How to Tell if Your Financial Adviser Is Overcharging You
If you work with a financial adviser, now might be a good time to review your advisory agreements and financial statements. Last year, the Securities and Exchange Commission took a closer look at the business practices of registered investment advisers and broker-dealers and didn’t like what it found. Financial advisers and broker-dealers under SEC supervision go through periodic examinations to ensure that customer disclosures and business practices are in line with the law. If the SEC notices that a large number of firms are making the same error over and over, it will issue an alert. In November, the SEC issued a risk alert for investors, noting that registered investment advisers might be miscalculating investment fees. This isn’t the first time the regulator has issued this type of alert, which suggests that it may be a continuing problem.
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Broadly speaking, a simple portfolio with just a retirement account should cost less to manage than a more complex portfolio with a variety of different investments. It is advisable to speak to more than one potential adviser to get a sense of market rates. If one quote differs widely from the others, that could be an indicator of overcharging. The lowest-cost products might not be the best for every investor in every instance. But if an adviser is recommending a product that is more expensive, he or she should be able to explain why. The main principle for investors here is informed consent: If you’re paying more, you should at least know why.
Investors can also get an idea of potential fees on their own by looking online at the Form ADV disclosures that advisers are required to file when they are registered with the SEC. This is a good place to start to get a sense of cost, and it is also a good reference point to go back to. This information is available on the Investment Adviser Public Disclosure website, part of SEC.gov. The fees your adviser quotes you should generally match the fees in this disclosure. If they don’t, and if it’s not because of add-on services or something else easily explained, that can be a red flag. Disclosures should also be recent. Forms posted in years past might no longer reflect current total costs.
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One of the ways broker-dealers overcharge clients is by steering them to products with higher fees than a valid alternative would charge. Under Reg BI, if a broker-dealer is recommending a product or service, it has to be in the best interest of the investor. If a product seems expensive, look at similar funds online to compare prices or ask about less expensive options. If you aren’t getting answers when you ask about other options, or if information is hard to find, that’s a red flag. For investors with an existing advisory relationship, compare your original agreement with current statements. If your adviser promises lower fees once your portfolio reaches a certain size, and yours qualifies, make sure the lower fees were applied... If an investor’s asset mix changes to include more actively managed funds or asset classes over the years, the adviser should be willing to walk the investor through any subsequent changes in fees. This is also true for add-on services like tax or estate planning. Actively managed investments or holdings of individual stocks and bonds can be more expensive than low-cost exchange-traded funds or mutual funds.
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Watch out also for flat fees. On the surface, flat fees sound fairly straightforward. They could be something like 1% to 3% of the assets in the account. But if you are in a primarily passive portfolio, or one that doesn’t trade frequently, the flat fee can add up over time for little to no service—especially if it doesn’t decrease as the size of the account increases.
https://www.wsj.com/articles/how-to-tell-if-financial-adviser-is-overcharging-11648753458 (subscription)
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