Comparing Costs of Investment Advise is Harder Than You Think

These days all of us have to watch our pennies. Whether you are buying gasoline or grand pianos smart consumers comparison shop for price. But when you go shopping for investment advice comparing costs isn’t so easy. It can be like comparing apples to oranges while the oranges are in a burlap bag,

TRADITIONAL STOCK BROKERS

When it comes to investment advice, most people probably think of traditional stock brokers first. Full Service brokers are considered your agent in buying and selling securities. The “bid-ask spread” means that the person buying the security pays a bit more than the person selling that security; the difference goes to the folks who maintain trading systems. In addition, brokers charge fees for each trade, whether buying or selling. There also may be an array of other fees for maintaining your account, even for fully reporting to you the status of investments. His or her income thus rises by maximizing the number of trades he or she performs for you. But the broker might also be paid incentives or commissions for promoting favored securities.

REGISTERED INVESTMENT ADVISORS

A Registered Investment Advisors (RIA) like Oaktree Capital has a fiduciary responsibility only to the client. We accept no commissions on or fees from any of the products or investments they recommend. Our only income is derived from fees for service paid by the customer. That means their only interest is in maximizing the client’s return on investment with in the parameters of that clients risk profile.

ADVISORS AFFILIATED WITH BROKERAGES

In recent years the Securities and Exchange Commission (SEC) has allowed brokerage firms to offer fee-based accounts similar to those offered by RIA’s if they proximately disclose account structures in which commissions or fees are paid to the broker ad the affilaited brokerage company not only by the client, but by the issuers of the product or security. An individual broker working as an agent of a brokerage firm can provide financial advice to clients and, like RIA, charge fees for maintaining and managing an account. And they can also collect fees and commissions from the instruments they are selling. They don’t have to disclose what or how much those other fees and commissions are. Some of these fees and commissions are called tails—fees paid continuously from the securities held by the client. Some are charged to you when you first purchase the product, and some are chraged when you sell. Since the broker doesn't know how long you will hold the security, he doesn't now that is tails will amount to, and when you will be paying a fee on the sale. Consequently, in this type of an account even the agent may not fully be able to tell you what those will be.

Furthermore, since these brokers or agents have no exclusive “fiduciary responsibility” to the client they may also benefit from pushing products that may not be in the client’s best interest. Because they are getting income from two sides of the same transaction, the fees to the customer might, at first glance, appear smaller than those charged by an RIA. But beware of this “bargain.” Because of the broker’s lack of a “fiduciary responsibility” to you, and the consequent presence of under-performing assets in your account, your brokerage-company account may cost you much more than the clearly-identified fees you may to an RIA.

LOOK FOR BROKER DISCLOSURE STATEMENT

How can you distinguish whether you are getting our apples or their oranges? If the person you are working with is functioning fundamentally as an agent of a brokerage company, even if your account with this person is called “fee-based” and so might appear to you to be identical to an account with us, the SEC requires that this agent prominently disclose the following in account applications, advertisements and sales materials:


“Your account is a brokerage account and not an advisory account. Our interests may not always be the same as yours. Please ask us questions to make sure you understand your rights and our obligations to you, including the extent of our obligations to disclose conflicts of interest and to act in your best interest. We are paid both by you and, sometimes, by people who compensate us based on what you buy. Therefore our profits and our salesperson’s compensation may vary by product and over time.”*

Brokerage also may not offer Discretionary accounts, except in accounts regulated as investment advisory accounts or Financial planning services, except in accounts regulated as investment advisory accounts.*

So go ahead, go price shopping. But if you notice that "prominent" disclaimer, ask a lot of questions. You will be glad you did.

Then come back and talk to us. See if our apple doesn’t shine just a little bit more than it did before you had full informantion.

*Cited by TD Ameritrade Institutional in What You Need to Know About Financial Advice, 2006.

Also of interest see the SEC publication
Investment Advisers: What You Need to Know Before Choosing One.

And check out the Oaktree handy Glossary of financial terms.