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Do full fee advisors churn $'s for their acct. with every buy and/or sell for the client?

catch22catch22
in Off-Topic
Okay, never used an advisor; so the question.

So, person "A" has $100,000 with their advisor. To keep things simple..........

The initial account set is 50% in equity fund "x" and 50% in bond fund "x". Six months later for whatever reason, 25% of either fund is sold and another fund is purchased.
Assume this pattern continues.

1. an initial fee to start the account with the first 2 funds puchases (CORRECT, YES?)

2. MIGHT advisor fees be generated again with subsequent purchases (in this example, every 6 months) ?

I know this is a bit of a wide open question, as advisor fees may function in varied fashions.

Have you a general guide line for fees with the above example?

NOTE: this question arises after viewing an 85 year old widow's account with several years of transactions. I did not consider most of the investment choices appropriate for her age and financial condition. But, the main item I noted was way too many transactions that had nothing to do with improving the quality of investments in her account.

Thank you.

Catch

Comments

  • fundalarmfundalarm
    it depends.. if advisor charges a fixed % of assets annually, then any fund rebalancing or replacement is included (sans the underlying fund's fee of course) . if invested funds are load funds, then the load is paid once, initially. any exchange of the fund into the same family would not incur additional load.

    if advisor is attached to a broker dealer and is compensated via commissioned products, then account churning might be a problem (not for mutual funds though, more for the exchange traded products). again, need to understand how relationship is set up.
  • Samuel
    As fundalarm noted, this is mostly a problem in commission-based accounts. If the advisor is simply swapping funds wholesale every six months and collecting commissions each time, the client may be able to go after him for churning.

    Unfortunately, the elderly are often victimized by unscrupulous salesmen masquerading as advisors.
  • BobCBobC
    Fee-only advisors are paid one of two ways: a percentage of assets managed or retainer fee. Either way, adding or subtracting the number of funds has no impact on the fee paid by the investor. Since there are no commissions in these accounts, that is also off the table. There may be transaction charges for the trades, depending on whether funds are part of an NTF platform or not. But assuming a fund is held for a year or so, the transaction charge will pay off with the lower expenses for institutional class shares.

    Of course, all this is thrown out where there are commissions paid on purchases. Unfortunately this is not addressed by the DOL fiduciary standards, except in the case of employee retirement accounts and rollovers of those accounts. And even then, the interpretation of the new regs is all over the place.
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