Most investors don’t know how much they are paying their financial adviser. Here are four questions to ask. P######o: iStockp######o/Getty Images
Don’t know how much you pay your financial adviser? Just ask, wealth-management experts say.
“The very least a financial adviser owes you is a transparent explanation of what’s going on,” says Terrance Odean, Rudd Family Foundation professor of finance at the University of California, Berkeley’s Haas School of Business.
If an adviser offers a complicated explanation, several different figures or flat-out says, “I don’t know,” Dr. Odean and others say it is time to ditch him or her.
“Some may make it seem like rocket science. But it isn’t. They’re using complexity to confuse the consumer,” Dr. Odean says. “If you’re not getting straight answers you understand, go elsewhere.”
Most investors don’t know how much they are paying their financial adviser, with 60% of investors surveyed by J.D. Power & Associates last year saying as much. But brokerage firms, pushed by new regulations such as the Labor Department’s fiduciary rule, are trying to change that.
Bank of America Corp.’s BAC 0.08% Merrill Lynch, for example, rolled out new monthly client statements earlier this year that more plainly state investment fees, including advisory fees, commissions on purchases of stocks and bonds, and charges related to using automated-teller machines.
Still, account statements can be lengthy, and experts say financial advisers need to be ready to provide a simple explanation of how they are compensated. Here are some questions to ask:
1. How much do you charge me for advice?
Ask your financial adviser if you are charged an annual fee, usually split across each quarter of the year, or pay a commission for each transaction. These charges should also be available on clients’ account statements under headings such as “fees and charges,” or factored into the overall performance of a given investment.
2. Are there costs tied to individual investments?
Some mutual funds charge so-called 12b-1 fees for marketing or distribution, which are often equal to 0.25% of a fund’s assets each year, but can be as much as 1%. Unlike commissions, 12b-1 fees don’t appear on transaction confirmations or client account statements.
How Much Do You Pay in Adviser Fees?
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Again, your financial adviser should be willing and able to explain any underlying investment costs. But investors can also rely on research firm Morningstar or the Financial Industry Regulatory Authority’s website (finra.org/fundanalyzer) to determine those costs. Investors in fee-based accounts should also ensure that any 12b-1 fees are rebated against their annual fee; otherwise, the adviser may be getting paid twice for the same investment, Dr. Odean says. These days, most brokerage firms either rebate the 12b-1 fee or offer mutual-fund shares without it.
3. In a managed account, a re there any extra costs?
More financial advisers are encouraging their clients to put their money in managed accounts—personalized portfolios of stocks and bonds chosen by a money manager. Such accounts are usually charged a fee by the brokerage firm, similar to your run-of-the-mill fee-based account. But they also tend to come with an added fee of as much as 0.5% charged by the investment firm managing the account. At Morgan Stanley MS -0.44% and Merrill, those fees, together with what the brokerage firm charges, could push annual costs as high as 2.5% of the portfolio’s value.
4. What other services do you provide?
If your adviser has simply put you in a diversified portfolio while charging a fee of as much as 1.5%, be sure to ask if he or she is providing any other services, such as tax or estate planning. After all, advisers earn their fee regardless of how those investments perform. And there are cheaper alternatives for simple asset allocation, such as robo advisers. “An adviser charging that much should be providing more than just a suggested portfolio,” Dr. Odean says.
Mr. Wursthorn is a Wall Street Journal reporter in New York. Email him at michael.wursthorn@ wsj.com.
Appeared in the May. 08, 2017, print edition.