Wall Street Needs Mandatory Disclosure; Not More Hypocrisy

Posted on January 2, 2013 by Jack Waymire

As long as there is no mandatory disclosure for financial advisors, Wall Street is free to determine what is communicated to you and how it is communicated (verbal versus documented). And, it would be naïve on your part to assume Wall Street will volunteer any information that damages its revenue and profitability.

A great New Year’s resolution for Wall Street would be to come clean with you and the millions of other investors who depend on its competence and ethics. For the first time, financial advisors and their firms would voluntarily provide the facts you need to make informed decisions. But, don’t hold you breath. Wall Street, like the tobacco and pharmaceutical industries, cannot afford to adopt business practices that include full disclosure. Continue reading →

Why are Investment Surrender Charges so High?

Posted on October 19, 2012 by Jack Waymire

First of all, sales reps say you will never pay the surrender charge or penalty for early withdrawal because you intend to hold the investment for at least seven years. That is true on the day you buy the investment – you have no intention of selling it that day. But, it is not true one year later when you determine the investment product (mutual fund, annuity) is under-performing and charging excessive fees. You determine you could do a lot better elsewhere, but you have to pay a 6% penalty (one year has elapsed) to move your assets.

Why are surrender charges just a big number? As you may know, investment product companies still pay the sales rep a 5% commission even though the assets are not deducted from your account. In effect, the product company is front-ending the commission payment to the advisor. The product company needs time to recover the commission payment. Most of the reputable companies charge early withdrawal penalties for seven years. They have that length of time to recover the commission payment and they are protected by the surrender charge if you decide to leave early. Continue reading →

Viva La Diferencia! [Consider a Fee-Only, Independent, Registered Investment Advisor]

Posted on August 13, 2012 by Frank Armstrong

Fee-Only, Independent, Registered Investment Advisors are an entirely different animal than the brokerages, broker-dealers, insurance companies, and banks that have traditionally dominated the investment advice market.

The traditional commission based sales model is fatally flawed and cannot be fixed. It’s almost impossible to provide fiduciary standards of investment management if the advisor is commission based. External influence and production pressure make any recommendation suspect. The investor’s best assurance of objective advice is the ironclad separation between the advice and brokerage functions. This is why we think fee-only compensation is so important. Do you really want to pay for tainted advice? Continue reading →

Avoiding Advisor Risk

Posted on July 26, 2012 by Frank Armstrong

Market Risk and Behavior Risk are well known and frequently discussed. But, there is another type of risk that is often overlooked; The Advisor Risk.

Investors that recognize that they don’t have the time, knowledge or inclination to deal with market risk, and/or the discipline to deal with their own behavior risk may seek advice, and unwittingly run into a third level of risk: The risk that their advisors are either not working in their best interest and/or are incompetent. This third risk is little discussed or appreciated. But, advisor risk is not trivial. Countless investors that delegated their investment decisions to so-called professionals have been devastated during the recent bear market. Continue reading →

5 Signs You Selected the Wrong Financial Advisor

Posted on July 17, 2012 by Jack Waymire

Most investors are not aware there are financial advisors and sales representatives (reps) who have very different services, agendas, and business practices. You can blame sales representatives for the confusion. Most of them refer to themselves as financial planners or financial advisors because they know investors do not want sales reps investing their assets. If they disclosed their real status, they would lose sales.

Following are five tips that will help you quickly and easily determine who are the real financial advisors and who are the sales representatives who are masquerading as advisors. Make sure you select a real advisor by requiring documentation for the following information. Continue reading →

Investment Performance Should Be Net Of Expenses!

Posted on July 11, 2012 by Jack Waymire

Most financial advisors report gross performance because the number is always higher, perhaps two to three percent higher. And, most investors accept the numbers because they do not know they should be asking for performance reports that are net of all expenses. The higher the expenses, the more likely the advisor is to report gross results.

There are several layers of expense that you should be aware of. If you know all of the expenses, you can add them up and deduct them from your performance yourself. Or, you can use a free tool that resides on the Investor Watchdog website (http://www.investorwatchdog.com/) that will obtain expense data for you. Continue reading →

Investment Advice Versus Investment Recommendations

Posted on April 12, 2012 by Jack Waymire

Wall Street is a marketing powerhouse. It knows how to manipulate investors for its own benefit. No matter how smart and sophisticated you think you are, all of those PhDs on Wall Street are smarter.

One popular Wall Street tactic is to blur differences to benefit itself. For example, can you tell me the difference between investment “advice” and investment “recommendations”? Would you believe there is a huge difference?

Investment advisors who are Registered Investment Advisors or Investment Advisor Representatives can provide financial “advice”. Stockbrokers, who hold Series 6 and 7 licenses, are not allowed to provide investment advice. They are limited to making investment “recommendations”.

If you want a real advisor you have to select a professional who is a Registered Investment Advisor or an Investment Advisor Representative.

What are wrap investment fees?

Posted on February 27, 2012 by Jack Waymire

Four layers of investment fees can be deducted from investors’ accounts: Investment advice, money management, custody, and transactions. Some investors express serious concern when fee after is fee is deducted by the various service providers. The industry’s solution was to create a wrap fee that consolidated four fees into one all inclusive fee.

Investors benefit from wrap fees when service providers discount their fees to participate in wrap programs. For example, a money manager that charges a 1% fee for a $250,000 account may charge half of that in a wrap program.

One caveat! Investors should find out how the wrap fee is divided by the various service providers and make sure the value of the services match the fee.

Do Commission Advisors Work for Free?

Posted on November 3, 2011 by Jack Waymire

An investor asked this question on the Watchdog website today. He was told a financial advisor’s services were free because the advisor was paid by third parties. This is a false sales claim that is designed to make this investor believe he will get something for nothing.

First, the advisor is not an advisor if his only method of compensation is a commission. Real advisors are paid fees for their knowledge, advice, and services. Based on compensation, this “advisor” is really a sales rep masquerading as an advisor.

Second, the third parties are the advisor’s broker/dealer, mutual fund companies, annuity companies, and others. They pay commissions to sales representatives to motivate them to sell their products. Does this investor really want a sales rep investing his assets? I don’t think so.

Third, these companies mark-up their fees to investors to recover the commissions they paid the sales rep. Consequently, the rep’s sales recommendations are NOT FREE! In fact, this investor may pay inflated fees for the next several years because he thought the sales pitch was financial advice.

Fourth, if the investor bought annuities, there will penalties of 7% of asset value, for early withdrawal. This declining penalty may last seven years. The annuity company wants investors locked in until they recover their commissions.

Advisors who are compensated with commissions do not work for free! And, by the way, their “work” is selling investments to investors. Their licensing does not permit them to provide advice and ongoing financial services.

Careful of the Leopard that Tries to Change His Spots

Posted on August 25, 2010 by Matthew Arndt CFA CPA CFP

Is your advisor unexpectedly changing his business model or practices? Do you suddenly find yourself in front of your advisor with him telling you all about the virtues of his new fee-based business? Explaining to you the merits of why his managing your portfolio for a fee is beneficial to you? Do you wonder why this is all the sudden happening right now?

The SEC is proposing a new regulatory framework that would require improved disclosure to investors. Part of the proposal includes the replacement of 12b-1 fees. You might be asking, what are 12b-1 fees? These are fees that are charged by most mutual fund companies and are paid to financial professionals. The mutual fund industry likes to call them marketing fees when really what they are is a commission paid to a financial advisor who sells a company’s mutual funds to his clients.

The SEC stated that 12b-1 fees totaled $9.5 billion in 2009 and in the words of SEC Chairman Mary L. Schapiro, “Despite paying billions of dollars, many investors do not understand what 12b-1 fees are, and it’s likely that some don’t even know that these fees are being deducted from their funds or who they are ultimately compensating. Our proposals would replace rule 12b-1 with new rules designed to enhance clarity, fairness and competition when investors buy mutual funds.”

Knowing what regulation is potentially coming to pass; many slippery types are now getting in front of this and approaching their clients explaining all the benefits of their new fee-based relationship and trying to convince their clients that the “old” way was not necessarily the wrong way but this new way is better. All you should be asking yourself is why didn’t my advisor practice this way of doing business throughout our relationship?

Tag Archives: investment advice