Bob Ritter's Blog #103: Charging Monitoring Fees for a Client’s Wealth Plan | Bob Ritter's Blog, ideas for financial service professionals

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I have been asked by several readers about the compliance issues regarding charging monitoring fees for the annual management of various aspects of a client’s overall financial plan. Such fees were discussed in Blog #97 and illustrated in Blog #98.

The facts and circumstances discussed in Blog #98 are very powerful, and several opportunities to charge monitoring fees were presented. The fees were included within the Wealthy and Wise analysis in Blog #98 and paid by asset withdrawal, not from the client’s personal cash flow.

I asked Mark Pace, the guest author of Blog #97, to comment on this compliance question. I am certain that his remarks will interest you.

Comments from Mark Pace, CLU, RHU, ChFC, President, ObjectiView, Inc.

This question of monitoring fees actually reminds me of the broker/dealer’s response in the mid-1970s to the whole concept of charging fees to manage mutual funds. Their response at that time was “Why would you want to charge a fee for something that already has performance management fees built in?” But look where we are today!

This discussion, in my opinion, boils down to:

Education
Liability
Money

Education

As you can see from my opening comment, before the mutual fund market really took off, a common language and consensus about what managing mutual funds meant and why it was important had to be created and shared among all stakeholders. The same holds true for managing life insurance. It is clear we have to help educate advisors, consumers and the broker/dealer community that life insurance is an asset with complex performance rights – particularly the universal life products – that need some form of ongoing management.

Liability

The broker/dealers will likely make the case that this is adding liability for which they then need to be compensated. I contend that providing performance management actually dramatically reduces liability; particularly when it is done from the inception of the policy. In fact, as an advisor, I would start with liability reduction as a powerful argument for performance management fees.

Additionally, there is an important distinction between variable products, which are a security and clearly under the purview of the broker dealer, and fixed products, which are not a security even though many broker dealers contend they are. The IUL products give broker/dealers even more fuel for this smoldering fire.

Money

This is really all about money. The broker/dealers have been trying to gain complete purview over every line of business in which the registered rep is involved.

In summary, if I were the advisor, I would approach the broker/dealer with the proposal that managing the fixed products is an outside business activity… one that I would disclose to them. I would attempt to get by without paying the broker/dealer compensation.

On the variable product side, because it is dealing with a security, a compensation method that meets the broker/dealer’s compliance requirements needs to be created. This would most probably be seen as another activity within the RIA and therefore you will need to share the fees.

The issue here is if we are dealing with the broker dealer’s RIA or an advisor’s separate RIA. If it is the broker/dealer’s RIA, they would have to make this a policy change for the entire system and complete the requisite amendments to their ADV. If it is an advisor’s RIA, it is a simple as making the adjustments providing for the management of life insurance and associated fees… just as many of the larger AUM firms have done. The other option is to build this into your annual financial planning fee, which can be done either by the broker/dealer or the independent RIA, and I’ve seen both.

Note: The advisors should also check state and insurance company regulations before monitoring charging fees.

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