False Fee-Only Claims Found

Three out of five financial planners who claim to offer conflict-free, "fee-only" advice are lying and actually earning commissions or other financial rewards from the products they sell, according to a study released Thursday.

Consumer Federation of America and the National Assn. of Personal Financial Advisors--the trade group for fee-only planners--sent out "mystery shoppers" to nearly 300 financial planners--every planner listed in the Washington, D.C., area. Although mystery shoppers didn't visit other geographic areas, survey sponsors believe the results indicate a nationwide problem.

Misrepresentations were prevalent. Although two out of three planners contacted said they offered fee-only services, these shoppers found that only 14%--about one in seven--were truly fee-only planners. The rest earned commissions or fees on some or all of the products they sold.

"These troubling findings confirm what has been suspected for a long time, that many financial planners are reacting to growing consumer wariness about conflicts of interest by obscuring the commission-based source of much of their income," said Barbara Roper, director of investor protection at the Consumer Federation of America. "Consumers who want a financial planner who is truly free of all commission-related conflicts of interest can't simply rely on their planner's word. They have to know how to ask the right questions and where to look for answers."

Financial planners are required to fill out detailed disclosure statements--ADV forms--for the Securities and Exchange Commission. The second part of these forms discloses how advisors are paid.

Theoretically, advisors who earn commissions and fees for selling products are supposed to check a box under question 1C on this form. But many don't, according to the study. Instead, information about their commission practices was buried in the fine print of the form's Schedule F.

Among the abuses discovered by the mystery shoppers: A Washington-area financial planner claims in customer brochures, "We are compensated only by fees and do not receive commissions." However, according to the planner's ADV form, he does earn commissions when he sells customers certain types of insurance.

A Maryland planning firm that promoted the idea that "real advisors are not salespeople" was tightly linked with a broker/dealer and an insurance agency that handled all the financial transactions for its clients, according to CFA.

There is nothing inherently wrong with a planner earning commissions on products that he or she sells. In fact, commissions can subsidize the planner's business and allow them to charge lower fees to customers who otherwise might not be able to afford the often steep fees charged for valuable financial advice.

"We support the belief that the consumer can be served by a variety of compensation methods, as long as the client is completely clear on what the compensation methods are," says Brigid O'Connor, spokeswoman for the Institute of Financial Planners, a Denver-based group representing both fee-only and commission-based financial advisors. "We are not familiar with the [survey], but any financial planner can lie. That's why it is important to work with someone who adheres to a code of conduct, such as certified financial planners."

Nonetheless, O'Connor says all consumers should be sure to investigate compensation methods before they follow a planner's advice.

In conjunction with their survey, CFA and the National Institute for Consumer Education are offering a brochure titled "Don't Get Burned by the Financial Planner Name Game," which spells out where conflicts of interest exist and describes where to look for information about a planner's background and compensation. To get a free copy of the booklet, consumers may call the National Assn. of Personal Financial Advisors at (888) FEE-ONLY. In addition, NAPFA can provide a list of local fee-only financial planners to consumers either over the phone or via the World Wide Web. NAPFA's Web address is http://www.feeonly.org


Mutual fund tax advice: Do you invest through mutual funds? If so, you're likely to have some complex issues to deal with at tax time.

Normally, you only have to report a taxable gain on an investment when you sell it at a profit or when you receive income from it. Mutual funds, however, are set up to pass through taxable gains and losses annually, but many investors roll these gains back into fund shares through automatic dividend reinvestment plans.

In addition, part of the gains that are being passed through are long-term capital gains, which are taxed at a preferential rate, while other gains are short-term profits and income, which are taxed at the fund owner's ordinary income tax rates.

Many fund companies, well aware that their structure leads to a variety of tax complications, give out free booklets at this time of year to shareholders and others who ask.

If you would like a booklet and your fund company doesn't produce one, Vanguard Group is willing to share theirs--"Taxes and Mutual Funds"--with any consumer who wants one. The booklet explains how to calculate and report your taxable fund gains, examines how taxes affect your long-term returns and discusses different approaches investors can use to minimize federal tax. For a free copy, call (800) 523-7721 or download it from Vanguard's Web site at http://www.vanguard.com


Consumer Checklist is a weekly feature that covers a range of pocketbook issues of interest to Californians. To contribute information about new legislation, products, services or surveys, write to Kathy M. Kristof, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053; or e-mail kathy.kristof@latimes.com.

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