September Newsletter

September 6th, 2018 by Anchor Bay Capital's Investment Team

Improving Our Billing Systems

At Anchor Bay Capital we are constantly reviewing our systems to make sure that we are up to date and providing the best value that we can for our clients.  As part of this process, we recently reviewed the way that we bill the accounts that we manage for quarterly fees and we feel that there is a better way to go about it.

Understanding “fees”

When it comes to the financial industry, the term “fees” can apply to several different types of account charges and can sometimes provoke negative feelings.  At Anchor Bay, we fully understand this and feel that it always appropriate to have transparent discussions about the fees that our clients pay.

As a fee-based advisor, we have chosen to be compensated directly from our clients.  This means that when it comes to our investment management and financial planning services we do not earn commissions or any other type of compensation from products or investment providers.  We feel that this creates a win-win situation for both the advisor and the client.  Our incentives are aligned with your goals for your money and since we work for you, it is important for us to continually earn your business.

The fee that we have agreed upon is billed from your investment account at the first of each calendar quarter.

There are charges that investors may incur that are not related to Anchor Bay and as part of our work for you, it is important that we are mindful of additional expenses and take actions to minimize these costs whenever possible.  Examples of these charges may be trading fees or internal expenses of funds.

Current Billing Process

We currently bill our advisor fees at the first of each calendar quarter.  We calculate this fee by receiving a report of the ending market value on the last day of each quarter.  Our quarterly fee is applied to the market value to determine the fee that is charged.

Example:

June 30th Ending Market Value:  $250,000

Annual Advisor Fee Rate: 1.50%

Quarterly Fee Rate: 1.50%/4 = 0.375%

Fee Billed:  0.375% x $250,000 = $937.50

The advantage of this process is that it is simple to calculate.  The value that is billed upon matches the value shown on your end of the month statement and therefore it is easy to reconcile.

However, in our research we have found that this is the least accurate method for billing for services because we are choosing one day’s market value to determine the appropriate fee to bill.

A More Fair Value

Let me use an example to explain why there is an issue with this method.  Let’s say that we have worked on your account all quarter and your value has experience normal market value fluctuations. Then, on the last day of the quarter, the market shoots up 3% and you have captured most of that return in your account.  When we bill for the quarter, you would pay 3% more just off of one day’s performance.  Likewise, this could happen in the other direction.  The market may have lost 3% that day and then you would pay less in fees off of one day’s movement.

This issue becomes more apparent when you think about money being added or withdrawn from accounts.  With this current system, if money needs to be withdrawn from an account, it would make sense for the client to request an account withdrawal on the very last day of the quarter and lower the value being billed.  It would also benefit the financial advisor to add money before the end of the quarter to increase revenue.

These types of conflicts are exactly what we feel are appropriate to avoid so that we can focus on our properly managing your accounts.

Moving Forward with a Better Way

Our technology allows us to use the Average Daily Balance method for billing your accounts.  This will allow us to avoid the conflicts that may arise when focusing on one day of the quarter.  Under the Average Daily Balance method, we track the market value of your account each day of the quarter and we bill on the average.  We still bill on the first day of each calendar quarter.  The difference is that the fees that you pay will more accurately reflect every impact of our work in your portfolio during the quarter.  The premise of when you make money, we make money and when you lose money, we lose money is so much more accurately reflected with an average daily value than by choosing one day of the quarter to measure against.

Changes Will Be in Effect October 1st

We encourage any questions that you have regarding this new method of billing.  We will be sending out through email an amendment to your client agreement that reflects this new calculation method.  You will need to sign this amendment.  We will try to obtain electronic signatures through Docusign for most clients, but if you would prefer to sign a paper document, please notify us.

We look forward to a great end of the year and again would like to welcome any questions that you have.  Please reach out to us at 760-602-3470, email to [email protected], or contact your advisor directly.

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