Scott and I had just finished up a meeting at Raymond James with an IT expert who was showing us a demo on some software that might make make some of our internal operations easier, when we stopped by to say hi to a business associate within Ray Jay.
To be sure, our business associate at Ray Jay we stopped in to say hi to is a very high-quality individual, so I believe what he told us. Here goes. And to be clear, I am not making any of this up.
Our guy at Ray Jay was talking to an unidentified Portfolio Manager (PM) at a firm registered in BC. This PM said he would do stock trades with Ray Jay, on behalf of his clients, but would want a "kick back" of sorts.
The proposal from this PM (I could use several other adjectives for this guy but they wouldn't be appropriate for our family-friendly website) was that he wanted to "add on" to the stock trading commission that Ray Jay charged his firm so he would be charging his clients more.
Here is how this PM's proposal would work:
- Ray Jay would charge him say $.01 (1 cent/share) on a stock trade
- Say he bot 50,000shs of XYZ
- Ray Jay would charge him a trading commission of $500.00
- Now even that $500 should be absorbed by his firm as an expense and covered by the Management Fee the client pays the firm
- But no, this guy currently operates, and wanted our friend at Ray Jay to do the same, where he would actually charge his clients more in trading commission and then Ray Jay would rebate him the difference
- Assume he charged his clients $.03/share instead of his cost of $.01/share
- He wanted Ray Jay to rebate the $.02/share back to him
- In this example, that would work out to $1,000 back into his jeans
- Guess who would be paying for that $.02/share or $1,000?
- That's right...his clients!!!
To which I replied, "You've got to be kidding me?". Nope, that was the fact. And this PM said the British Columbia Securities Commission said it was "ok" to operate this way! Really?
Guys like this give the financial services sector a bad reputation.
But in the end, the clients would have no idea that they were being charged an extra $.02/share. How would they? What a joke.
As a PM registered with the Ontario Securities Commission (OSC) and in BC, Alberta and Sask, I would be shocked if a regulator said this form of business practice was "ok". And even if they did, what PM would actually do that?
As a PM in any jurisdiction in this country, we have a Legal Obligation to operate with a Fiduciary Duty to our clients. This means putting our client's interests ahead of our own at all times. How does over-charging your clients put their interests ahead of your own?
Stories like this are just part of the reason why we created Our Voluntary Code of Conduct for the Stewardship of Your Wealth (read here if you haven't already: highrockcapital.ca/uploads/3/4/2/5/34254660/our_voluntary_code_of_conduct_as_stewards6.pdf). The first two are extremely important, certainly in relation to this story we heard yesterday:
1) Put our client’s interests ahead of our own
2) Be transparent and forthcoming about fees and costs and their impact on your portfolio
Last thing, before I sign-off on this topic, that clearly has me worked up into quite a state, below is a full explanation of our High Rock Private Client Fees:
And for further clarity, let me add:
- We charge our clients one Management Fee of 1.15% (ann) on their total assets at each month end (1/12th each month)
- Of that 1.15%, we pay Raymond James Correspondent Services to act as Custodian (.12%) and trading commissions (.03%). Doing the math, you can see that High Rock keeps about 1.00% for our operating expenses (rent, technology, etc) and for food (and red wine)
- And the last little circle in the bottom left are fees that we all pay if, as and when we own Exchange Traded Funds. These are the Management Expense Ratios that are "hidden or embedded" in any Fund that an investor would own. And here is something interesting, and something I argued with the OSC on 2 years go (read Barry Critchley's article on June 2, 2015 here: highrockcapital.ca/in-the-news.html), technically, the new Fee Disclosure Rules do not state that a PM or an Advisor needs to divulge to you that you are paying hidden/embedded fees on any funds you own. All they need to do is make sure that when you buy a fund, you receive a copy of what is called a Fund Fact document - a one-page, both side, description of the fund your broker just sold you. If you look at the bottom of one page, in super tiny print, you might see the MER. And even the MER is not the entire picture. Most Funds (I am including ETF's here too!) have trading commissions that get added to the MER to create a TER (Total Expense Ratio). And the OSC doesn't think this is all that important to have complete and full disclosure on these MER's and TER's? 99% of the prospective clients we meet have no idea of how these MER's are even paid out nor how dramatically they can affect their overall performance. Heck, most people don't even know they are paying them (how you actually pay them will be saved for another day)
Well the OSC, nor their other provincial counterparts, may not think full fee disclosure is all that important, but at High Rock, we do, and we have gone above and beyond the regulatory requirement to help educate our clients and prospective clients exactly what they are paying, what we are making and what anyone else involved is making.
Here it is: