Kristen D’Andrea, The Daily Record Newswire
At least once a week, Charles Massimo stumbles upon a company whose employees are paying 30 to 40 percent more for their 401(k) plans than they should be due to excessive fees.
"They will never meet their goals because their fees are so high," said the president and founder of CJM Fiscal Management in Deer Park.
Still, what's most disconcerting to Massimo and other advisers is that many investors remain unaware that their advisers may be receiving commissions for recommending specific equity mutual funds.
Under the Dodd-Frank Act reforms, which went into effect in January, disclosures for commission or "kick-back" fees are now required for pension and 401(k) retirement accounts. However, accounts that aren't regulated by the Employee Retirement Income Security Act, such as equity mutual funds, were excluded from the new law.
"The problem is that advisers are collecting commissions on the sale of a product and it's skewing the incentives and creating a conflict of interest in where advisers are putting investors' money," said James Sanford, founder and portfolio manager at Sag Harbor Advisors in Sag Harbor. "The lion's share of the fee structure in mutual funds, whether upfront or annual fees, is being paid to financial planners and advisers, and clients are completely in the dark."
Sanford worked on Wall Street for well-known brokerage firms for two decades and said he's seen how this works. Financial advisers who are aligned with a broker-dealer can collect commissions as high as 50 to 90 percent for pushing certain equity funds, he said.
"It is grossly incentivizing advisers to put clients' investments in high-fee funds regardless of what's in their best interest," Sanford said.
Years ago, investors would buy funds and pay their financial adviser an upfront commission of 2.5 to 5.5 percent, depending on the amount of the fund being purchased, according to Katie Connors, a partner at AVZ Wealth Management in Hauppauge. Funds have evolved to give investors more choices and, today, there are a variety of ways in which commissions can be charged, she said.
Investors choosing class A shares of a mutual fund pay an upfront fee, which generally goes to the brokers who sell the fund's shares, when they are purchased (also known as a front-end load); class B mutual fund shares have no upfront commission fees, but a fee is charged when the fund is sold (also known as a back-end load); for class C shares, there is no upfront sales load, or commission, but there may be a small back-end fee if the fund is sold by the investor in the first one or two years, as well as other annual expenses, Connors said. In addition, all three class shares may have associated 12b-1 fees, which are annual distribution fees that are considered operational expenses and are included in a fund's expense ratio, up to 1 percent of a fund's net assets.
Connors does not have a problem with financial advisers getting paid for doing a good job; it's the folks in the industry who are not upfront about the fees that are making a bad name for everyone, she said.
Her firm offers fee-based asset management, in which the advisers' fee is dependent on the value of the client's account.
"If they do well, I do well," she said, adding, "It puts everyone's interests on the same side."
"After the meltdown of 2008-2009, the perception of Wall Street soured," Connors said. "The idea of people in my business earning fees has been demonized."
While she concedes some advisers took advantage of the situation, "most of us are trying to do a really good job for our clients and have their best interests at heart," she said.
Sanford would like to see the U.S. Securities and Exchange Commission require advisers to disclose whether they are making a commission on certain products. Still, he believes clients cannot rely on regulators to address this concern.
"Investors need to take ownership and ask key questions to put them on the right footing," he said.
While most reputable financial advisers will explain to their clients how they'll get paid before entering into a relationship, Connors said she agrees clients need to be actively involved and aware.
Clients should ask their advisers how they are compensated, she said. If they are fee-based advisers, Connors recommends asking what their fee is, how it is calculated, whether it's debited directly from the account and if there are any ongoing trailing commissions (or 12b-1 fees). If the adviser does not offer a fee-based relationship, but rather a traditional commission-based one, clients should inquire about which share class the adviser recommends and why, she said.
Sanford recommends investors stick with fee-only advisers "preferably performance fee-only advisers where the interests of both are aligned" and avoid those collecting commissions altogether.
"Do not use an adviser with a broker-dealer affiliation," he cautioned. Additionally, he suggests investors ask their advisers if they'd be willing to tell them where their own money is invested and if they'd be willing to get paid only if their client's portfolio makes money.
Still, Massimo maintains the simplest way for investors to avoid any confusion about fees is to buy index funds which, he said, have the lowest cost and, historically, the best returns.
"A lot of brokers don't offer them, however, because they don't get paid on them," he said.
Just as Las Vegas was built on losers' money, Wall Street was built on all of the investors who have paid excessive fees each year and never beat the market, Massimo said.
"Unfortunately, it will continue to happen as long as there are brokers who put their interests above their clients," he said.
Published: Mon, Sep 15, 2014
