The High Cost of Fee-Based Financial Advisors
Posted March 17, 2012on:
Many people think that fee-based financial advisors are those who charge their clients fees for service; therefore, they have more transparency and less conflict of interest. That’s exactly what the financial industry wants you to think.
Fee-based financial advisors are the financial industry’s response to the rise of independent fee-only financial advisors. Fee-only financial advisors are paid solely through fees for service paid directly by clients; they are not licensed to receive third-party commissions. Consumers rightfully associate this compensation model with integrity and unbiased advice.
What can the financial industry do to confuse the consumer? Answer: Invent “fee-based financial advisors.” Though the name is very close to “fee-only financial advisors” and indeed they charge clients fees for advice, they also put their clients into high-commission (and high-priced) products. They make money from both sides, most of the time without the knowledge of their clients.
Take my newest client for example; he is a retired doctor. He has been using a fee-based financial advisor for many years with lackluster result. Last year, his portfolio shrunk 9%, which finally helped him make up his mind to change.
His fee-based financial advisor charged him 1.2% annual asset management fees. For that kind of money, you would think the advisor would direct investments to low cost funds? Not so. Upon close examination, I found the average expense ratio of funds in the portfolio is 1.03% and the average load is 5.1%.
For those who are not familiar with these terms, loads are a one-time charge that fund companies give to the financial advisor as a kickback. Expense ratios usually include 12b-1 fees, which are ongoing payments to the financial advisor as long as his client stays with the fund.
So this doctor was set back more than 6% in explicit and hidden costs in the first year and roughly 2% thereafter. It’s very hard to build wealth when your financial advisor is taking most of it.
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