The Investment Scientist

When Your Financial Adviser is Not Your Friend …

Posted on: February 26, 2009

“Avoid the fee-ing frenzy,” says David Swensen. financial-advisor

Marion banks at Wachovia. When she needs to rollover her 401(k) into an IRA account, she naturally asks a Wachovia financial advisor for help. He helps her open an account and recommends she buy the Evergreen Asset Allocation Fund (EAAFX). Is there anything wrong with this picture? Plenty!

First, the fund has a sales charge (front-end load) of 5.75%. Her 401(k) balance is $100,000. This means, the advisor takes $5,750 just for the act of opening the account for her.

Second, the fund has an expense ratio of 1.27%. This expense ratio includes a 12b-1 fee of 0.25%. This means the advisor will continue to collect about $250 every year for as long as Marion is invested in the fund. The fund manager will collect $1,020- every year!

Third, the fund is actually a fund of funds. Money in the fund is simply divided up and invested in a numbers of other funds, each of which has another layer of managers and fees ranging from 0.39% to 1.02%.

In fact, there are superb funds that don’t charge front-end load and have low expense ratios. But financial advisors who work on commission may never tell you about what’s a better choice for you. No wonder Jack Bogle, founder of the Vanguard Group laments, “Too much salesmanship and too little stewardship.”

Ninety percent of financial advisors are ‘product pushers’ on commission. Conflict of interest runs rampant. How can people like Marion, and people like you, protect themselves against what David Swensen calls a fee-ing frenzy? The answer is, by going with a fee-only advisor.

What is fee-only?

Fee-only means the advisor doesn’t take commissions, product incentives, or third-party payments as hidden compensation.

Why fee-only?

If Marion had met a fee-only advisor, he would have charged her $200 (hourly fee) to set up her IRA account and selected a few Vanguard index funds with expense ratios ranging from 0.09% to 0.19%.  A fee-only advisor is not incentivized to sell high-cost products.

Get my white paper: The Informed Investor: 5 Key Concepts for Financial Success.

5 Responses to "When Your Financial Adviser is Not Your Friend …"

Well said. We are 401(k) fiduciary experts, and the same applies to fee only advisor on the rollovers…you have a fiduciary obligation to act in the best interest of your client. It’s an SEC enforcement process, not the voluntary FINRA.

A broker who is transaction based can easily be biased towards a fund that their sales manager recommends or a fund company which offers rewards…or even a slow day, where you can reshuffle the portfolio and collect commissions.

I hope lots of investors read your post

[…] to read how to avoid hidden fees by the like of Merrill Lynch financial advisors. Tags: CEO pay, executive bonus, john thain, […]

[…] outside help to hurt themselves. I’ve been writing about how ignoring conflict of interest, hidden fees, and not taking the necessary time to do due diligence costs investors a great deal of money. […]

[…] financial adviser. But before you do that, you … market research, surveys and trends Does your financial advisor engage in “fee-ing frenzy”? « The … A woman banks at Wachovia. Let’s call her Marion. When Marion needs to rollover her 401(k) […]

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s


Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.


%d bloggers like this: