Most investors have absolutely no idea how much money advisors earn from their investments. Theres certainly nothing wrong with advisors being compensated for their work. The problem arises when there is a lack of transparency in the advisor/client relationship. You should know exactly how much you are paying, for the investments and services you receive. Only then can you make an informed decision on whether or not you are receiving a good value for your money.



I cant tell you how many times people have told me, Oh, I didnt pay my advisor anything. The insurance company paid him, not me. Or Ill hear, Commission? What commission? I just bought a muni bond, not a stock. The problem with commissions is that you dont always see them. But trust me, there is no such thing as a free lunch. You are paying something, whether you realize it or not.

On some investments, the commission is quite obvious. On others, you have to dig a little deeper to uncover the charge. In an effort to level the playing field, Im going to reveal the typical commissions paid on a variety of investments. Be aware that these commissions can vary between different providers.

Lets start with one of the most popular investments; mutual funds. No load funds charge no up front commission, but do have a yearly management fee that can range from .25% to 2% per year. Load mutual funds, the kind you would buy from a commission-based advisor, can top out at 5.75% for equity funds, and 4.5% for bond funds. But breakpoints can greatly decrease the commission you pay. So the more you invest, the less commission you pay.

The commission paid on individual stocks can be as low as $10 a trade. Because there is so much competition in both stock trading and mutual funds, commissions on both are dramatically less than they used to be.

The commission on individual bonds is much harder to see, because it is built into the price. Commissions increase with the bonds maturity length, usually topping out around 3%. But the only way youll know for sure is to try to get a price for the same bond from a discount house.

Now well get into the higher commission products where the fees are especially tricky for the investor to uncover. For example, variable annuities typically pay the broker between 6% and 7%, yet most investors think theyre not paying anything when they buy them. If they ask their advisor about it, theyre often told that the insurance company pays the advisor, not the investor. But its amazing how the surrender penalty amount closely resembles the amount the agent received in commission.

Investors may not realize that no-load annuities are available. These plain vanilla products lack some of the flashy features of their high-cost cousins, but they deliver the same basic result at a dramatically lower cost.

Commissions are considerably higher for equity-indexed annuities. Rates of 10% or more are common, with some charging less. But these are by far the highest commissions charged in the financial services industry. Is it any wonder that these are promoted so heavily?

One of the main problems with commissions on insurance products is that the insurance companies realize their real client is the agent, not the investor. If they dont pay a high enough commission, an agent will simply sell an annuity from another company. And since the commission isnt clearly understood by the investor, sky-high commissions are the result.

Agents will argue that the additional features of these annuities are worth the money paid. But I disagree. If it were such a good deal, then why not use these high fees as a selling point, instead of hiding them in pages of fine print?

Heres the commission the advisor receives if you move a $500,000 IRA or 401k into each product: Mutual Fund - $12,500, Individual long-term bond - $15,000, Variable annuity - $30,000 and $50,000 for an equity-indexed annuity. How many months/years did it take you to save the amount the advisor will be getting?

I feel there is a conflict of interest when these details arent disclosed. How can you make an informed decision unless you know what the advisor is making? How can you compare various options? Frankly, you cant.