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Will NASAA's Disclosure Model Help Investors & Brokers?

The North American Securities Administrators Association ("NASAA"), a group of securities regulators for states in the U.S, Mexico and Canada, has introduced a standardized fee-disclosure model for the U.S.-based broker firms. The move was prompted after a survey commissioned by NASAA in Jan 2015 revealed confusion among investors regarding certain fees charged by their respective brokers.

According to Carol Foehl, a NASAA official, many firms at present disclose fee-related information either in lengthy documents or by complex charts. A standardized presentation of fees, including annual brokerage and maintenance charges, will thus increase financial transparency and abate investor confusion.

Details

Transparency issues were first brought up by NASAA after it commissioned a survey in Apr 2014. Post the survey, NASAA was recommended to work with the self-regulatory organization, Financial Industry Regulatory Authority ("FINRA") and other groups, to develop a simplified presentation format for addressing the transparency issues.

The new format was released at NASAA's annual meeting held at San Juan, Puerto Rico on Sunday. The model intends to highlight different types of fees charged by broker companies as well as the frequency of such charges. NASAA also recommends that a company's website should have a direct link to such disclosure on its home page. Nonetheless, adoption of the model is not mandatory for companies.

Leading financial services company, Morgan Stanley MS , is reportedly one of the first ones to use the new format.

NASAA's Apr 2015 Report

NASAA's April report disclosed in details the findings of its January survey, which was conducted by ORC International, an independent research firm. The report showed that nearly 25% of investors (that were surveyed) were not aware if any additional fee was being charged by their brokers, apart from regular investment commissions.

Moreover, another 30% believed that their brokers were not charging any service and maintenance fees at all. Further, 52% of investors, who were aware of such fees, were clueless about the amounts charged toward the same.

Interestingly, almost 88% said they preferred if broker firms would use "standardized and uncomplicated terms" to describe service and maintenance fees, as it facilitates easy comparison.

Disparity in Presentations & Fees

According to a 2012 survey by NASAA, there is a considerable difference in amounts charged by broker firms for the same service, Notably, the Automated Customer Account Transfer or ACAT fees ranged from zero to $175 among the 34 broker-dealers surveyed, while mark-ups on transfer fees came 100-280% above the wholesale cost to a broker-dealer.

Moreover, there is a wide disparity in the current presentation formats of various broker firms. For example, Morgan Stanley reports commissions and service fees collectively, while online broker age firm E*TRADE Financial Corporation (ETFC) provides individual figures for commissions and service charges.

Bottom Line

Better transparency in financial statement is in the best interests of investors as they benefit from unambiguous and complete information. More importantly, full and standardized information increases investors' confidence in the broker, which ultimately proves beneficial for the company.

Apart from Morgan Stanley and E*TRADE Financial, other U.S.-based investment brokers include Interactive Brokers Group, Inc. IBKR , The Goldman Sachs Group, Inc. GS , LPL Financial Holdings Inc. LPLA , JMP Group LLC JMP and The Charles Schwab Corporation SCHW .

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MORGAN STANLEY (MS): Free Stock Analysis Report

SCHWAB(CHAS) (SCHW): Free Stock Analysis Report

INTERACTIVE BRK (IBKR): Free Stock Analysis Report

GOLDMAN SACHS (GS): Free Stock Analysis Report

JMP GROUP INC (JMP): Free Stock Analysis Report

LPL FINL HLDGS (LPLA): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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