My first experience with an advisor wasn’t good. In early 2007, I was an academic preoccupied with geopolitics, with little knowledge of the markets and even less of the vehicles people like me—the most retail of retail clients—would use to access them.

I walked into my branch and told the teller I wanted to invest $1,000. He herded me to a waiting area and, eventually, I got an appointment with the resident advisor.

She did a terrible job.

We discussed risk for a few minutes. I explained I’m normally conservative with my finances, but on a whim I felt bold, excited by the prospect of making money with no effort. I put it all in a U.S. equity fund.

When it tanked, I panicked and ran for the exit.

I didn’t know the fund’s fee structure, but that soon changed. It had a DSC schedule, and I got clobbered. I’m sure the hefty stack of documents I received at the outset explained fees in excruciating detail. But who reads fine print?

While I’m not blameless, that advisor gets an F (even by pre-CRM2 standards). But if you think I want a ban on embedded commissions and DSCs, you’re mistaken.

Read: Is advisor fee deductibility really beneficial?

In a free society, regulators have no business nudging consumers this way or that. Their job is to enable people to make informed choices.

Take someone who has $70,000 to invest, and has neither the time nor inclination to figure out which robo-portfolio suits him. Fee-based is out of reach, so commission structures are what give him access to advice.

And with CRM2, he’ll know how much he’s paying, how his advisor’s paid, what services are provided, and what his costs will be if he bails. If commissions—which usually cover ongoing services beyond asset allocation—are as offensive to him as some industry observers opine they should be, let that be his motivation to learn how to DIY.

Regulators are due to revisit the issue of embedded commissions early next year, but their efforts are better directed elsewhere. More important than how advisors are paid is what clients are paying for. Recent research suggests it may not be what they think.

Read: Top tips from portfolio managers in 2014

By now, you’ve become familiar with active share. The metric shows how far a fund manager’s holdings deviate from the benchmark. The researchers who devised it found most managers who claim to be active are actually closet indexers, which means they charge active-level fees for what is little more than an index product.

Regulators shouldn’t dictate who charges what for which product. But, it’s completely appropriate for them to require that manufacturers add active share scores to Fund Facts. Devising a comparable measure for active bond funds should be a longer-term goal.

Active share won’t tell clients how a fund will perform, but it will warn them about managers who charge more than they’re worth.

Maybe a little sunlight will spur more managers to live up to their billing.

Read: How to answer common fee questions

Dean DiSpalatro is senior editor of Advisor Group.

Originally published in Advisor's Edge

Add a comment

Have your say on this topic! Comments are moderated and may be edited or removed by
site admin as per our Comment Policy. Thanks!

See all comments Recent Comments


Trail fees ensure that the advisor has a vested interest in protecting the client from undue markets conditions based on the best information available. If the assets go down so does their pay. Complete and informed disclosure, up front is the key. No surprises should be every advisor’s mission statement.

Friday, Feb 20, 2015 at 2:18 pm Reply


Agreed. As a matter of fact we shouldn’t have any laws at all because we should all be ethical enough to not steal or murder each other.

Active Share IS needed on Fund Facts. Turnover Ratio IS needed on Fund Facts. Calendar performance relative to underlying benchmark and category peers IS needed on Fund Facts.

Friday, Feb 6, 2015 at 11:12 am Reply


Actually Steven in this case you (especially) want to make sure there is some laws. Murder is the example you used not me. However, laws that get into the minutia of details surrounding dislosure of every aspect of choice regarding (again in this instance) fees, attepts to legislate morality and that cannot be done. Buyer beware is all about that. It is simply telling the purchaser to do their own due dilligence. If your first dealing with an advisor makes you question thier integrity, you’ve made a mistake. Don’t walk out to seek a new advisor…!!!!

Friday, Feb 13, 2015 at 4:53 pm


It’s true that many people have and will be caught unaware of fees either because the advisor skipped over them,the client didn’t comprehend or didn’t read the documents. However, it is the advisors responsibility to make the client FULLY aware of the fees and let the client decide which is the best choice for them; back end,front end, low load or fee for service. I also believe it is the advisors responsibility to put the clieny’s money into suitable investments. I wouldn’t call placing all of the money in one investment prudent even if it is only $1,000.00; it’s still the clients $1,000.00 and it is the advisor’s duty to protect it as best they can. Sometimes you just have to protect the client from themselves or it will come back to bite you. An advisor shouldn’t need a regulation nor a document to force them to do what is right and always has been right.

Wane MacDow

Tuesday, Oct 14, 2014 at 2:48 pm Reply


If 1000 bucks into a single mutual fund isn’t prudent, I don’t want to know what you would do with it….but I have a suggestion…

Friday, Feb 13, 2015 at 4:47 pm