When I read the papers and I find a financial advisor running a ponzi scheme or a Third Party Administrator (TPA) stealing from a client’s custodial account or an attorney like Marc Dreier trying to rip off investment firms for hundreds of millions of dollars in selling fake promissory notes.
It also reminds me of the administrator working at my old TPA firm who tried to convert plan assets into his own IRA account, only to be caught by the plan custodian because he got his IRA account number wrong.
The question I always have thought is what were they thinking? Did they honestly believe that they will get away with it? I understand more a person who robs a bank with a ski mask, then a plan fiduciary or advisor stealing money from a registered custodial account. Discover is inevitable.
I remember having a tax return client who told me that he didn’t want me to go bad. It was never in my nature to do the wrong thing (I did leave that TPA because of my aversion to their ethics) and I believe that eventually, criminals get caught.
When it comes to charging fees to plan sponsor, excessive fees are not a crime, not yet at least. Obviously, fiduciaries have a duty to not charge the clients excessive fees and plan sponsors/fiduciaries have the duty of prudence, not to be charged excessive fees by plan providers.
Clients whether they are plan sponsors or TPAs sometimes say my fees are too low, I have an RIA client who thinks my $500 a month retainer is too low for the amount of hours of work I give. My explanation is based on a fear of mine, that in the end, the clients will know. So if you a charge a reasonable fee for a client for your services, you will never hear them complain on how much you overcharged them because I am convinced that in the end, the clients will know. If you cheat them and charge them an excessive fee, they will find out and they will let other people know that you really got one over on them.
There is a well renowned ERISA attorney who used to refer work to the producing TPA that I worked for. A competing TPA later showed one of that attorney’s client that not only were they charge $7,000 for a custom made document when a $2,000 volume submitter document would have sufficed, but the ERISA attorney also got a split of the RIA fee as part of a “paid solicitor agreement”. So the clients in the end found out that this ERISA attorney was putting their needs ahead of the client.
How many plan sponsors of defined benefit plans discovered that their plan was not a retirement savings plan, but rather a gimmick for their insurance salespeople to sell excessive policies with excessive premiums that the plan sponsor could no longer afford?
I did a Retirement Plan Tune-Up for a client recently and the broker on the plan was charging 60 basis points for a $14 million 401(k) plan without providing investment education or developing an investment policy statement. So the clients found out from me that they were paying an overinflated fee and not getting compensated for it.
Plan providers can make untold fortunes of charging excessive fees, but the clients will eventually find out and there are just so many clients you can find to take advantage of and churn out.
At the end of the day, you charge people a fair fee for a fair amount of work, you’ll be OK. If you don’t, you may discover that the clients will find out and help ruin your reputation in an industry that is close knit and where word travels fast.