A shares at NAV, this issue would disappear immediately. I suggest the SEC speak with the buy-side and stop this at the source. If you build it, some will still come.

Let's change the way we do things by eliminating the issue. With the creation of clean shares, a transparent way to show the management fee and add-ons for commissions to the advisor, we reduce the rationale for A, B, or C shares. This is a good transition for new fund purchases, forces disclosure to the client, and eliminates conflicts of interest for the advisor.

We need to take control and eliminate the demand for varied share classes by taking them out of our inventory. See if your favorite fund/fund family offers T shares and ask your broker dealer if they have them in their inventory. This share class offers quality investment solutions, priced at a fair fee for the advisor’s compensation, and fully discloses to the client.

As wealth professionals, let’s do the right thing for our clients. Lead by example, think T shares, and stop giving fund companies justification to continue creating multiple share classes.

Rich DeSalvo

CEO and Founder

f3Logic, LLC

Where Fiduciary Freedom is First

Advisory services are offered through f3Logic, LLC, a registered investment advisor.


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