State regulators probe whether investors get money’s worth from subscription fees

As the ways that investment advisers charge for their services proliferate, state securities regulators are continuing to probe whether investors are getting enough bang for their advice buck.

Over the last several years, so-called subscription fees — such as charging a client a monthly retainer fee — as well as hourly fees have become increasingly popular as an alternative to the traditional fee based on assets under management.

But state regulators have been expressing concern that new fee structures sometimes don’t align with services provided over the period that the charge is assessed. The issue will continue to be a priority this year.

“We are working on providing guidance about subscription fees,” Maryland Securities Commissioner Melanie Senter Lubin said during a recent InvestmentNews webcast. “There are a lot of evolving fee models that we’re taking a look at. It’s kind of fundamental that an adviser, as a fiduciary, needs to perform the work they’re being paid for, and if they’re not performing that work, they need to refund the monies.”

Lubin said the North American Securities Administrators Association, the umbrella group for state regulators, is aiming to produce the guidance sometime this year.

Subscription fees shouldn’t be singled out for review, said Barbara Roper, director of investor protection at the Consumer Federation of America.

“We need to be sure that when we’re looking at this one particular business model, we’re equally willing to challenge some of our assumptions about the other business models,” Roper said on the webcast. “I look at some AUM fees that get charged — and which, if you paid them, would be much higher than you would pay under the typical subscription fee — and they pass without any sort of scrutiny, and, I think, they’re egregiously high in some cases.”

Lubin agreed there can be drawbacks to AUM fees. “AUM fees are a really dicey issue.”

A recent study by Kitces Research found that AUM fees can amount to more on an hourly basis than prevailing levels for hourly fees.

“At median levels, we found that primarily AUM advisors are generating revenue at rates that would imply hourly fees between $350 and $800,” the study states. “This is in start contrast to the $100 to $300 implied hourly fees generated by advisors operating on a primarily hourly basis and speaks to the challenge of building an hourly practice that is as financially successful as advisors operating on an AUM basis at common fee levels.”

The difficulty of parsing different fee approaches may be slowing down state regulators, said Michael Kitces, head of planning strategy at Buckingham Wealth Partners.

Kitces, co-founder of XY Planning Network, has been in talks with state regulators about subscription fees, which are utilized by many XYPN investment advisers.   

“I suspect the regulators may have realized that their concerns about monthly subscription fees actually apply to all advisor compensation models — including and especially AUM — which is leading them to take a more measured approach to uniformly consider all advisor compensation and fee reasonableness, not just monthly subscriptions,” Kitces wrote in an email.

The Certified Financial Planning Board of Standards Inc. also has been talking to state regulators about fee oversight.

“Alongside our partners in the Financial Planning Coalition, CFP Board appreciates the opportunity to engage in a dialogue on issues related to fees with members of NASAA’s Investment Adviser Regulatory Policy & Review Committee,” CFP Board chief executive Kevin Keller said in a statement. “We look forward to picking up the conversation again in the hope of arriving at a solution that facilitates broader consumer access to competent and ethical financial planners without sacrificing investor protections.”

During the webcast, a listener asked whether it’s okay for advisers to charge a fee for their availability to investors. “I’m not so sure whether it’s reasonable to pay just to have someone be ready to help you,” Lubin said.

Regardless of the form of the fee, state regulators want to ensure investors are getting what they pay for.

“The bottom line is the fees need to be reasonably related to the services provided,” Lubin said. “But the services have to be provided.”