Demand your adviser disclose any conflicts - now!

I read a lot of financial Web sites on an ongoing basis. Most of it is not relevant or even very interesting to my audience here. But, any developments or information that I read that I believe will be of use to readers of this blog will be shared. In this post I want to make you aware that even though advisors may tell you they are fee-only and aren't incentivized to recommend any investment that is not in your best interest, they may be hiding the truth.

I found a good discussion of this issue at the following link and full credit goes to the author. I have taken the liberty of sharing with you some of the most important points from this article below. Go to the site for more information.

"Many advisers advertise themselves as fee-only advisers, collecting fees as a percentage of assets and operating with a fiduciary obligation to put their clients' best interests first. Yet they can also, at the same time, operate as brokers and collect commissions without disclosing this fact to the client. Double or even triple the compensation they collect from clients may be from commissions on the products they use, including mutual funds, private real estate investment trusts (REITs), structured notes and more.

The most common source of commissions for brokers is run-of-the-mill mutual funds. While you may be familiar with the fees embedded in mutual funds, you might not realize that your adviser could be getting 80% of those fees. For example, the A share class of a mutual fund can have a front-end load as high as 5.75%, and your adviser may pocket up to 4.25%. Given that the fund may have a C share class offering lower costs, how could any adviser choosing A shares claim to act as a fiduciary?

So while your adviser may claim he is only charging you 1% to 2% of assets under management, he can legally be charging you commission on investments without your knowledge that lead to actual fees of 3% to 5% of your money. The easiest and most important investment decision you can make is to use a fee-only adviser who has no broker-dealer affiliation and can thereby not legally accept commissions at all."

Now back to my words:

So, what you need to do right now is ask your advisor if he or she has a broker-dealer affiliation. If the answer is NO, then demand (not ask for) a letter stating this fact and make sure it is signed and dated by the advisor. They break the law if they mislead you on this point, so you want it in writing. If the answer is YES, they do have a broker-dealer association that incentivizes them, then find another advisor. Period, end of story.