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