Your Financial Adviser’s Conflicts Could Put Your Money at Risk
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Before we get into today's episode, your money briefing is exploring what you need to know to become a homeowner and sustain your home. You can get early access to our series, Buying a Home and Keeping It, on WSJ Special Access, available only for WSJ subscribers. Now on to the show. Here's your Money Briefing for Monday, April 15th. I'm J.R. Whelan for The Wall Street Journal. A financial advisor can help you decode the markets and find smart ways to invest. But some advisors make recommendations that wind up not being in your best interest.
If I'm your advisor and I'm charging you 1% of your portfolio, I get paid more when your portfolio does well and goes up. So, you know, if I'm making good investment decisions, then that's going to benefit both you and me in tandem. With the commissions, the incentive is to sell you products, whether you actually need them, whether they're actually in your best interest or not.
We'll talk to Wall Street Journal personal finance reporter Anne Tergesen after the break.
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Your fee-based financial advisor's recommendations for boosting your portfolio may create conflicts that aren't in your best interest. Wall Street Journal personal finance reporter Anne Turgason joins me. Anne, what's the difference between fees an advisor might charge and commissions?
It's become increasingly popular for advisors to charge fees rather than commissions. Now, with a commission... The way it would traditionally work is that a broker would charge you commissions. They would say, hey, I've got a stock tip for you or I've got this great annuity I want to sell you. And they would sell you investments that they would charge a commission on for you to purchase. So that would be a sales-oriented relationship. They would have an interest in selling you products that would earn them money through commissions. But with trends in the marketplace, a lot more advisors have given up commissions, and instead they charge fees. And typically what that involves is they charge, say, about 1% of your portfolio's value annually in order to manage your portfolio and provide you with a financial plan and an ongoing relationship.
So it's not piecemeal charges like a commission would be. It's one charge per year sometimes?
It's one unified charge, and they will justify that charge by saying they provide a number of services, including financial planning, which is important for people.
Why do consumer advocates support the fee-based financial planning?
There's a feeling among both regulators and consumer advocates that the fee-based financial planning better aligns the economic interests, the financial interests of the advisor with the client. So, for example, if I'm your advisor and I'm charging you 1% of your portfolio, I get paid more when your portfolio does well and goes up. So, you know, if I'm making... good investment decisions, then that's going to benefit both you and me in tandem. With the commissions, the incentive is to sell you products, whether you actually need them, whether they're actually in your best interest or not.
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