Compliance April 25, 2014

Survey Finds Little Consistency on Fee Disclosures

A recent survey report from the North American Securities Administrators Association (NASAA) finds a wide disparity in how broker/dealers and other financial services providers disclose fee charges.
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The NASAA report argues this disparity can cause substantial harm to investors, who often fail to understand the expenses they pay to access and maintain their investments. Researchers go so far as to suggest the widespread use of questionable practices regarding broker/dealer fee markups is likely directing excess compensation to some broker/dealer firms.

“The report raises concerns regarding the transparency and reasonableness of broker/dealer fee practices,” explains Andrea Seidt, who serves as NASAA president, as well the Securities Commissioner for the state of Ohio. “State regulators will be examining these issues more closely … We welcome the opportunity to work with the industry to ensure that fees are reasonable and fairly disclosed to investors.”

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Seidt says that, while most broker/dealers are complying with the technical requirements governing fee disclosures, NASAA has concluded that such disclosures are frequently buried in fine print or are imbedded in lengthy operating documents that are difficult for investors to understand. NASAA also feels the widely varied terminology that broker/dealers use to describe their work and expense structures does not always adequately capture the services provided or the prices assessed for those services, making it difficult for investors to ensure they are getting a fair value.

“Fees hidden within pages of impenetrable verbiage is not meaningful fee disclosure,” Seidt says. “Investors should be able to easily compare and contrast fees among the various broker/dealers in order to make an informed investment decision.”

The findings come at a time when other self-regulatory organizations (SROs) and federal watchdogs are considering similar matters. The Department of Labor (DOL), for instance, is currently seeking comments on a proposed 408(b)(2) fee disclosure rule amendment  that would simplify the way fee data is presented to retirement plan sponsors and participants. The proposed rule would force broker/dealers, financial advisers and other service providers to provide investors and their fiduciaries with a “fee disclosure guide” when their fee disclosure documentation is overly lengthy or to digest—a suggestion that has caused some ire among industry groups (see “DOL Fee Guide Proposal Misses the Point, Some Say”).

Seidt says NASAA’s recent report was in part prompted by actions taken by state securities regulators in Connecticut involving inappropriate fees charged by broker/dealers. Lessons learned in that case seemed likely to apply to broker/dealers more widely, prompting the investment products and services project group within NASAA’s broker/dealer section to conduct a survey of fee data from 34 prominent broker-dealers.

Some key findings from the survey include:

  • There are extremely diverse disclosure methods across the investment markets. Disclosures explaining fees to clients ranged from a single paragraph to seven pages in length. Initial fee disclosures lack uniformity whether by method of disclosure, terminology used, or location of the disclosure.
  • Questionable markups on fees charged to investors are widespread. For example, mark-ups on transfer fees ranged from 100% to 280% above the wholesale cost to the broker/dealer.

The report notes that fees imposed by broker/dealers on customer accounts must be reasonable for the services performed. Fees that are not reasonably related to services, or that are excessive, may constitute violations of federal and state laws, as well as the standards maintained by various SROs, including the Financial Industry Regulatory Authority (FINRA).

A full copy of the report and survey results is available here. More on the industry’s challenge to expanded fee disclosure requirements from the DOL can be read here.

Data & Research April 25, 2014

Many Draw Down Accounts Without Plan

More than half of retirees say they have withdrawn funds from retirement accounts, usually to cover short-term expenses, without a strategy in place to mitigate longevity risk.
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Fifty-two percent of retirees have withdrawn funds from their retirement savings without any strategy in place, according to the most recent release of the Perspectives of Retirement survey from PNC Financial Services Group. PNC conducts the survey semi-annually among a national sample of 1,200 adults, ages 35 to 75, to track the way workers and retirees are spending accumulated resources.

PNC says the latest survey results show nearly the same percentage of retirees (53%) are concerned about running out of money. Of those who have withdrawn funds, almost 60% did so to cover living expenses.

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Survey results show retirees grow more likely to withdraw money as they age, but nearly 40% of young retirees (age 64 or younger) are already drawing down non-annuitized savings. Almost two-thirds (63%) are concerned that Social Security or pensions will not be enough to cover expenses and needs further into retirement, PNC says.

“Most retirees don’t have a plan for drawing down savings and that is a concern,” explains Joseph Jennings, senior vice president of wealth management with PNC. “Using savings to cover expenses indicates that retirees may not have a retirement income strategy in place and are putting themselves at greater risk of outliving their funds.”

PNC finds one-third (35%) of retirees say the amount of money they use in retirement is about what they anticipated, but nearly as many (31%) had no specific expectations when entering retirement. The remainder split evenly between those who are spending more and those who are spending less.

One positive sign in the survey data shows many of the retirees reporting concerns about running out of money have already taken action to control their expenses and budget more tightly. They are also taking various actions to reduce overall living costs or raise new sources income, PNC says, among other positive actions.

The 53% who fear running out of money report the following about their financial outlook:

  • Two-thirds have recently changed the way they manage their money. Fifty-nine percent have reduced expenses and 41% now budget more carefully;
  • Those who are concerned are more likely to say they get a higher percentage of their total retirement income from personal savings and investments, at an average of 35% versus 24% for those who get most of their retirement income from other sources, such as Social Security;
  • The equity in their home is more likely to be important to their retirement plans, but at the same time, they are more reluctant to rely on the equity for income; and
  • These retirees have significantly fewer assets, on average, with total investable assets at $225,000, compared with average assets of $411,000 among those who are not concerned.

The survey suggests retirees continue to rely heavily on Social Security. Almost eight in 10 (77%) receive Social Security, while 66% have a pension and 50% use money from savings and investments.

"The need for early retirement planning is crucial, and those nearing retirement can no longer take risk out of their portfolios,” Jennings adds. “We're living longer and need more funds to afford our longevity. Younger generations do not have pensions to rely on, so early planning is more important than ever.”

More information on the survey can be accessed here.

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