Friday, October 9, 2015
Are you a Reverse Churning Victim?
You've probably heard about the fee-based financial advisory model-and "broker" being relegated to dirty-word status -but do you know about reverse churning? You should, before you opt for the fee-based model simply because it's becoming commonplace .Dealers love it because of the steady cash flow it provides and simplified cost reporting. But is it suitable for you?
The entire concept of fee-based accounts was introduced in the mid nineties to try and resolve the conflict of interest related to commission- based accounts. The simple explanation was that in an effort to reduce account churning issues and minimize regulator attention, the investment industry started to request that brokers open fee-based accounts. As a result of the success, many of the brokerage firms encouraged their advisers to open more of these types of accounts.
The idea behind fee-based accounts is that you are paying an ongoing fee in lieu of brokerage commissions as compensation to your financial advisor. It's typically based on a percentage of the value of your account and recalculated periodically to account for changes in the value of assets. While a fee-based account is perceived as some sort of advisory promised land of fairness, it isn't for everyone .When assets are placed into a fee-based account just for the sake of the advisor collecting the fee, with little or no ongoing advice, service and/or trading, it's called reverse churning.
Sometimes an old-fashioned brokerage account could make more sense for you. If you have an account that is inactive or just sitting on investments with very little chance of being bought or sold, then a fee-based account could actually be harmful to you. You would be in the detrimental position of paying an extra expense for nothing, making your account an unnecessarily expensive financial proposition. So while "broker" has become a dirty word these days, the reality is that, depending on the circumstances, a brokerage relationship could be a better choice for you.
In particular , be sure to check that if you own mutual funds you are not being sold a series that pays a trailer commission to the dealer. That would be double dipping. You should be sold the F Series of the fund with a lower MER due the trailer component having been stripped out.
In deciding which type of account is better for you-fee-based, brokerage or possibly both-you and your investment advisor will need to determine the level of ongoing service advice and investment management that you desire in order to make the most appropriate choice.
NOTE: Some dealers may not offer a choice of account.You may be asked to transfer to another dealer.Others may impose a minimum annual amount for commissions.