Posted by on Jul 25, 2014 in Blog, Columns |

By Jason Zweig | 1:07 pm ET
Jul 25, 2014
Image Credit: Christophe Vorlet


Even a “fiduciary” investment adviser may still be able to treat clients in ways that might surprise you.

Someone who owes you a fiduciary duty must put your benefit ahead of his own; in practice, that should mean minimizing fees, eliminating all avoidable conflicts of interest and fully disclosing any other material conflicts. Unlike brokers—who need only ensure that their recommendations are “suitable,” given your needs and circumstances—investment advisers are already required by law to meet that standard.

Even so, many advisers impose “termination fees” on clients who leave the firm within a set period. It is appropriate for an adviser to recoup the cost of setting up and administering your account—and perhaps even to deter you from bolting the first time the market dips a little. But securities lawyers say that termination fees should be directly related to those costs. Otherwise such fees would seem to violate the spirit, if not the letter, of fiduciary duty.

“If for any reason you don’t trust your adviser anymore, or you don’t like his performance, then terminating the contract is your only real way to protect your interest,” says Robert Plaze, a partner at law firm Stroock & Stroock & Lavan in Washington who formerly regulated investment advisers at the Securities and Exchange Commission. “You shouldn’t be penalized for doing that.”

Termination fees are fairly common. In its latest annual brochure, filed with the SEC in May, Horter Investment Management, a financial-advisory firm based in Cincinnati, says that it charges clients $200 if they exit some of the firm’s strategies within 90 days. That is in addition to management fees that run up to 2.75% annually.

The firm manages approximately $700 million, according to another form filed with the SEC. Drew Horter, head of the firm, was traveling this past week and no one else was authorized to comment, said an employee.

The David J. Yvars Group, an investment-advisory firm in Valhalla, N.Y., says in its SEC brochure, filed in April, that “if an account terminates within one year of opening, a 1% termination fee will apply.”

A client with $1 million would thus pay $10,000 to leave Yvars Group within the first year, in addition to the firm’s management fees, which run at a 2.6% annual rate for a stock-oriented account of that size.

Yvars manages approximately $100 million, according to the brochure. David J. Yvars Sr., chief executive of the firm, didn’t respond to several requests for comment.

Regulators have taken the position in the past “that some termination fees may violate an investment adviser’s fiduciary duty,” says David Tittsworth, president of the Investment Advisers Association, a trade group in Washington. Such fees, he says, may be unfair if they “penalize a client just for terminating an adviser or keep a client from ending a bad advisory relationship.”

Other experts caution that the law in this area is ambiguous. The SEC, says Mr. Plaze, “should either enforce this or change the rules.” A person familiar with the SEC’s thinking says that the agency views each such situation based on the facts and circumstances.

Brian Hamburger, president of MarketCounsel, a consulting firm in Englewood, N.J., that helps investment advisers comply with financial regulations, says advisers are increasingly insisting that clients give them 30 to 90 days of advance notice of a termination.

In some cases, that might enable advisers to unwind complex or illiquid securities without hastily depressing their prices. But often, says Mr. Hamburger, it simply enables advisers to keep earning fees from clients who have already said they don’t even want to work with them anymore.

So bear in mind that the word “fiduciary” isn’t a guarantee that an adviser will put you first.

If an adviser’s brochure says you could owe a termination fee, ask why he feels, as a fiduciary, that such a charge is in your best interest.

“Clients often make the argument that a termination fee is inconsistent with how an adviser should operate,” says Barry Barbash, a partner at law firm Willkie Farr & Gallagher and former head of investment-management regulation at the SEC. “They say it makes them uncomfortable, so they’d like to see it struck from the contract.”

Finally, bear in mind that most advisers don’t charge termination fees at all, and many will even refund a portion of your fees if you decide to leave the firm. So think twice before you hire someone who will charge you to fire him.