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Adviser fees confusing

By Sheyna Steiner ·
Tuesday, June 14, 2011
Posted: 4 pm ET

Last year, as the Securities and Exchange Commission was taking comments on the matter of a fiduciary standard for broker-dealers and other financial service professionals, the Consumer Federation of America conducted a survey which found that nearly all investors, 9 out of 10, believe brokers or advisers should put their clients' interests ahead of their own.

And two out of three believed that stockbrokers were held to a fiduciary standard. The fiduciary standard obligates a registered investment adviser to only recommend investments that are in their client's best interest.

Unlike registered investment advisers, stockbrokers work under the suitability standard which says that an investment must be suitable for the investor based on their goals, time frame and investing experience.

The conclusion reached by the study by the Consumer Federation of America found that investors largely have no idea which financial service professionals act as a fiduciary.

As it turns out, investors are also somewhat ignorant when it comes to paying for investment services, a recent study by Cerulli Associates has found.

Sixty-four percent of the investors surveyed reported that they believed advisory services were complimentary or free, or they just weren't sure how their adviser was paid.

The  survey also asked how investors would prefer their advisers be paid. Forty-seven percent said they would prefer to pay through commission. Twenty-seven percent felt that fees based on assets would be best and only 8 percent of investors thought an hourly fee was preferable.

Investors with less than $100,000 investable assets were most likely to approve of commissions -- 49 percent of them did. They were least likely to be amenable to an hourly fee, with 7 percent in favor of one.

According to Cerulli, it's not until investors reach a threshold of $500,000 that paying for financial advice becomes more palatable. Only 22 percent of investors with investable assets of less than $100,000 would be willing to pay for it versus 44 percent of those with $500,000 or more.

After the new fiduciary standard is implemented, consumers will more than likely still have a wide range of choices when it comes to getting investment advice. The SEC report given to Congress in January recommending a uniform fiduciary standard clarified that any regulatory changes would preserve a commission-only advice model.

Hopefully brokers will do a better job communicating payment structures to clients. The study by Cerulli Associates found that while investors were more likely to say that they prefer paying for investment advice through commissions, investors with a commission-only relationship were most likely to be dissatisfied, with 27 percent reporting unhappiness.

Being unsure of how their adviser was paid also caused consternation; 47 percent of people who don't know how their adviser is paid also say they are dissatisfied.

As in any relationship, communication is vital. To me, the results speak to a need for absolute transparency when it comes to investment advice in addition to investment products. People should know what they're getting and how much they pay for it.

That's not a giant leap of deductive reasoning but it will be some time in coming. In the meantime, investors must pay attention to details and do due diligence when hiring an investment adviser of any stripe.

Speaking with an investment adviser of any kind can sometimes be like going to the doctor. Many people have no idea what's going on and it's somewhat stressful, which makes remembering details difficult.

To that end, be sure to ask questions and take plenty of notes.

Use this Bankrate work sheet during the first meeting with a prospective financial planner or adviser to ensure that the most important questions get answered.

For more information on finding financial advice, read "Financial planners: Not just for millionaires anymore."

Would you prefer to pay commission, or have a third party pay it, or pay an hourly fee?

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Barak Volner
July 20, 2011 at 1:15 am

Fees are confusing and most brokers do not follow fiduciary responsibility. Please be aware that just because they have a Series 7 and licensed with FINRA doesn't mean they should immediately be trusted. Pay attention to the new guys at firms like Morgan Stanley , UBS & Merrill. Be aware, interview the brokers, and educate yourself.

Lucas Smith
June 15, 2011 at 11:24 am

I would either opt for a % of assets fee or an hourly rate. Commisions are totaly against my best interest as they do nothing but skew an advisers advice.