Money Magazine
Money Magazine's undercover financial planner

Planner's promise too good to be true

Your financial planner may not be outright lying. But be skeptical of pledges to cut costs.

By The Mole, Money Magazine's undercover financial planner

(Money Magazine) -- Question: My financial planner has told me if he invests over $1 million for me in mutual funds, the fund companies will pay him a direct commission and I will not have to pay sales charges. Sounds like a good deal. Is my planner telling me the whole story?

The Mole's Answer: You are right to question whether your planner is telling you the whole story, and I'd bet pretty heavily that he's not. Unless your planner's firm is a charitable institution, there has got to be something in it for him.

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The Mole is a certified financial planner and certified public accountant who, in the interest of fairness, thinks you should know what goes on behind the scenes. Have a topic you'd like him to write about? E-mail themole@moneymail.com.
Sample charges on A shares
Less than $25,000 5%
$25,000 - $49,999 4.25%
$50,000 - $99,999 3.75%
$100,000 - $249,999 3.25%
$250,000 - $499,999 2.75%
$500,000 - $999,999 2%
$1 million or more 0%
Source:The Financial Industry Regulatory Authority (FINRA)

It appears that you are buying mutual funds with a sales load. Loaded mutual fund families charge fees in various ways, depending upon the share class sold to you.

There are three main classes of shares.

  • A shares have front-end sales charges and generally have lower ongoing fees.
  • B shares have no front-end sales charges, but have the highest ongoing annual charges. The fund also charges you a back-end load when you sell before a certain number of years, known as the contingent deferred sales charge.
  • C shares that have no front-end sales charges and lower back-end charges for only one year. Their annual fees are usually somewhere in between the A and the B share costs.

If you're noticing a pattern here, it's that the mutual fund company will make its money one way or another.

Now, if your planner is saying that you will not have to pay any sales charges for over a million bucks, he is probably correct here and talking about A shares. Each fund family can give price breaks when you buy a boatload of their funds. For example, The Financial Industry Regulatory Authority (FINRA Web site lists the charges you can expect (see table below right).

But getting the sales load waived is a far cry from avoiding any fees related to these expenses.

Your funds will have annual expenses, and there will likely be 12b-1 fees, meant to cover marketing and distribution. Like sales charges, 12b-1 fees can be used to compensate a broker or other investment professional.

Just because you are paying out of your fund balance rather than writing a check doesn't mean you've dodged the bullet on those fees.

My advice is to send your advisor an e-mail that says, "I just want to confirm my understanding that I will not have to pay any fees related to these investments. Could you kindly just ping me back a confirmation of this understanding?"

As I've written before (see 'Get it in Writing,') you are far more likely to get the truth from advisors if they know it is documented.

When it comes to investing, or anything else for that matter, if it looks too good to be true, it usually is not the whole truth. It's important that we investors understand the total fees we are paying for our investments, rather than just the portion going to our advisors. Top of page

Ask Money Magazine's undercover financial planner a question. Send e-mails to: themole@moneymail.com.

Retirement savings doomed by high fees

More from the Mole in Money Magazine:
Financial advice: Get it in writing: When making investment decisions, believe what your adviser writes, not what he speaks.

The wrong kind of advice: When your planner steers you toward expensive investments, stop and ask the right questions.

Why 'trust me' makes me nervous: Planners try to make money for clients, but also for themselves. Anyone who says otherwise is trouble.

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.