Banking & Finance

Investment industry still struggling with commissions vs. fees

Action Point Financial owner started his firm to have control over decisions.

May 6, 2016
| By Pat Evans |
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Ben VerWys said there was no Jerry Maguire-type memo when he decided to leave his place in the traditional investment advisor world.

Still, the general behavior in the financial industry was wearing heavily on VerWys until he decided to break out on his own and left Oppenheimer & Co. in October 2014 to start Action Point Financial. VerWys set out on his own to be a better communicator with his clients — which currently number more than 70 with more than $20 million in assets.

“When’s the last movie that paints financial people in a positive light?” VerWys said. “It doesn’t exist, and for good reason. It began to become apparent the business I’m in wasn’t taking great care of people nationally.

“The firms are often not putting people first and put profit first.”

Many investors aren’t happy either.

When speaking to new or potential clients, VerWys often hears them talk about a lack of communication, underperformance, excessive fees and a lack of transparency.

A 2015 survey from J.D. Power & Associates confirms those beliefs, with 38 percent indicating advisors didn’t help set goals or discuss risk tolerance, and 42 percent said advisors didn’t meet key performance indicators.

The bigger indicator for VerWys is that 60 percent of investors do not understand the fees they’re paying. “It rings true nine out of 10 times: If you don’t know what you pay, it’s too much,” he said.

VerWys said fees are the preferred way to charge clients, but they can still be egregiously high. To reduce Action Point’s fees, VerWys first trimmed the “fat” many large investment firms traditionally fund, including large marketing budgets and lawyer retainers, and fees for litigation and contracts that feature non-compete clauses to prevent advisors from striking out on their own.

VerWys also dropped his Series 7 license, which allows advisors to trade commission-based products, which he said helps eliminate conflicts and much of the need for attorneys.

Another cost-savings factor VerWys has implemented is the idea of making less money.

“There’s no secret: Most financial people do pretty well, and there’s nothing inherently wrong with that. I’m absolutely a capitalist,” he said. But, he added, “Do we have to do that well? Do we have to gouge the clients to afford that lifestyle?”

With average financial advisors being in their mid- to late-50s and not a lot of younger talent coming into the industry, VerWys said its becoming more difficult to find an advisor ready to work with younger professionals in their 20s, 30s and 40s.

“There are a lot of people getting great jobs that want help with their investments and how to start their life, and ultimately the industry is making it more difficult for people who are my friends and peers to get good advice,” he said.

Many larger firms have raised minimum investment levels, making it more difficult for people in their 30s and 40s being a client until they’ve put a lot of work in.”

VerWys said he likes the idea of helping out his peers. Whether a person invests $5,000 or $1 million, no client at Action Point will pay more than a 0.95 percent fee, he said.

Moving away from commission-based investments to fee-based helps make advisors more willing to work for the investor, he said. Commission-based advisement is generally more lucrative, VerWys said, but clients soon figure out there’s no guarantee of a return in the stock market, so why pay someone an exorbitant amount when a small-fee-based model means an advisor will worker harder for the client?

“It brings us to the same side of the table because we both want the account value to go up,” VerWys said. “If it goes up, we both win. If it goes down, we both lose. That’s how it should be, so our interests are aligned.”

VerWys believes the industry is headed away from commission-based investment advisors and toward more transparent, fee-based services. The movement is slow, he said, and largely predicated on computer help, but that will cause problems, as well.

Most investors want alternatives but don’t know what else is out there or how to obtain it, he said. Many don’t think about possible alternatives until something bad happens, like a market crash.

“Oftentimes, you don’t realize there’s a problem until you don’t like it,” VerWys said. “When you really need someone to walk you through the concepts of finance is in the moment a portfolio is tanking.”

That was part of VerWys’ mission when he started his own company: to provide guidance to his customers while explaining to them what they’re paying and why they’re paying it.

“There’s change coming and there’s an opportunity here in West Michigan to get this advice and critical thinking,” he said. “The majority of people we meet with are discontented, and we want to make a difference, and there is a way to do this with purpose.

“It’s a slow shift toward a significantly improved way of doing business, and we want to treat a client’s money like it’s our money.”

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