Suze Orman: Say ‘No’ to Financial Advisors Who Work on Commission and Sell You B-Class Mutual Funds
In an article posted today on Yahoo! Suze Orman writes:
A financial advisor who makes all of his or her money on commission for the investments you buy and sell obviously has an interest in getting you to do alot of buying and selling. And it’s not unreasonable to see that the advisor has a financial incentive to get you to pay high commissions.
As I’ve written elsewhere, many financial advisors receive hidden “kickbacks” from their brokers. That is, a good chunk of your commission is kicked back to them from their broker. So even if your advisor doesn’t explicitly work on commissions he still might in fact if he receives these hidden “kickbacks”.
She recommends working with advisors who charge you an upfront, flat fee:
A better arrangement is to work with an advisor you pay a flat annual fee rather than per trade commissions. A typical advisor fee might be 1 percent to 1.5 percent or so.
However, even here you have to be careful:
But again, you need to be careful that your advisor is taking good care of your money. If you’re paying an advisor 1 percent or so a year for his fee, and the advisor is then turning around and putting you in mutual funds with annual expense ratios of around 1.5 percent, your total investing costs are way too high.
As Top Gun wrote in “The Investment Advice Business” :
Many of these financial planners are, to be frank, not especially competent investors. They lazily invest your money in the big mutual funds , incurring the above mentioned size problem plus tacking their own assets under management fee on top of that already charged by the mutual fund.
On Class B shares of mutual funds, which charge you a decreasing back load (depending on how long you own the fund) rather than a front load but for this reason have higher expense ratios, Orman writes:
But the longer you stay invested in the fund the longer you’ll be paying a very steep expense ratio. That’s the annual charge all mutual fund investors pay on their investments. The problem with B share funds is that the expense ratio can be 1.5 percent a year or more, because a big portion of that charge goes to pay the advisor who sold you the fund. [Bold and Italics added]