Can We Be Better Investors By Asking Questions from Shakespeare?
The title of this blog is from the following line from Shakespeare’s Romeo and Juliet.
“What’s in a name?”
A recent Barron’s article titled Overpaying For Financial Advice, highlights what might lurk behind some big Wall Street names.
It details a Morgan Stanley (MS) regulatory filing, which shines a bright light on what brokerage firms pay for investment products versus the fees that are charged to clients.
To have a little fun with Shakespeare:
What’s In A Fee?
Maybe more profit than you realize, or would be comfortable with, when you look beyond the brand.
According to the Barron’s article, some MS clients are paying as much as 2.5% for active equity managers that only cost 0.42% (a 6x mark-up of the manager before resale).
For elite, bespoke and separately-managed fixed income portfolios (sounds good and valuable doesn’t it?), MS is only paying the “elite managers” 0.23% for what is sold to clients at 2.5% (a mark-up of over 10 times).
Think about that.
At many brokerage and wealth management firms investors are sold what are often presented as boutique, alpha-generating separate account managers.
For this access, pitches often suggest that investors need to pay-up for the valuable managers.
What the Barron’s article lays bare is that the vast majority of the fee can be going to the brokerage firm (excuse me – wealth manger), not the “valuable manager” (over 90% in some cases for fixed income strategies, as disclosed in the article).
Investors think they are paying high fees for the manager.
In reality, they are paying high fees for the brokerage firm’s business platform, marketing, sales management and commissions to brokers (excuse me – again – wealth advisors).
Is it suitable to sell a client a product at a fee that includes a mark-up of as much as 10 times?
The regulatory answer is “yes”.
But while high mark-ups may be deemed suitable, is it appropriate to sell clients on the idea that they are paying for one thing (investment managers) when they are in fact paying the majority of the fee for something else (branding, marketing, sales and commissions)?
This is a bigger question and would require a much longer blog.
I think it is very safe to say, however, that clients are due greater transparency in what they are actually paying for than they have currently.
How does this all relate back to Romeo and Juliet?
Don’t be star-crossed and fall in love with a brand when entering into what can be an emotional relationship (money matters can be highly charged).
Some find comfort in established brands and nothing is wrong with businesses having solid profit margins, especially if value is being provided.
All we’re suggesting is that, investors should avoid making decisions on brand alone.
Maybe someday the industry will stop Protesting Too Much to simple, plain-language disclosures that are easy for everyone to understand.
In the meantime, ask more questions about fees, business models, profit margins and incentives.
What’s in a name?
Maybe more fees and mark-ups than you think.
Pavlov’s Brokers – FWP Insights
Transparency: Do We Protest It Too Much – CFA Institute Enterprising Investor
Trust and Fiduciary Services: Questions to Consider – CFA Institute Enterprising Investor
Ignoring Fees Doesn’t Beat the Market – FWP Insights