Thursday, April 7, 2016

Your financial advisor can no longer be a glorified salesperson

New rules designed to protect Americans from excessive fees and sales commissions paid to financial advisors were finalized in the White House on Wednesday, April 6th.

If you invest in a mutual fund or ETF, there are going to be fees.  The key is to minimize those fees so that they don’t put a drag on your investment returns.  Different investment fees include: expense ratios, 12b-1 fees, loads, account management fees, and assets under management fees. 

Previously, the law allowed financial advisors to recommend and push investments that may not have been in the best interest of the client.  When advisors are helping their clients choose between multiple funds, there was nothing stopping them from recommending investments that earned them higher commissions.  Instead of protecting their clients, many financial advisers were really just glorified salespersons trying to earn the biggest commission possible.  These fees and expenses are often hidden in the fine print and most consumers just don’t know about it.

Even just 1% extra in fees may reduce your available retirement funds by 10 years!  Fees associated with a fund lower your return by being taken from your fund’s assets.  Often times, these fees do nothing to enhance the performance of your investment fund.  Loads are basically commissions paid to agents, advisors, or brokers who sell you a fund.  If you are working with a financial advisor, you are likely paying loads on your funds.  These commissions can be applied on the front end (A shares), back end (B shares), or ongoing (C shares). 

Quoting from Labor Secretary Tom Perez: “advisers says things like ‘we put our clients first,’ but going forward this is no longer a slogan.  It’s the law.”  Financial advisors are now obligated to recommend an investment that is in their client’s best interest.  This rule is set to be phased in next year.  Naturally, much of Wall Street is opposed to the new guidelines and have fought hard to block this rule.

I hope more investors realize that they can be much more successful investing in index funds on their own rather than working with brokers and financial advisors.  We invest mostly in Vanguard mutual funds, which have the lowest fees in the industry.  While we can’t control what happens to the stock market, we can definitely control the amount of fees and commissions we pay.  Read more about fees and minimizing costs in my previous post here.  Here's one (of many) threads on Bogleheads about an investor realizing that he's been paying way too much in fees through his financial advisor.

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