Dear Dr. Don,

My husband (he was a Dr. Don, too), who had been our family’s sole income provider, recently passed away. I am 55 years old and have invested the life insurance proceeds that will have to support us through a Certified Financial Planner who is with an investment subsidiary of my bank. This investment firm uses third-party fund managers.

When I invested, I didn’t fully understand that I would be charged 2.25 percent of my assets, paid quarterly. I have asked a few people I know, and they seem to think the fees I’m paying are very high considering that I have mostly fixed-income bonds. I have also talked to a relative’s commission-based financial adviser who told me that if I place my investments with him, he can manage my investments for less than 2.25 percent.

My current financial adviser has warned me that you can never know how much you’re actually paying in fees, commissions, mark-ups, spreads and buried expenses if you use a commission-based adviser. Also, the commission-based adviser told me I cannot transfer over my investments to him, that I would have to liquidate and re-buy, which means I would pay commissions on top of the fees I’ve been paying. Both advisers are CFPs and registered with the Financial Industry Regulatory Authority.

So I have three questions:

  • Are fees of 2.25 percent of assets high for investments that consist mostly of fixed-income bonds (and some annuities)?
  • How do I weigh a for-fee adviser against a commission-based adviser if I don’t know what the commission-based adviser might cost in the long run?
  • Can fixed-income bonds be transferred from one agent to another without liquidating them?

— Susie Shareholder

Dear Susie,

You’ve got some great questions about investment management. Let’s start with the easy one. Individual bonds, and stocks for that matter, can be transferred from one brokerage account to another. That’s important, because selling the securities so you can transfer the assets as cash creates a taxable event.

Transferring mutual funds to the new brokerage account isn’t always possible, especially if you’re invested in proprietary funds. You say your current broker has you invested in third-party funds, which shouldn’t be proprietary.

Here’s what the SEC Web page “Transferring Your Brokerage Account: Tips on Avoiding Delays” says about nontransferable securities:

Know Which Securities May Not Transfer

Some types of securities may not be transferred. These securities include:

  • securities sold exclusively by your old firm;
  • mutual funds or money market funds not available at the new firm;
  • limited partnerships that are private placements;
  • annuities; or
  • bankrupt securities.

If your request includes some of these nontransferable securities, it may take longer to complete a transfer. Your old firm is required to transfer whatever securities or assets it can through ACATS and ask you what you want to do with the others. You generally have two choices: either sell the nontransferable security and transfer the cash, or leave the security with your old firm. Sometimes, you may be able to take possession of the security itself. Taking possession of a security may pose risks, such as the security could be stolen. Also, it may not be advisable for retirement plans.

One way or another, a financial services professional will get paid for the service he or she provides you. The three common models are commission-based, hourly fee-based, and assets under management. You are currently being charged 2.25 percent paid quarterly under an AUM model. That’s not a 9 percent annual rate, that’s 2.25 percent annually.

Whether or not that rate is too high depends, in part, on the size of your account. Most investment professionals have sliding fee scales, where smaller accounts pay higher fees. Paying this much on a portfolio invested in bonds, and/or bond mutual funds does seem excessive. An earlier column, “How a financial planner is compensated,” provides more detail.

A commission-based adviser isn’t necessarily the most expensive option, although I have a strong bias against buying mutual funds with a sales load. The SEC provides some help for investors on this topic too with its Web page “Mutual Fund Fees and Expenses.”

I know there’s been a lot of assigned reading in this answer. Forgive me, in my day job I’m a college professor. One last thing I’d like you to look at are the publications in the CFP Board of Standards “Financial Planning Resource Kit.” You can download the publications online or request they be mailed to you.

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