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Transparency in financial service charges

by Tony Novak, CPA, MBA, MT
, revised 11/28/2011

The new buzzword in the financial service industry is “transparency”. This term refers to the principle that all aspects of financial transactions, especially charges and commissions, should be plainly visible to customers or the public.

The underlying belief is that transparency in fees and charges helps consumers make better financial decisions. There are market study indications to both  support and oppose this premise but most consumer advocates believe that the benefits of increased fee disclosure outweighs the drawbacks.

Historically the financial industry has hidden charges from the public and even from their own employees. The prevailing logic has been that when net results are accurately reported to customers, it was not necessary to disclose all of the firm’s intermediate and internal financial transactions. Lately the logic is turned upside down. Financial firms are now under pressure to disclose all charges and ancillary transactions. Last year the mutual fund industry was attacked by federal and state regulators. Now the insurance industry is under attack for these same issues. There is some speculation that banks and mortgage companies may be next on the regulators’ list of targets.

It is not at all clear whether transparency in reporting actually helps consumers. Certainly it makes consumers feel more comfortable, but the added comfort comes at an additional cost to financial companies.

 Cost disclosure will ultimately add to the price of mutual funds, insurance policies, stock trades and other financial transactions. Some firms like Ameritrade have already decided to commit to fully transparent transactions even if that means they will no longer remain as a low cost leader within their industry. Ameritrade is a discount broker that charges about $11 per investment trade where some other competing firms have recently dropped their charges to about $8 per trade. Ameritrade is betting that consumers will feel more confident with the added level of reporting and disclosure and ignore the $3 difference in price.

The highest level of transparency for a financial company is to have an open books policy, where any interested party has access to the company’s financial records. Few companies have been able to achieve or sustain this level of transparency, but is still held as an aspiration for some of the most idealistic firms.

For example, Freedom Benefits Association was originally organized in 1997 under articles that called for an open books policy. While this was an admirable goal, we learned that it was often not possible to ascertain the details of individual transactions at a cost that made sense to members. We found, for example, that it was impossible for us to determine the charges built into an insurance policy for up to 15 months after the starting date of a policy. As a result, Freedom Benefits discloses financial information on an aggregate basis rather than for each transaction.