Lynn O'Shaughnessy

What a lot of people don't realize is that they will pay; they just won't know it. You see, the commissioned guy is only going to hook you up with mutual funds, annuities and other products that trigger a sales charge and/or ongoing higher expenses. And that's only fair, because he needs to earn a living. By restricting you to commissioned funds, however, you won't have an opportunity to invest in some excellent low-cost options.

A commissioned adviser, for instance, isn't going to sell you Vanguard index funds because these inexpensive mutual funds don't spin off commissions. What's more, some of these folks are going to be unable to resist signing you up for dubious investments that generate megacommissions that might allow them to buy, with just one fortunate sale, a mighty fine plasma TV. It's the siren call of fat commissions that I'd suggest prompts the sales of expensive and inappropriate equity indexed annuities and variable annuities.

If you choose a commissioned adviser, you need to ask for specifics on how he is paid and the amount of the compensation. There are good funds that charge sales commissions, but you need to know the cost of adding them to your portfolio. Ask what share class of mutual funds that he or she is recommending and why. With commissioned mutual funds, so-called A shares are almost always the preferable route.

When investors are clueless about the compensation, they are more likely to continue paying long after the point where they would normally kick up a fuss. The way some commissioned mutual funds are structured, investors will pay continually higher charges to compensate a broker or adviser even if he is long gone. I liken this to paying a taxicab driver many years after he dropped you off at the curb.

- Fee-based advisers. I can't help but think that the folks that came up with the term "fee-based" were trying to befuddle investors. It's far too easy for people to confuse "fee-based" with "fee-only." The major brokerage firms embraced fee-based services a while ago in the hopes of keeping clients from defecting to discount brokerage firms, where they can take advantage of low fees. With fee-based accounts, brokers can charge customers a flat fee or a figure based on the amount of cash in their account.

Too many investors, however, are being gouged by fee-based accounts. And that's what Eliot Spitzer, in his final salvo as New York attorney general, alleged when he filed a civil suit in December against UBS Financial Services, a major Wall Street player, for putting thousands of clients in fee-based accounts when regular commissioned-based accounts that charge per trade would have been far cheaper.

In the suit, Spitzer, who is now New York's governor, cited all sorts of examples. An account of a woman in her 90s, for instance, was allegedly charged $35,000 during a two-year period even though only four trades were executed. UBS denies all the allegations.

- Fee-only advisers. More financial professionals haven't embraced the fee-only model because, at least initially, it's a tougher way to make a living. People unfortunately balk at writing a check for advice, even though they can ultimately pay far more if they don't choose the direct route.

I admire fee-only veterans because they clearly have commanded enough respect and word-of-mouth referrals to build up a sizable practice. When you rely upon a fee-only adviser, you can happily eliminate a humongous conflict of interest. You don't have to worry about your financial point person recommending something because he's going to capture a fatter commission. The fee-only adviser works exclusively for you.

These advisers will typically examine your entire financial status, from your retirement dreams to your cash flow, and develop an investment plan tailored to your time horizon, risk tolerance and goals. Fee-only clients typically pay the adviser a percentage of their assets annually to manage their money.

Some investors, however, don't need this constant hand-holding or find it too expensive. For those folks, it is possible to find fee-only planners who charge by the hour. Next week, I will explain how you can find these professionals and what questions to ask when you start shopping for advice.

Lynn O'Shaughnessy

Lynn O'Shaughnessy is the author of Retirement Bible.

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