Why your 2018 investment statement is misleading

Wealth


The low-fee revolution in investment products is evidence that a total wealth return reporting standard inclusive of tax consequences would lead to improved outcomes for clients. Since the Securities and Exchange Commission forced investment companies to report performance results net of fees, these expenses have fallen precipitously. The same outcome could be expected with the total-wealth-return reporting standard we propose. It would force wealth management companies to compete against how much wealth they build for you, not investment returns, which are just a means to the actual wealth-building end investors all seek.

Fund companies, advisors, custodians and brokerages all have the technology to do what we’re proposing. For instance, advisors can use custodian cost-basis data (and their client data) to deduct tax liability from performance results and expectations, as well as quantify the impact of their tax-reduction strategies. Fund companies could also easily sample their customers, use published IRS data or simply a modal example to adjust performance for expected tax liabilities. They can also figure out account withdrawal optimizations. The Vanguard Group released a paper on implications of account withdrawal order for taxable investors but does not do these calculations for individual clients.

Regulators, too, are long overdue for an updating of their performance reporting guidelines, most of which predate the development of the technology that now makes this more robust wealth accounting possible. It seemed for a moment like we were moving closer to this better reporting standard. The DOL fiduciary rule that was killed earlier this year emphasized — both in the rule itself and especially in subsequent guidance — that the “best interest” of the clients should not be narrowly defined in terms of fees and investment returns but should also consider the broader portfolio and life situation of the client. That broader definition of best interest was included at the urging of both consumer advocates and some within the financial industry.

The bottom line is that today the will is not there among financial companies as long as they are not required to be judged by this higher standard. It costs time and money to invest in these wealth-building tools, and that is not money wealth managers are likely to invest if they are being evaluated solely on investment returns instead of the reason investors actually invest money: to build wealth. We expect that it is inevitable that the industry will one day be held to this higher standard, since the technology already exists. But for now, we’re not holding our breath.

By Matt Fellowes, founder and CEO of United Income



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