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Monday, April 22, 2013

Ask Your Investment Advisor How He or She is Compensated

People are embarassed to talk about money.  I started on the investment side managing money for institutions such as pension funds, college endowments, and corporations.  So this wasn't a problem for me for a good part of my career.

But then I switched to managing money for individuals and was given a checklist with all kinds of questions to ask about people's financial situation. The questions were pretty standard - about how much people made and how much debt they had, etc.  I mentioned in passing, to the president of the company, that I felt awkward asking these kinds of questions.  His response: "Why?"

Asking these questions, of course, comes with the territory of being an advisor; and I quickly got over my awkwardness.

Still, I think today that clients should flip all of this around and really pin their advisor to the mat on how they are being compensated.  In other words, they should find out exactly what their advisor is making off of them.  Believe it or not, it is now the law that qualified plan (i.e., 401(k)s,403 (b)s, etc.) fund providers have to spell out the costs to participants of the plans they are investing in--down to the level of individual mutual funds as well as account maintenance.

All of this is brought up by an excellent article, "How Financial Advisers Get Paid," by Jim Blankenship.  The article nicely spells out the difference between fee-based and commission-based compensation.  In fact, the article can be an excellent lead-in to asking the question on compensation. The next time you see your advisor, just mention you've read a recent article on the subject and it led you to wondering about his or her compensation.

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