Question: “I received a letter from my financial adviser at a large firm informing me that my now-closed account was overcharged advisory fees from 2009 to 2017, totaling $16,413.44. They said the overcharge was a technical error, and my account should have received a scaled advisory fee. The scale was for accounts from $1 to $500K a fee of 1%, $500K – $1M is .75% and $1M+ is .50%. My account was charged 1% for eight years even though my account exceeded $500K and $1M. They calculated $11,449.89 in overcharge fees and $4,963.55 in interest calculated based on 3% per the Department of Labor’s underpayment interest table.
But the stock market performance during that period averaged 12%, so I requested that the firm base the interest on that. Instead, I received the check for $16,413.44. Can they legally use this table versus basing the overcharge fees on market performance? They earned 9% on my money from 2009 through 2023, not to mention I’m one of multiple clients that was overcharged. They benefited from overcharging by using client funds and investing in the market. I have filed a complaint with the SEC and have been advised that they cannot help me. What else can I do? How can I make sure I never end up in this position again?”
Answer: To begin, some pros think the AUM fee model can feel outdated and problematic — even when there aren’t overcharge issues. “The idea that the overcharge alone was $11,500 over eight years, when clearly they weren’t paying enough attention to the account to catch this, which means they were definitely not doing enough work to justify a 1% fee, is wild to me,” says financial planner Elizabeth Pennington at Fearless Finance. Note that plenty of advisers charge on a project or hourly basis — you can find advisers at CFP Board, NAPFA or through this free tool that matches you to fiduciary advisers from our ad partner SmartAsset.
Typically, when using the AUM model, advisers charge an industry average of about 1% AUM, with a sliding scale often reflected for balances over a certain threshold. But many advisers also offer hourly or project-based engagements, with hourly prices ranging from $200 to $500 per hour and project-based services costing between $1,500 and $7,500 depending on the scope of work.
Have an issue with your financial adviser or looking for a new one? Email questions or concerns to picks@marketwatch.com.
Can they use the DOL table and what is your recourse?
Long story short — yes, the advisory firm can use the table mentioned. “There is something called the regulatory standard for interest on restitution. The DOL table is based on an IRS regulation, which explicitly states it is used in employee benefit and fiduciary corrections,” says Joe Favorito, certified financial planner at Landmark Wealth Management.
While it’s understandable that you’re frustrated by the opportunity costs you’ve missed out on, the firm didn’t necessarily make 12% on the overcharged amount. “That assumes that all of that excess profit was immediately invested in the same investments with the same growth rate as the company’s corporate account when the fee was deducted from you, which is unlikely,” says Favorito.
In fact, it’s quite common to use the Department of Labor table in this industry. “It wouldn’t be out of the ordinary to use the table in this case. At the same time, investment advisory firms have a multitude of expenses that they incur in the course of running their business. Is an assumption being made that they invested their advisory fees and earned the same return as you? Most firms use advisory fees they collect to pay employees and other overhead expenses they incur on a monthly basis as opposed to investing them into the market,” says Jason Steeno, president of CoreCap Investments and CoreCap Advisors.
Additionally, note that if your return was negative, which would have been unlikely over an eight-year period, or the return was below the DOL schedule, they still would have had to pay you the same amount, says Favorito.
As for taking this to the next level, we’re assuming your financial adviser’s regulator is the Securities and Exchange Commission (SEC). “If that’s not the case, or if they are duly registered, you may have better luck filing a complaint with FINRA. As to whether you have any recourse, unfortunately, these are relatively small dollar amounts and would not warrant either paying an attorney to engage with your adviser’s compliance department or filing an arbitration claim,” says Ogorek.
What should you do going forward to prevent this kind of thing?
In the future, ask the firm to provide you with a quarterly or at least annual billing summary that breaks down the fee schedule. “Many clients don’t ask for it as the fee is on their statement. However, typically the adviser can provide this breakdown regularly,” says Favorito.
You may want to step up your involvement in the process, too. “Carefully review your statement of fees periodically when you receive them from your broker or adviser. This means sitting down with a calculator and going through each breakpoint to ensure that you are being billed correctly,” says certified financial planner Anthony Ogorek of Ogorek Wealth Management.
What’s more, you might consider switching to an adviser who uses a more modern fee structure. “I strongly believe that an hourly or flat fee model is more fair to clients, better aligns with adviser workload and allows better access to fiduciary advice to a broader range of clients,” says Pennington. You can find advisers at CFP Board, NAPFA or through this free tool that matches you to fiduciary advisers from our ad partner SmartAsset.
Have an issue with your financial adviser or looking for a new one? Email questions or concerns to picks@marketwatch.com.
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