Quatloos! > Investment Fraud > Financial Planning > Sales Commissions & Loaded Investments

Sales Commissions
and Loaded Investments

If one thing is for certain, we're going to draw some heat from the financial and securities sector for this one. But first, they are going to draw some heat from us -- and they deserve it.

Commissions = "Conflict-of-Interest" and sometimes just "Con".

Far too many investment decisions are clouded because a fiancial advisor needs to sell a loaded product to pay for a night out on the town to lure in another client, or because a stockbroker's figures are a little low at the end of the month and he doesn't want to lose the cubicle with a window. If someone has the choice of putting you into Investment A and making $100 or putting you into Investment B, which performs the same as Investment A, but making $200, they will almost always put you into Investment B. Well, that's a $100 you are starting out in the hole and must make up to break even.

The one recurring them that we see in our initial client interviews is that clients have been counseled to make bad investments just so that their financial advisor could make a large commission. The worst-of-the-worst is the financial advisor who charges either an up-front flat fee or a continuing percentage wrap fee and then also takes commissions from selling the client loaded financial products. If this fact is actively concealed from the Client, it may amount to fraud. If this fact is disclosed to the Client, then the Client is an idiot if he or she does not seek another advisor who does not accept commissions in addition to the fee.

The buying of loaded products is just inane: Loaded products typically do no better than their no-load counterparts. Where do you think the load goes, anyway? Do you think the load goes so that the fund manager can hire industrial spies to get advance information on a specific company? Virtually all the load either goes to commission, or is pure profit to the shareholders of the company which owns the fund. Loaded products DO NOT significantly outperform no-load products over time -- anyone who tells you otherwise is probably lying.

Moreover, for wealthy individuals in the highest tax bracket, the last thing they should want is an actively managed portfolio where the constant buying and selling of stock to beat the S&P 500 results in an annual hidden tax burden for the client. What wealthy individuals want are financial products which are passively managed so that they have very little portfolio turnover, and thus very little capitals gains to be reported. Which is to say that for persons in the highest tax bracket a high-return investment which is always throwing off dividend income and short-term capital gains is probably much worse in the end than a slightly underperforming passively managed investment which has nominal tax consequences. After all, the measure of success for you should be your after-tax net increase and not whether your fund manager was placed on the front cover of Kiplinger's.

And here is a little tidbit that stuns most Clients: Even for most heavily loaded funds the load can be waived!  A good fee-only financial advisor will have relationships with a number of fund families whereby their Clients can purchase these top-performing funds, some of which have substantial loads, on a load-waived basis. Considering this, if you're paying a load for these same funds, you're just a sucker.

Even for funds which will not waive their load, a good fee-only financial planner will agree that any commission received from the sale of these products, whether from a load or a 12b fee or whatever, will be applied against your future fees (a financial planner cannot legally "rebate" commissions, but applying commissions against future fees has about the same effect).

This is not just for mutual funds. There are also: No-Load Stocks, No-Load Annuities, No-Load Life Insurance Policies, etc., etc., which are substantially comparable to the loaded variants. There simply is no justification, period, for you to be paying a load for any of these products: Everytime you buy a loaded product you start just that much in the hole. Consult your local fee-only financial advisor for details on these no-load products.

Any financial advisor who charges an up front fee and then also receives undisclosed commissions may potentially have committed a fraud, and you should contact our litigation unit to evaluate the financial advisor's conduct and to advise you whether you may have any legal recourse.

Research! Research! One of the things commissioned stockbrokers will trot out is that they get all sorts of research, "hot calls" and all sorts of other bells and whistle which, even if they don't help your long term return, will at least make you feel like you are a big-time player fighting for trades in the pits.

What they don't tell you is this: You don't have to put all your money with the brokerage firm to get this research or access to these calls, etc. -- you only have to place the minimum (say 100 shares of stock) to have access to this information.

So, let's say you have $2 million. Do you put it all with the brokerage firm? No -- You put $10,000 in some long-term stock, such as Microsoft, with the full-service brokerage firm, and the rest with the deepest discount brokerage which you can find which gives good service. You get all the information and bells and whistles you want from the full-service firm, but you never trade the $10,000 -- instead, you take the advice and trade your stocks with the discount brokerage (not that the discount brokerages, in reality, have any lesser quality of research than the full-service firms: they don't).

Truth is, today many excellent firms post top-quality research on the internet, so it is difficult to imagine paying for research.