Over the weekend , the Securities and Exchange Commission called for stockbrokers to put clients' interests ahead of the bottom line. But brokers aren't the only advisers who put themselves first. Consumers depend on financial experts of all stripes – and many are saddled with conflicts of interest that could cost you money.
The advice industry is booming -- the ranks financial planners, college aid advisers, mortgage brokers and more are expected to increase by 30% by 2018, to 271,200, according to the Bureau of Labor Statistics. But many of these advisers get paid to peddle specific products, or to encourage consumers to make risky decisions. Among the conflicts: Insurance agents and some financial planners often get the biggest commissions by selling products that can result in smaller savings for consumers. Mortgage brokers profit by originating larger mortgages—even if a buyer has a tough time making payments. And college financial aid advisers rake in fees of up to $1,000 or more to boost financial aid, rarely delivering more than what a family can do on their own.
Of course, no one sets out to get bilked. Many consumers even second-guess advice, then push their worries aside, says Linda Sherry, director of national priorities at Consumer Action, a nonprofit advocacy group. One reason: A surprising number of people believe -- sometimes mistakenly -- that financial professionals are acting in their best interest: 76% of investors said so for financial advisers and 60% said the same for insurance agents, according to a September 2010 study co-authored by the Consumer Federation of America. The truth, however, is another story, says Barbara Roper, CFA's director of investor protection. Many, she says, are "salespeople with no obligation to act in the best interest of the customers."
Here are some warning signs to look for when working with four types of advisers.
Fee-only advisers don't sell products, and therefore don't have commission incentives (they charge a flat or hourly fee or a percentage of assets under management, or both). But other financial planners depend on commissions that come from selling products, others charge fees or get a percentage of assets--many use a combination of the three. One big pitch to watch out for: variable or equity-indexed annuities where high commissions often eat into returns. The same tax-deferred retirement saving benefits occur with an IRA or 401(k) often for a tiny fraction of the fee, says Roper. Planners make up to four times more in commission (about 5% to 8%) on average by selling a variable annuity than investing a client's money in mutual funds, says Sheryl Garrett, a fee-only certified financial planner. Invest $3,000 a year in an index fund with a 6.75% net return and you'll have $40,000 more after 25 years than if you put the same money in an annuity at 5% net yield.
What to do: Make sure you understand how fees and performance on funds you are pitched stack up to other funds with similar exposure. (Many people don't: About 32% of women and 23% of men rely solely on a financial adviser's recommendations for mutual funds, according to the CFA.) You can also ask if the fund is owned by the company selling it or if the broker gets paid extra for selling it, says P.J. Gardner, founding partner at AGW Capital, an investment consulting firm, but there's little guarantee that they'll tell you.
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