"One More Thing...."

Remember how Columbo used to leave a room, stop at the door, turn around, and say, "Oh, yeah, one more thing....."? Well, I have one more thing related to yesterday’s blog! By the way, this was prompted by an article I read over the weekend, published by a pro-brokerage house magazine. I was planning on covering this later, but I got inspired!!
The other thing I want you to talk with you about is broker/advisor compensation.
Now, although I run a fee-only practice, I am not wholesale against the concept of charging a commission. If you have a small amount of money that I put in a diversified mutual fund, we reinvest the dividends, and you dollar cost average into it, I may not trade in your account much. Taking a one-time 5% commission and then letting you hold your money in that fund for four or five years works well for you. You might even save money over my annual fee.
(I actually get around this problem by helping very small future clients open an account at an online firm like TD Ameritrade, Schwab, Fidelity, etc. Then, they can hold that money there and come back to me when it's a larger account. This way, they don't pay the commission or the fee.)
Part of the financial reform involves lowering the annual fees (called 12(b) 1 fees) that brokers receive in the years after they sold you the product. They get the commission in year one, then each year after that as long as you own the product, they get 12(b)1 fees. Not a problem, but the issue is sometimes brokers don't disclose the 12(b)1 fees, or for that matter the amount of commission received.
The issue isn't how you get paid; it's in the transparency of the advisor’s model and how much he or she gets paid.
For example, a common practice is for an advisor to claim he or she is fee based. Now, this doesn’t mean that they don’t take commissions; it means they can take commissions or fees, on different parts of your portfolio. If you want to work with someone who takes no commissions, you need to work with a fee-only advisor.
What do you do? First, ask your advisor how they are compensated: fees, commissions, or both. Then, ask them how much compensation they will receive from any source for the transaction they are proposing. Be careful that they disclose all money received, as annuity companies pay the advisor directly. That’s why you have a surrender period. The surrender period ensures the annuity company gets their money back. Ask how much of an annual fee the investments carry. If the numbers seem high, ask if there are cheaper, equally effective investments. Don’t hesitate to take time to think about it. If you work with a fee-only advisor, you should regularly get an itemized invoice explaining how much fee was charged. Check this amount against your statement to make sure the fees were taken accurately.
This isn’t a “fee versus commission” fight. In my mind, that’s the wrong fight. The right fight is for transparency. The second right fight is to require fiduciary conduct on the part of anyone who manages your money, all of the time. If someone is a transparent fiduciary, how they are compensated ceases to matter.
Be Prosperous!
Peggy