Common Objections
In today’s hyper-competitive environment every financial institution wants to boost sales and profits, so one would expect them to market value their clients’ sundry assets and collect fees on them as they do on stocks, bonds and mutual funds. But then why are so many institutions pricing their clients’ sundry assets at $1, effectively giving their services away for free while exposing themselves to extraordinary fiduciary risk?
Several common excuses are given below, along with SPARDATA’s comments.
We’ve never market valued these assets before. This is undoubtedly true, but then there has never been Sarbanes-Oxley, Worldcom and Enron before either. The regulatory environment has gotten much tougher recently; regulators, judges and juries expect banks, brokerages and other financial institutions to act with their clients’ interests and the law in mind. If your firm is mispricing its clients’ sundry assets and it has not yet heard from its regulators about it, sit tight -- you will be hearing from them shortly.
There are vendors who can price this stuff? While most financial institutions know they have many sources from which they may obtain market data for traded securities (such as FT Interactive Data, Bloomberg, Xcitek etc.), many do not know SPARDATA can value virtually any type of sundry asset: closely-held stocks, partnership interests, church bonds, mortgages, hedge funds and much more. SPARDATA’s charges are very reasonable, and in any event the new fee income the institution enjoys far outstrips the cost. Many of the nation’s leading institutions use SPARDATA today including National City Bank, PNC Bank, Piper Jaffray, Bank of the West and Key Bank.
We’ve never charged our clients fees before. Failure to charge fees to hold sundry assets is a foolproof sign the assets are being improperly valued. Financial institutions always market value their clients’ publicly traded assets and collect a fee for the service. It should be no different for sundry assets, except that possibly the fee charged should be higher to compensate for the extra effort. SPARDATA recommends institutions inform clients they will start getting yearly research reports for every sundry asset at the same time they announce sundry assets will be treated identically to market-traded assets from a fee perspective. Pair the good with the bad, in other words.
Our clients don’t want their sundry assets valued. Of course not, if it means they have to pay higher fees, but since when is that a good reason? The client has asked your institution to hold the asset, and the law requires you to market value it depending on what type of account holds it (see the Sundry Asset Compliance Manual for details). You should charge a reasonable fee for doing so. If the client is unwilling to pay the fee, fine – but insist the client remove the asset from the account as you are not in business to provide services for free.
Clients objecting to having their sundry assets priced may have a more sinister motive: tax avoidance. A sundry asset priced at $1 can be distributed out of an IRA, pension plan or other tax-deferred account without triggering any tax due to the IRS. It makes the Form 1099-R the institution files with the IRS reporting the distribution false and misleading. What institution wants to perpetrate a fraud on the IRS?
He’s a really important client. It goes without saying that sundry asset owners are among the institution’s wealthiest, most valuable clients. The relationship manager may argue that fees should be reduced or waived in light of the other revenues that client generates. This is a political question, and the institution may well decide to reduce or waive the fee – but if so make sure the client knows what fee he should have paid absent the waiver so he appreciates the benefit the institution is affording him.
