Brokers are burying fee disclosures in complicated customer documents and sometimes levying unreasonable charges, according to a report released last week by state securities regulators.
In a
survey of 34 broker-dealers from across the country, the North American Securities Administrators Association Inc. found widely inconsistent disclosure methods and questionable practices regarding fee charges and markups.
For instance, fee disclosures ranged between one paragraph and seven pages and were sometimes embedded in a document that totaled anywhere from one page to 45 pages. The regulators also found questionable markups on fees charged to investors. For example, markups on transfer fees ranged from 100 percent to 280 percent above the wholesale cost to the broker-dealer.
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Two places to look for overcharges: for small, ancillary services, and in account transfer fees.
Ancillary services are such things as paper statement fees or, as specifically investigated by the regulators, fees for stock certificates. In one case, for example, a broker-dealer charged customers $500 to receive securities in certificate form, more than eight times the $60 cost the wholesale clearing firm had charged the broker-dealer for the same service.
Regulators found that Automated Customer Account Transfer fees ranged from zero to $175 among the broker-dealers surveyed. These fees are charged for the transfer of assets in a customer account from one brokerage firm and/or bank to another. The regulators also analyzed data from a large clearing firm that provides clearing services to nine of the surveyed broker-dealers. While the clearing firm charged $25 to facilitate an account transfer, the broker-dealers charged customers between $50 and $100 to facilitate the transfer, a markup ranging from 100% to 280%.
“While broker-dealers may comply with the technical requirements governing fee disclosures, their disclosures lose effectiveness when hidden in small print, embedded in lengthy account opening documents, or vague in terminology that does not define the service provided,” the NASAA report stated. “Broker-dealer customers would benefit from greater consistency and transparency in the disclosure of fees.”
The report recommended that NASAA work with the
Financial Industry Regulatory Authority Inc., the industry-funded broker regulator, to develop a model fee disclosure that is “simple to read, easily accessible, and can be used effectively by investors to understand fees and to conduct fee comparisons,” the report stated.
Finra has been addressing the issue and plans to do more.
“As NASAA notes in its survey report, Finra has been focused on disclosure of fees in retail brokerage accounts and individual retirement accounts for some time and issued guidance as recently as last year,” Finra said in a statement. “In addition, Finra is currently in the process of revising its rules on fees and markups.”
The report also recommended that NASAA set up a task force to work with the financial industry in “standardizing the language, placement and structure of fee disclosures similar to the approach taken in the banking industry.” It also encouraged more investor education.
“The report raises concerns regarding the transparency and reasonableness of broker-dealer fee practices,” Ohio Securities Commissioner and NASAA President Andrea Seidt said in a statement. “State regulators will be examining these issues more closely, but welcome the opportunity to work with the industry to ensure that fees are reasonable and fairly disclosed to investors. Improved fee disclosure will help investors compare fees effectively and efficiently.”
