Poised to outperform.
We always act in your best interest.
However, many wealth managers operate under what's called the "suitability standard." This means they have no legal obligation to put your interests first. They don't need to recommend the best or cheapest products; they merely need to recommend something "suitable." They are allowed to consider their own interests, not just their clients' interests, when making investment decisions.
In a practice known as "dual hatting," an advisor who is a fiduciary when giving certain advice may be subject to only a suitability standard when giving other advice. Unfortunately, this means "consumers may not know which legal or conduct regime applies to the advice they are receiving at any moment."1
Bireme is always a fiduciary. We always act in your best interest. Don't settle for advice that is merely "suitable."
Best execution is our only goal.
We are able to have such focus because we are not incentivized to care about anything else. In contrast, many advisors are paid on commissions. These advisors are incentized to generate high transaction costs instead of high returns. We never take commissions at Bireme Capital.
Another practice that can skew the incentives of managers is the use of "soft dollars", whereby mutual funds trade commissions for "access to research, analysts, management teams and even financial terminals and software from their brokers."2 Bireme does not participate in Interactive Brokers' Soft Dollar Commission Program, nor do we participate in any similar programs at other broker-dealers. Our clients' historical commissions average .28 cents per share.3 Compare that to a year-end 2016 Greenwich Associates estimate of 3.8 cents per share for firms in the US and Canada who bundle soft dollar research with trade execution.4 That's over 12 times higher.
Finally, some advisors and retail brokers receive "payment for order flow." This means they are paid to route customer's orders to an unrelated third party, rather than attempting to achieve the best possible price in the open market. This creates a revenue source for advisors at the expense of their clients. Former NYSE Chairman Richard Grasso called the practice "bribery" and said it was "inconsistent with serving the interests of investors’ orders."5 Advisors receiving payment for order flow include leading roboadvisors like Betterment and Wealthfront.6
Transparent fees. No hidden fees or kickbacks.
Advisors may get kickbacks for investing their clients in certain funds and products. The CEA notes that these investments tend to be inferior, often high-fee and low-performing. A 2015 report from the office of Senator Elizabeth Warren called "Villas, Castles, and Vacations"8 found a "widespread practice of offering agents kickbacks" that are "effectively concealed from customers." These kickbacks "benefit the agent and the company, but they do so at the expense of their customers."
It's not always easy to find out how your advisor is compensated. Senator Warren's report found that "current disclosure rules are inadequate to ensure that customers are informed about the incentives agents receive for selling them specific financial products." 60 Minutes ran an exposé on the 401(k) industry, finding that providers "deducted more than a dozen undisclosed fees from its clients' 401(k) accounts."9 The CEA says "studies find that households are mostly unaware of their advisers’ conflicts and compensation arrangements."
Contrast this with our completely transparent fees. We have no source of compensation other than our clearly-stated advisory fees. We don't make money on commissions. We don't participate in soft dollar programs to defray our costs. We don't sell your flow. We take no kickbacks.
Because our fees are clearly stated, we're at a disadvantage versus our competitors who hide their fees. The CEA understands this: "It may be difficult for new entrants providing quality, unconflicted, low-cost advice to compete on price when other advice erroneously appears to be free. Therefore the prevalence of hidden fees and conflicted payments may make it more difficult for low-cost, high-quality alternatives to compete on a level playing field."
We think honesty, transparency, and unconflicted investment advice is worth the risk.
All our strategies are run in-house, and while client fee structures may differ based on things like qualified investor status or how much financial planning we provide, our fees never change based on which our five investment strategies a client is invested in. Therefore, our only incentive is to put you in the strategies that we think have the most attractive risk and return prospects. As we have seen, other advisors may get fees and kickbacks from choosing specific funds and products. Even if another advisor uses in-house strategies, a conflict may exist if some of their strategies charge higher fees than others.
We also believe that operating our own strategies helps us understand how they are likely to perform, in a way that might not be possible for a manager who outsources the investment process to third-party mutual funds. We hope to use that to our clients' advantage via our dynamic allocation process.