that costs should be part of the equation and everything should be open and upfront.  Certainly now the cost is right there on confirmations and some fund families (Columbia/DWS) print out in actual dollars what the costs are to own the fund on a quarterly basis. 

 That folks do not ask is certainly not unusual.  People do not inquire as to medical costs if they have insurance nor do doctors that I go to ever tell you the cost of anything.  Recently visited a cardiologist and no place did I see his charges nor did he tell me nor did I ask.  Does he have an obligation to have his charges posted (my barber does)? 

12B-1 costs that hurley refers to I can't get too excited about.  They are part of the overall fee structure thus Fundamental charges an expense ratio of 60 basis points of which 24 basis points is the the 12B-1.  Do you really think I go through the 60 basis points line by line?  Management fee (should that be explained?), 12B-1 .24, and then other expenses 0.11. 

Most folks I work with want solid performance and service when they need it.  If they buy "A" shares the cost is discussed and shown on the confirmation.  If "B" shares there is a time period which they must hold to or  the cost is deducted from early withdrawal.  Solid performance is a result of low costs and good money management but if someone wants to explore the depths of management fees including 12B-1 no problem with me.

Good discussion!

AL Lindquist:

that costs should be part of the equation and everything should be open and upfront.  Certainly now the cost is right there on confirmations and some fund families (Columbia/DWS) print out in actual dollars what the costs are to own the fund on a quarterly basis. 

I don't think the issue is what it costs as much as the issue is not understanding how the advisor is compensated and then finding out later and feeling like something was hidden from you.  The reason I want to know how the advisor is compensated is because I want to be able to understand if there is a financial incentive to steer me toward one investment over another. 

There is a huge conflict of interest inherent in these payment arrangements.  I am certain there are ethical advisors out there who don't place their own financial interests ahead of their client's.  I am equally certain that there are those who do, though.  One way I can begin to assess whether my financial advisor is putting his/her own interests ahead of mine is by comparing what the advisor's compensation is from one plan versus another. 

I, like Brian, expect to pay people for their services and don't begrudge them earning their living.  But I do need to be able to evaluate what is in it for the advisor so that I can assess whether or not the financial advisor is factoring in his/her income into their recommendations for my assets.

AL Lindquist:

That folks do not ask is certainly not unusual.  People do not inquire as to medical costs if they have insurance nor do doctors that I go to ever tell you the cost of anything.  Recently visited a cardiologist and no place did I see his charges nor did he tell me nor did I ask.  Does he have an obligation to have his charges posted (my barber does)? 

Medical care paid for by insurance is a totally different and non-analogous situation.  First of all, people do inquire about their copays since it comes out of their pocket.  As for the portion of the bill paid for by the insurance company, they have already paid for that and the insurance has negotiated the rate with the doctor and there is nothing they can do to change that at the point at which medical care is needed.  People sure as heck do care how much of an insurance premium they pay, but since many get their health insurance through their employers, they don't have much of a say in the matter other than to choose a cheaper plan if multiple plans are offered or pressure their employer to switch insurance companies.

AL Lindquist:

12B-1 costs that hurley refers to I can't get too excited about.  They are part of the overall fee structure thus Fundamental charges an expense ratio of 60 basis points of which 24 basis points is the the 12B-1.  Do you really think I go through the 60 basis points line by line?  Management fee (should that be explained?), 12B-1 .24, and then other expenses 0.11. 

I would have appreciated it if my advisor had explained to me how he was compensated for the reason I gave above - for me to evaluate what financial incentives the advisor had to steer me toward one fund over another.  When it wasn't explained to me and I found out through my own research, I felt like it was being hidden from me.  Others may not feel the same.  Seems like Brian felt the way I did.

Again, I expect to pay and don't begrudge anyone making a living.  I just want to know the information up front.  I never would have thought to ask about a portion of the expense ratio being passed on to the advisor so that is why I never did.  It never occurred to me that ongoing fees were passed on to the advisor.

AL Lindquist:

Most folks I work with want solid performance and service when they need it.  If they buy "A" shares the cost is discussed and shown on the confirmation.  If "B" shares there is a time period which they must hold to or  the cost is deducted from early withdrawal.  Solid performance is a result of low costs and good money management but if someone wants to explore the depths of management fees including 12B-1 no problem with me.

Good discussion!

I want sold performance, too, but I also recognize the inherent conflict of interest that exists in these payment arrangements and want the opportunity to assess if the particular advisor puts my or his/her own interests first.  Without the information on how the advisor is compensated, I can't do that.  And if it isn't present to me by the advisor, I wouldn't even think to ask about some of these types of arrangements, like the 12(b)-1 fees, because it would never dawn on me that an arrangement like that exists.

Let's not forget the historical context of the 12b-1 fee, it was never intended to be a "commission."  e.g., from Investopedia: "Back in the early days of the mutual fund business, the 12b-1 fee was thought to help investors. It was believed that by marketing a mutual fund, its assets would increase and management could lower expenses because of economies of scale. This has yet to be proved. With mutual fund assets passing the $10 trillion mark and growing steadily, critics of this fee, which today is mainly used to reward intermediaries for selling a fund's shares, are seriously questioning the justification for using it. As a commission paid to salespersons, it is currently believed to do nothing to enhance the performance of a fund."

I can see paying an adviser a one-time fair fee to recommend a fund (or series of fund), but the 12b-1 fee (which has apparently been bastardized from its initial intent) goes on forever. If one buys and holds a fund for decades, one pays the fee over and over again, for advice that may have been given years ago.  If one needs ongoing financial advice, I don't think a broker is the best source for unbiased advice.  Really, if a T Rowe Price product were "better" for the client, would it get offered by the broker over an Oppenheimer or AF product?

Greg

it seems one should ask questions and one should explore other avenues when investing or buying any product.  There are numerous investment magazines, radio and television programs, and the internet opens everything up for all of us.  Someone investing money has plenty of opportunity to compare every aspect of the investment.  If I sit with you I answer all the questions but will tell you these are the funds I use for myself, my family, and my clients.  If they work for you fine and if not no problem. 

In almost every case I make my recommendations, follow through with a letter (s), and then get feedback.  If you want to know how I am compensated just ask.  12B-1 is simply part of the ongoing fee structure so if 60 basis points is too much then finding a suitable investment and someone to work with is something one can do.  What if the 12B-1 was the total 60 basis points?  Would that bother someone?  If so why?  If I hired a lawyer and the fee was $1,800 do I care what % she gets, her firm gets, or the partners receive?  What if she was on retainer for $600 a year?  Do I care how the $ is split up?  Just be there when I need you!

This 12-B 1 is a joke--it's part of the expense ratio.  If the ER is too high does it make a difference whether there is a 12B-1 or not?  People care about results--poor results and low ER's would not make someone feel better. My firm requires the client sign and retain a form that explains "A", "B" and "C" shares--one page--basic English.   

If you interview an advisor then ask all the questions.  Go to the internet and and google questions folks should ask before buying a fund.  I present the plan and the cost ("A" the load--"B" the time period) if we can work together fine, and if not that's also fine.  It's not like there is no competition--no information available--or no lack of critics.

Conflict of interest?  In any relationship (marriage--join a church--belong to a professional orgainization) both sides gain something.  Who would think I would not benefit and the client would not benefit?  Is this investment best for the client?  Does this investment benefit me?  I would hope we both benefit.  With most of the client money I have with the American Funds I think we all have benefited.

What about the client that puts her interest first and my interest way back on the burner?  I can't begin to recount to you how many folks want to, and have, used me.  You know the students talk about the teacher to their peers and their parents, but the in the teacher's lounge the instructors talk about the kids.  I have run into lots of folks who have used me, taken my time and effort to fashion financial plans and then never bothered to answer calls or return E-Mails.  When you show up and sit with them the impression is they are straight shooters, but 4-5 hours of work later they prove to me something different.  It would seem to me that honesty and integrity are two way streets.  I should answer every and all the questions honestly--potential clients should be upfront and honest about intentions.

Al, when I engage my lawyer to write my will or my revoc. trust, it's a one-time fee, not ongoing.  By your analogy, the lawyer would be extracting a commission/fee for each year the will or trust is in effect!

Greg

AL Lindquist:

it seems one should ask questions and one should explore other avenues when investing or buying any product.  There are numerous investment magazines, radio and television programs, and the internet opens everything up for all of us.  Someone investing money has plenty of opportunity to compare every aspect of the investment.  If I sit with you I answer all the questions but will tell you these are the funds I use for myself, my family, and my clients.  If they work for you fine and if not no problem. 

ITA - the problem is that many older people aren't well versed in the internet and are intimidated by it so they don't use it.  As for older women in many cultures, we are socialized to be nice and polite and it is just not considered nice and polite to ask about fees.  There are some cultures where that is not the case and they haggle, but not in my culture.  Many of us are widowed stay at home moms and had husbands who took care of the finances who didn't leave behind a plan and just assumed we weren't interested in learning about it (and indeed, many weren't).  They would have provided one if only they knew they were going to die so young, but they wrongly believed they had many more years on this earth than they ended up having.   

I am not speaking for myself here, but for many of my friends, that was the case.

AL Lindquist:

In almost every case I make my recommendations, follow through with a letter (s), and then get feedback.  If you want to know how I am compensated just ask. 

As I stated, for many women, particularily older women, we are socialized not to do this.  We are socialized not to be aggressive and asking about fees like that is not nice and polite and is aggressive.  As an aggressive female, I assure you, those of us who are aggressive are treated harshly in this society. 

AL Lindquist:

12B-1 is simply part of the ongoing fee structure so if 60 basis points is too much then finding a suitable investment and someone to work with is something one can do.  What if the 12B-1 was the total 60 basis points?  Would that bother someone?  If so why?  If I hired a lawyer and the fee was $1,800 do I care what % she gets, her firm gets, or the partners receive?  What if she was on retainer for $600 a year?  Do I care how the $ is split up?  Just be there when I need you!

It isn't about the cost as I said before.  It is about the disclosure.  I am not sure why you keep honing in on costs when the issue is disclosure.  I have already stated why the disclosure matters to me.

I don't think the case of the lawyer paid by the hour is at all analogous to a financial planner who gets paid by loads and ongoing 12(b)1 fees.  The lawyer who is paid hourly is more analgous to a financial planner who gets paid hourly.  The financial incentive is for the financial planner to bill more time, not to steer you toward any particular fund.

AL Lindquist:

This 12-B 1 is a joke--it's part of the expense ratio.  If the ER is too high does it make a difference whether there is a 12B-1 or not?  People care about results--poor results and low ER's would not make someone feel better. My firm requires the client sign and retain a form that explains "A", "B" and "C" shares--one page--basic English.   

Does it explain that the 12(b)1 fees go to the advisor?  Again (and again and again), the issue isn't cost, it is disclosure.

AL Lindquist:

 

If you interview an advisor then ask all the questions.  Go to the internet and and google questions folks should ask before buying a fund.  I present the plan and the cost ("A" the load--"B" the time period) if we can work together fine, and if not that's also fine.  It's not like there is no competition--no information available--or no lack of critics.

That just isn't feasible for many older people who didn't grow up using the internet and many older women in particular who were socialized not to question men.

AL Lindquist:

Conflict of interest?  In any relationship (marriage--join a church--belong to a professional orgainization) both sides gain something.  Who would think I would not benefit and the client would not benefit?  Is this investment best for the client?  Does this investment benefit me?  I would hope we both benefit.  With most of the client money I have with the American Funds I think we all have benefited.

No one is questioning whether you should be paid, or at least I am not.  I just wanted to understand all of this better before I invested with my advisor.   I expect to pay for any advice I am given.  I also expect to be told how I am paying.

AL Lindquist:

What about the client that puts her interest first and my interest way back on the burner?  I can't begin to recount to you how many folks want to, and have, used me. 

You know the students talk about the teacher to their peers and their parents, but the in the teacher's lounge the instructors talk about the kids.  I have run into lots of folks who have used me, taken my time and effort to fashion financial plans and then never bothered to answer calls or return E-Mails.  When you show up and sit with them the impression is they are straight shooters, but 4-5 hours of work later they prove to me something different.  It would seem to me that honesty and integrity are two way streets.  I should answer every and all the questions honestly--potential clients should be upfront and honest about intentions.

This is one of the downsides of commission based sales work.  I think financial advisors should be paid by the hour.  That eliminates the conflict of interest and prevents you from being used and prevents me from paying hidden fees.  I would rather pay up front and know what I am paying for.