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The 21 Questions You’re Going to Need to Ask About Investment Fees

Posted: February 28, 2017 | by: Thomas F. McKeon, CFA

If the answer to Number 1 is wrong, you can forget about asking the next 20.

On 2/10/2017 The New York Times published an article by Ron Lieber about the challenges of trying to find out how an investment advisor is compensated. It is a well-intentioned article prompted by the Department of Labor ruling about to take effect—and still in legal jeopardy—that all investment professionals who provide services to retirement accounts accept fiduciary responsibility. Fiduciary responsibility is simply the responsibility to act in the best interest of the client. The well-established brokerage and insurance industries have been fighting the adoption of the DOL standard mightily. The inference is obvious: many brokerage and insurance products are not in the best interest of the client.

From the NYT article:

Question Number 1: How much money are you making and what are the different ways you are making it?

If the answer is anything other than:

"...my only compensation is the fully disclosed asset-based or flat fee paid by you Mr. & Mrs. Client..."

the next 20 questions won’t matter. Any professional who is paid by a product sponsor (brokerage, mutual fund, insurance) is hoping to serve two masters: client and sponsor. Product sponsors generally seek to incentivize sales through compensation schemes. And since no man can serve two masters, under this arrangement the compensation to the professional and objectives of the product sponsor will sometimes take precedence over the objectives of the client. It is simple human nature. And this conflict which has served brokerages and insurance companies so well for so long is soon to be seriously eroded. Investors everywhere should rejoice. It also explains the pushback from the brokers and insurance companies.

From the article: “The fiduciary rule ultimately comes down to the fact that some people are making a lot of money at the expense of other people who have no idea how much their adviser is getting paid.”

Virtually all investment professionals serving retail clients now prefer the moniker “advisor” to broker, or agent or anything else that smacks of the conflicts inherent in their licensing and business model. But only registered investment advisors (RIAs) are truly advisors, providing conflict-free investment advice, accepting fiduciary responsibility and serving clients first and foremost. Anything else is a conflicted financial services professional.


We now share a few of the next 20 questions in the NYT article that in the full daylight of the answer to number 1, sound almost criminal.

Q. Number 2 & 3: How much money will you personally make in cash commissions, now, if I select this product? How much will you make later in any sort of ongoing or trailing commission?

A. Any answer other than zero and please see answer to Number 1 means you are talking to a conflicted individual.

Q. Number 4 & 5: Is there a bonus you are eligible for that comes as a result of your recruitment to this firm? Is it in jeopardy if you don’t make this sale?


A. See above.


Q. Number 6 & 7: Are you earning more from selling me this product than you might from selling me a similar product from a different company? Are you earning more than you might if you put me in a a different vehicle from the same company?

A. You get the point.


Q. Number 8: Is your company or the company that created this product running any contest that might lead to you getting to take a free trip?


True enough some people have legitimate needs for insurance and annuity products. And finding out up-front how much they cost is critical. But the insurance industry has long sold annuity products into client IRA accounts, for example. Selling a tax-advantaged annuity into a tax-advantaged IRA is financial malpractice. There is no need for a client to pay for the preferential tax treatment of the annuity inside an already tax-advantaged IRA account.

Author Ron Lieber wraps up the article with this: “Rather than get caught up in the (DOL Fiduciary rule wrangling) it’s probably best to protect yourself from the outset. And in an industry that makes a game of hiding lots and lots of fees every which way, the best possible response is to ask lots and lots of questions.” We couldn't agree more.

So by all means, ask Question Number 1. You will learn whether the professional you are questioning is a true advisor or a conflicted sales-person who may sometimes put your interests above his, and may sometimes prefer to sell a product with a higher payout. Depending on the answer, you can simplify the process and dispense with the next 20.

For investors who seek objective investment advice, it makes the most sense to work with an investment advisor…unconflicted, fully transparent and accepting fiduciary responsibility, providing client-specific investment advice.

Would you accept investment advice for your hard-earned personal or retirement assets from anyone else? You already know the answer to that question.


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