Comments on: Straight Talk on Compensation

By: Francis St.Onge, CFP, EA

Francis St.Onge, CFP, EA — Tue, 16 Jun 2009 21:05:55 +0000

I am a fee-only planner and a tax preparer who sees many tax clients who have been “advised” on where to invest their funds (not me). I have been unable to rationalize in my mind how these tax clients were ever given an explanation on how some of their investments could have ever been for their benefit. On the other hand it was pretty easy to see how the adviser was benefited by the same recommendation. My most recent example was a person who was in an annuity that resulted from a rollover of his 401k. The withdrawal was taxable and resulted in a tax liability equal to 33% of the withdrawal because this caused their social security to also be taxed as well. Client had no idea about this until I did the tax return.

By: Tamela Rich

Tamela Rich — Sun, 14 Jun 2009 19:44:05 +0000

The day after this post Investment news wrote about a house bill, “Conflicted Investment Advice Prohibition Act of 2009″ which l aims to allow only independent investment advisers — essentially those advisers whose compensation is not affected by the counsel they provide — to work directly with 401(k) participants.

Hearty comments ensue — worth reading.

http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20090611/REG/906119981/-1/rss02&rssfeed=rss02

By: dasan

dasan — Wed, 10 Jun 2009 15:33:44 +0000

Good points. Most of the major “wirehouses” such as Merrill Lynch, UBS, Morgan Stanley provide clients with a long, detailed legal document that explicitly states how they will be compensated. These agreements also clearly (if you’re a lawyer) state that conflicts may exist. As Tamela Rich ably states, in the financial advice business, there are good and not-so-good apples.

One of the appeals to both advisors and clients is dealing with a so-called “fee-based” independent advisor that charges a fee based on assets and does not get “kickbacks” otherwise known as commissions for choosing certain investors over others.

Obviously even institutional investors need help in this area, as the recent scandal over “pay to play” in the New York State pension funds shows.

I agree wholeheartedly with Tamela Rich that the solution for both sides is to put clearly, IN WRITING, what the conflicts are and how the compensation is determined.

Funny – no one asks their doctor how they get paid either? Might be worth asking. Most doctors I know have incentive to rush you through their office because they are paid by the HMOs based on how many patients they see per day.