Do you have faith in your financial advisor, that he or she has your best interests at heart?
If the answer is no, you’re not alone.
Roughly 32% of Americans believe a financial advisor is likely to take advantage of them, according to a 2017 survey by Personal Capital, a California-based online wealth management company. And of the 54% of Americans who do not work with a financial advisor, nearly half — or 45% — cite a lack of trust as the reason.
This widespread mistrust is rooted in the belief that many financial advisors put their own financial interests -- and those of their firm’s -- ahead of their client’s, by recommending investments that carry excessive or hidden brokerage fees and advisor commissions. Such recommendations may not always be made by choice.
While most advisors have their clients’ best interest at heart, when they work at large brokerage firms, they are often put in the position of having to protect their clients from the very firms they work for. The firm’s job is to create as much revenue as possible so its share price goes up. The advisor’s job is sometimes put in conflict with that.
But let’s be clear: Fees and commissions aren’t necessarily a bad thing. Every wealth management firm charges clients for the advice provided and the work performed. After all, financial advisors need to make a living, too.
It’s when fees become excessive, are tied to proprietary investment products, thus creating a conflict of interest for the advisor, and buried in fine print -- or even worse, not disclosed at all -- that they become a problem. A lack of transparency about brokerage fees, advisor commissions and other potential conflicts of interest only serve to erode the very trust that advisor-client relationships are built upon.
People come to an advisor for advice. They want to trust someone for their advice, and what ruins that trust is the idea that there’s not transparency or full information.
The fees clients don’t see
Nowadays, large brokerage firms are charging more in fees and burying those fees in places where they were not able to in the past, leaving many investors in the dark.
According to the Personal Capital survey, 10% of investors don't know whether they pay fees, and 21% know they pay fees but aren't sure how much they pay.
Those numbers are not reassuring if the goal is informed investing. And what about investors who’ve encountered a fee they did not expect?
There are plenty of them out there, too.
In a June 2018 Harris Poll, nearly half (48%) of the 2,000 U.S. adults surveyed said they’ve incurred an unexpected fee -- 40% on bank accounts and 19% on investment accounts.
A NerdWallet analysis of those poll results found that IRA fees could cost an investor as much $144,633 over his or her lifetime. (Note: NerdWallet’s figure factored in median trade commissions, mutual fund expense ratios, mutual fund transaction fees and mutual fund sales loads from the top online brokers.)
These findings come as no surprise. Most brokerage firms charge more in fees for retirement accounts than they do for check writing and wire transfers. (The average fee ranges from $75 to $150 per account per year.)
Overall, hidden fees on investment accounts can cost investors as much as 2.5% a year -- that’s $2,500 for an account with $1 million in assets. As the NerdWallet analysis shows, it can add up quickly for the millions of Americans whose retirement dreams depend upon investment revenue.
But if investors have knowledge, they have power -- the power to decide which investments -- and expense ratios -- are right for them.
If investors are aware of fees upfront, they can make informed decisions about their portfolios. This could mean choosing mutual funds or money market accounts that carry fewer fees, putting more revenue back into their portfolios.
What investors should ask
Here are a few tips for investors:
- Kindly demand the details: Ask the advisor to detail the advisor fee plus any underlying investment expense ratio.
- Get clarity on commission: Ask the advisor: “How much do you receive in compensation for an investment that you recommend?” What most investors don’t realize is that when an advisor makes a $10,000 investment for their client, almost 2.5% of that $10,000 is going to the broker as a commission. It doesn’t show up that way because it’s built-in.
- Find a fiduciary advisor: Fiduciary firms are held to a higher standard, meaning they are required to put clients’ interests ahead of their own. This means more transparency, objective advice and upfront fees.