Lying About Fees

The majority of the financial services industry is incompetent or worse.

Many feel I am too hard on those who provide financial services or sell financial products. Of the two groups, I am harder on the latter.

Why am I so hard on the investment industry? Because I believe they deserve my criticism and much more. Stockbrokers, financial product insurance agents, and many investment advisors pay lip service to their clients, but seem to focus on their own well-being first.

Based on my own anecdotal experience from talking with thousands on my talk shows, I am confident that if you asked a group of investors approximately how much they pay in investment commissions or fees 90% would have no clue. Heck, in 2016 the financial research firm, Hearts and Wallets found that 30% of investors actually believed they pay nothing to their financial firm. Really? Your advisor works for free?

Ever been to free doctor, lawyer, dentist, accountant, or mechanic? Apparently the only free services come from financial advisors (oh, and Facebook… oh, wait).

Why would your financial advisor want you to think they’re free? Could it be because the number might shock you?

For example, you can find lots of index funds that charge less than 1/4 of a percent per year, while that “no-load” C share your broker sold you dings you for 1/12 to 2% every year. Oh and the most honest front-load A share probably charges more than 5% up front and about 1% per year.

If your broker disclosed those fees verbally, knowing that Vanguard or Schwab offer funds with no-load and annual fees well under half a percent per year, would you honestly choose the broker?

The insurance industry’s investment product sales force is even worse. Ask your agent how much their commission is on that annuity of cash-value life policy and the most likely answer is “none.” Drill down further by asking “then how do you get paid?” and the most likely answer will be “the company pays me.” Technically correct, but massively misleading. Try it with your salesperson.

The whole truth is far different. Very few product peddlers receive a salary to do whats right for you. The VAST majority are paid a commission based on the amount of money they get you to hand over. For some insurance products, the commission can be as high as 10%. But, they don’t have to tell you that. If you want to know how much you might or have paid… grab your policy documents and find the first year surrender charge. That’s typically the amount of commission paid.

The investment advisory industry has its own issues, even though they are, generally, required to act in your best interests. While the average annual fee charged by RIAs is just over 1%, many, including most of the big name, old school brokerage firms have rates that start at 2% or more. Those, combined with high annual fees for actively managed mutual funds and you fees can exceed 3% per year.

From my perspective, it's just too easy and rewarding for financial professional to be less than honest. The few regulations that require compensation disclosure only require it in ponderous disclosure documents that, like those online terms of use from folks like Facebook, we never read. So the onus is on you to ask. And if your advisor isn’t immediately forthcoming and willing to put their assertions to paper, find a new advisor.

Commissions/Charges/Conditions from a Actual Indexed Annuity

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Don McDonaldComment