Uncover Hidden Costs of Financial Advice

Physician's Money DigestSeptember15 2004
Volume 11
Issue 17

If you're a physician in the market for a financial advisor, be sure to do some research before making your decision. Not all financial advisors are created equal. The same goes for the cost structures within which they are compensated.

Some stockbrokers call themselves financial advisors or financial consultants, making it more difficult for physician-investors to choose the best advisor for their needs. Oftentimes, financial advisors who are employed by large brokerage firms are under pressure to sell, and are more interested in earning high commissions than they are in protecting your investments.

Investor Beware

New York Times

Barbara Roper, director of investor protection at the Consumer Federation of America (www.consumerfed.org), concedes in a report that the large brokerage firms have changed somewhat in the way that they do business. However, Roper notes, "In the end these are still primarily salespeople who are marketing themselves as advisors."

During the past 5 years, large Wall Street brokerage firms have stopped relying primarily on commissions and now charge most customers annual fees based on assets under management. The fees usually range from 1% to 3% of assets. The brokerage firms normally charge lower percentages for larger portfolios and are usually willing to negotiate terms with wealthier clients. The smaller your portfolio, the less success you're likely to have in negotiating compensation.

Even though annual fees usually cover most direct costs, financial advisors sometimes charge additional commissions. Many advisors are also known to collect additional sales commissions from insurance firms, banks, and mutual fund companies.

Brokerage firms claim that they train their advisors to focus on a client's long-term interests. Approximately 14,000 financial advisors at Merrill Lynch rely mostly on asset-based fees. However, they can earn commissions, depending on the arrangements with their clients. Erik Hendrickson, spokesman for Merrill Lynch, says it is up to the client and the advisor to decide what compensation structure works best. Merrill Lynch takes measures, he says, to ensure that advisors are fair to clients.

Federal and state laws are in place requiring financial advisors to try to avoid conflicts of interest with regard to commissions and to disclose potential problems. However, physician-investors still need to be careful from whom they obtain their financial advice.


Fees can significantly reduce long-term returns. Excessive costs are one reason the SEC began an investigation into the way brokerage firms sell mutual funds, the article reports. SEC Chairman William Donaldson recently told a US House financial services subcommittee that the agency would examine whether incentives at large firms motivate brokers to sell mutual funds that generate high commissions to customers, even if such investments are unsuitable for them.

What You Can Do

What are your options for avoiding high-priced advisors? Roper says that most small investors can manage quite well on their own with no-load mutual funds. Otherwise, she strongly recommends using independent financial advisors whose income is generated solely from fees—not commissions.

Do some investigating to locate a reputable financial advisor. Visit www.sec.gov/investor/brokers.htm to obtain important information from the SEC about financial advisors who manage more than $25 million in client assets. Other advisors must register with state securities regulators. The North American Securities Administrators Association (202-737-0900; www.nasaa.org/nasaa/abtnasaa/find_regulator.asp) provides an online link to such state filings.

You can find independent advisors through the National Association of Professional Financial Advisors (888-333-6659; www.napfa.org). Members earn their income solely from fees based on a percentage of managed assets.

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