Financial Advisors’ Commissions Revealed and You May
Find Them Shocking
There is a conflict of interest when these
details aren’t disclosed
By Jeffrey D. Voudrie, CFP
June 5, 2008 - Most investors have absolutely no
idea how much money advisors earn from their investments. There’s
certainly nothing wrong with advisors being compensated for their work.
The problem arises when there is a lack of transparency in the
advisor/client relationship. You should know exactly how much you are
paying for the investments and services you receive. Only then can you
make an informed decision on whether or not you are receiving a good
value for your money.
I can’t tell you how many times people will tell
me, “Oh, I didn’t pay my advisor anything. The insurance company paid
him, not me.”
Or I’ll hear, “Commission? What commission? I just
bought a muni bond, not a stock.” The problem with commissions is that
you don’t always see them. But trust me, there is no such thing as a
free lunch. You are paying something, whether you realize it or not.
On some investments, the commission is quite
obvious. On others, you have to dig a little deeper to uncover the
charge.
In an effort to level the playing field, I’m going
to reveal the typical commissions paid on a variety of investments. Be
aware that these commissions can vary between different providers.
Mutual Funds
Let’s start with one of the most popular
investments: mutual funds. No load funds charge no up front commission,
but do have a yearly management fee that can range from .25% to 2% per
year.
Load mutual funds, the kind you would buy from a
commission-based advisor, can top out at 5.75% for equity funds and 4.5%
for bond funds. But breakpoints can greatly decrease the commission you
pay. So the more you invest, the less commission you pay.
Stocks
The commission paid on individual stocks can be as
low as $10 a trade. Because there is so much competition in both stock
trading and mutual funds, commissions on both are dramatically less than
they used to be.
Bonds
The commission on individual bonds is much harder
to see, because it is built into the price. Commissions increase with
the bond’s maturity length, usually topping out around 3%. But the only
way you’ll know for sure is to try to get a price for the same bond from
a discount house.
Now we’ll get into the higher commission products
where the fees are especially tricky for the investor to uncover.
Variable Annuities
For example, variable annuities typically pay the
broker between 6% and 7%, yet most investors think they’re not paying
anything when they buy them. If they ask their advisor about it, they’re
often told that the insurance company pays the advisor, not the
investor. But it’s amazing how the surrender penalty amount closely
resembles the amount the agent received in commission.
Investors may not realize that no-load annuities
are available. These ‘plain vanilla’ products lack some of the ‘flashy’
features of their high-cost cousins, but they deliver the same basic
result at a dramatically lower cost.
Equity Indexed Annuities
Commissions are considerably higher for equity
indexed annuities. Rates of 10% or more are common, with some charging
less. But these are by far the highest commissions charged in the
financial services industry. Is it any wonder that these are promoted so
heavily?
One of the main problems with commissions on
insurance products is that the insurance companies realize their real
client is the agent, not the investor. If they don’t pay a high enough
commission, an agent will simply sell an annuity from another company.
And since the commission isn’t clearly understood by the investor,
sky-high commissions are the result.
Agents will argue that the additional features of
these annuities are worth the money paid. But I disagree. If it were
such a good deal, then why not use these high fees as a selling point,
instead of hiding them in pages of fine print?
Here’s the commission the advisor receives if you
move a $500,000 IRA or 401k into each product: Mutual Fund - $12,500,
Individual long-term bond - $15,000, Variable annuity - $30,000 and
$50,000 for an equity-indexed annuity.
How many months/years did it take you to save the
amount the advisor will be getting?
I feel there is a conflict of interest when these
details aren’t disclosed. How can you make an informed decision unless
you know what the advisor is making?
How can you compare various options? Frankly,
you can’t.
If you have a specific question or would like more
information, give me a call toll-free at 1-877-827-1463 or you can also reach me by email at
jeff@guardingyourwealth.com.
I will answer your financial question FREE.
About Guarding Your Wealth:
“Guarding Your Wealth” is a
nationally syndicated weekly personal finance column written by Jeffrey
D. Voudrie, CFP. Mr. Voudrie is the President of Legacy Planning Group,
a private wealth management firm that employs sophisticated proprietary
strategies designed to protect and grow its clients' investments. Visit his website,
www.guardingyourwealth.com to read past articles under the Guarding
Your Wealth Article Archive that may not have appeared in
SeniorJournal.com.
Guarding Your Wealth for Seniors, on
SeniorJournal.com, is
a collection of columns by Voudrie that deal with issues of particular
interest to senior citizens.
Click here
for all columns.
In addition to being a nationally
syndicated columnist and Certified Financial Planning Practitioner, Mr.
Voudrie provides personal, private money management services to select
private clients
nationwide.
Looking for an energetic expert who
is passionate about financial and wealth management? Mr. Voudrie is an
excellent speaker who will excite and inspire your audience. Mr. Voudrie
is available for a limited number of speaking engagements, television
appearances and radio talk shows.
