As it launches a state lobbying initiative, one of XY Planning Network’s priorities is to convince states to take similar approaches to regulating the fee-for-service model that its 1,300 advisers use.
Michael Kitces, XYPN co-founder, is frustrated that policies on service-based charges — such as hourly, monthly and retainer subscription fees — can vary from state to state and sometimes within the same state’s securities department.
‘We’re trying to encourage a more consistent level of regulation,” Kitces told reporters on Monday during XYPN’s virtual annual conference.
In addition to working on fee-for-service regulation, XYPN also will promote fiduciary advice policies at the state level as part of its lobbying program.
It announced the launch of the effort at its conference at the same time it indicated that it will not appeal to the Supreme Court its lawsuit against Regulation Best Interest, the Securities and Exchange Commission’s new broker advice standard. A federal appeals court upheld Reg BI earlier this summer.
State securities regulators have been scrutinizing the fee-for-service model. They’ve raised concerns about advisers charging a monthly fee without providing specific services during the month.
“Fees need to be reasonable and, so far, states have not warmed to the idea of advisers charging fees for availability alone,” Ohio Securities Commissioner Andrea Seidt wrote in an email. “As a legal matter, advisers need to deliver services according to the contractual term they set with their clients — whether that be one month, one quarter, or one year.”
Regulators have requested refunds to clients when “an adviser had charged a client for many months and could not identify any demonstrable client activity or service to a state examiner,” Seidt said. States also have raised objections to monthly subscription fees that exceed the equivalent of a 2% annual fee on assets under management.
SCHWAB SUBSCRIPTION MODEL
Seidt praised the Charles Schwab subscription model for offering a low monthly fee that “falls within existing caps upon conversion,” easy cancellation options and providing a set of services that are easily documented.
“If XYPN is wanting state sign-off on that Schwab type of approach, I’m sure states are willing to listen,” she said.
Kitces countered that the Schwab subscription is for investment management services, while XYPN members provide financial planning advice that goes beyond investment management. He also said that registered investment advisers have long charged quarterly fees based on assets under management without providing services on a quarterly basis.
“I don’t understand why advisors would be required to refund clients’ monthly fees if clients end out not using their investment management, financial planning, or availability for that month, when regulators have for decades permitted advisors providing literally identical services without requiring them to refund their quarterly AUM fees when clients end out not using their investment management, financial planning, or availability,” Kitces wrote in an email.
He said state regulators should start with AUM-based advisers in requiring services be rendered in each billing period.
States have had “several productive conversations” with XYPN, Seidt said.
Kitces said he has asked the North American Securities Administrators Association to write a model rule for fee-for-service regulation.
He said that fee-for-service is working well in practice. None of the XYPN advisers who use XYPN’s compliance policies has recorded any fee complaints.
“Given a base of advisers as large as we have, [that] means the fee-for-service model actually has an astonishingly low complaints rate from consumers,” Kitces, head of planning strategy at Buckingham Wealth Partners, told reporters during the XYPN conference.
STATE LOBBYING CHALLENGES
The XYPN has hired Duane Thompson, a longtime fiduciary advocate and policy adviser, to lead its state lobbying effort.
Thompson has focused mainly on Congress and federal regulators while working in the investment advice sector. He gained experience at the state level earlier in his career while working for the International Franchise Association.
The primary challenge in lobbying the states is keeping track of developments in 50 legislatures and being nimble enough to respond.
Although major bills can take four to six years to get through Congress, legislation can move much more quickly at the state level, Thompson said. In many states, lawmakers only meet for a few months each year and can fly through the legislative agenda.
“It’s kind of the Wild West,” said Thompson, senior policy adviser for Fi360, a fiduciary training and technology firm. “Things move fast. It’s hard to keep on top of it, especially when you’re on the defensive and you have to react.”
Kitces said XYPN is a “material bloc of the entire base” of state-registered advisers and has the potential to become a force in statehouses.
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