NEW YORK -- When you shop for consumer products, you automatically look at the price tag. You wouldn't buy without first knowing what things cost.
Yet the very same people who are tigers at Wal-Mart may turn into mice when shopping for financial products. On a planner's advice, you might put your life savings into five or six different types of investments -- and never discover what you've paid.
Some planners do list all their fees and commissions; some others will list them if you ask. But many deflect the question, give you only a partial answer or simply blow smoke in your eyes.
In April, Massachusetts became the first state to require that, before making a sale, investment advisers disclose the specific sums they will earn. The law covers fees, commissions, markups on bond prices, and other forms of compensation, such as bonuses for selling a particular product. The law doesn't cover stockbrokers, alas; only planners who advise on investments. But it's a valuable first step. The state also imposed minimum-competence standards on new financial planners.
When you don't get full disclosure, you often pay far more than you realize. For example, take Robert and Jean S. of Cincinnati, who are both in their mid-50s (I've withheld their last name, by request). Robert felt forced to accept an early retirement offer and needs a plan for his investments. They have about $170,000 in stocks and in Robert's company 401(k) plan. But Robert will need to find a job to maintain his current standard of living.
The planner advised them to sell half their large holdings in a single, inherited stock. She'd put the proceeds into a bond fund, a tax-deferred annuity and some life insurance for Jean. She picked three stock funds for the money due from Robert's 401 (k). All of the products carried sales commissions, because that's how this planner earned her living. But -- as is typical -- nowhere was that cost disclosed.
The couple sought a second opinion from a planner who takes no sales commissions but instead charges fees for his time. He, too, suggested that they diversify out of the inherited stock. But he advised a mix of no-load (no sales charge) mutual funds. For now, he rejected the annuity; it locks up money that the couple might need while Robert looks for other work. And he doubts that Jean needs life insurance. He thinks Robert could manage on what he has if Jean died unexpectedly.
A third planner, Mary Malgoire of Malgoire Drucker Inc. in Bethesda, Md., who also charges only fees, priced both proposals for me.
The commission planner would have earned $8,000 to $12,000 -- mainly from the stock funds and the life insurance. Yet her services felt nearly free, because commissions aren't paid in cash. They're largely subtracted from the money that the couple planned to invest, which would shrink their long-term assets but not their visible bank account. The only cost they could see was the $150 they paid upfront, for the initial meeting and the recommendations.
The fee-only planner, by contrast, would have charged a maximum of $2,000 to develop a full plan and execute it. His fees were disclosed upfront. But although he cost substantially less than the other planner did, his services felt more expensive because the couple would have paid in cash.
The couple are still deciding what to do. It might have helped them to know how much the commission-paid planner really would have cost. Had her commissions been itemized, they might also have asked more questions about whether Jean needed life insurance.
On paper, 28 states require some sort of commission disclosure, but these laws may not be a lot of help. In California, for example, the planner's brochure simply has to mention that he or she receives commissions without specifying the amount, a representative for the California Department of Corporations told my associate, Amy Eskind.
The Securities and Exchange Commission has been batting around the idea of commission disclosure, but so far no proposal is on the table. A bill in the House of Representatives would require disclosure, but the new political majority may not be interested in new rules for business. In this case, that would be a pity. Any free-marketer knows that markets work best when consumers know the price.
Jane Bryant Quinn is a syndicated columnist. Write to her at: Newsweek, 444 Madison Ave., 18th Floor, New York, N.Y., 10022.