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Free advice is worth the price

By Sheyna Steiner · Bankrate.com
Thursday, February 28, 2013
Posted: 5 pm ET

Investors have to be cut some slack when it comes to the Cerulli Associates' survey that came out this week, showing -- once again -- that most investors have no idea how their adviser gets paid. How would they know? Brokers have no obligation to tell clients they get paid more for selling certain products.

Here's how Cerulli's findings shook out in the report, "Retail investor advice relationships 2012: Meeting investor needs post-crisis."

  • Thirty-one percent weren't sure how their adviser was paid.
  • Twenty-nine percent said the advice was complimentary or that they don't pay for the service.
  • Ten percent said it was a mix of fee and commission.
  • Ten percent said their adviser was fee-only.
  • Twenty percent said their adviser was paid commission-only.

It's not that being paid a commission is automatically bad or that advice from a fee-only planner is better or will lead to better investing strategies. There should be an obligation to disclose conflicts of interest, and there's not -- right now.

As a matter of ethics, brokers should disclose conflicts, "But it's not always a legal requirement. I can't see it being done until it is required," says Scott Smith, director at Cerulli Associates.

To smooth out the confusion and reduce conflicts, the Securities and Exchange Commission has been working on developing a universal fiduciary standard as suggested by the Dodd-Frank Act. In a nutshell, that means brokers would have to put a client's best interest ahead of their own. If product A pays the broker more but product B is a slightly better fit for the client, they would have to recommend product B -- or at least tell the client that there is a conflict of interest.

The Dodd-Frank Act told the SEC to study whether or not investors understand what kind of advisers are fiduciaries and to find out  if investors know how the investment advice sausage gets made, so to speak. After six months, the regulator gave the study to Congress and said that investors would benefit from a fiduciary standard for all financial professionals giving investment advice. The January 2011 report also recommended that conflicts of interest be disclosed or eliminated. It remains to be seen how it will all shake out.

"I think the best-case scenario would be that as part of the Dodd-Frank universal fiduciary requirement, all retail investors would be treated as investment advisory clients and receive mandatory conflict disclosure," says Smith.

This month, Elisse Walter, the chairwoman of the SEC, told Congress that the SEC is giving serious consideration to the fiduciary rule making, AdvisorOne.com reported in the story, "SEC's Walter: Fiduciary rule under serious consideration."

Do you prefer to pay a flat fee for financial services, or do you prefer to work with someone who's paid on commission? With the right disclosures, commission could work in the favor of investors, as there are no up-front costs -- as long as they know what they're getting.

Follow me on Twitter: @SheynaSteiner.

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Senior investing reporter Sheyna Steiner is a co-author of "Future Millionaires' Guidebook," an e-book written by Bankrate editors and reporters. It's available at all the major e-book retailers.

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