Care for Some Incidental Advice?

November 11, 2019

How would you feel if you took your car to be serviced and were told that the work they were going to do was incidental to whether your car was roadworthy? Of course no car service shop would make an explicit statement that undermined whether they had your best interest in mind. However, that is not the case in the weird and wonderful world of providing investment services.

The services we provide to our clients includes oversight of other investment firms that they use. This gives us visibility not only of the nature and performance of funds that other firms deploy, but fees and disclaimers. It is not uncommon for the total amount of fees to be buried, so we pick up our shovels and do some digging to get to the bottom of the true costs being paid by our client. The disclaimers are never the stuff of vacation reading but we often check them anyway.

Last week our work for a client led us to being given a client report from one of bluest of blue-chip investment houses in the country. The report ended with six pages of “Important Information” (more commonly known as legal disclaimers). The first paragraph dealt with what should have been the simple topic of explaining the nature of the relationship the investment house maintains with its clients. Not so fast… 231 words were devoted to covering the many nuances of this highly complex arrangement.

Despite the length of the exposition there was no mention of acting in the best interest of the client, putting the client’s interests first, or having any fiduciary responsibility. On the contrary one sentence stood out for its legalistic effort to avoid any responsibility at all. Apparently “where” the investment manager was acting as a broker on behalf of the client then any advice given would be “incidental.” My Merriam-Webster dictionary defines incidental as “being likely to ensue as a chance or minor consequence.”

So for any client of this blue-chip investment house there will always be two challenges. First, the client will have to work out whether the actions of the manager at that time were as a broker. Second, when receiving any advice at or around this time they would have to consider that such advice was of minor consequence. Of course the latter is probably true for the investment house. By contrast the advice might well have major consequences for the client.

On this same theme, I saw a research report last week which compared independent investment advisors with those firms operating as both broker and advisor. The two main conclusions were striking: independent advisors had lower fees (by c.30%) and much fewer problems with advisors with disciplinary records (by about one fourth) as compared with those advisors who wore both advisory and broker hats.

The lesson from this story is simple. Be very wary about your relationships with the investment management and advisory industry – and read the small print (or ask us to do that for you).

Richard Rushton