Fraud > Financial
Planning > Sales
Commissions & 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
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
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
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