Want to know what gets up my nose? Double-dipping
Written by Ben Bennett on March 09, 2015.
No, I’m not talking about sticking a half-eaten tortilla chip back in the communal salsa bowl. That just spreads germs which may indirectly end up in my nose.
Double-dipping in the financial world describes the unethical practice of charging clients a fee for advice then also taking commission on the funds you select for them. This practice is so endemic in the offshore industry that I have seen advisers justify it on the basis that it is the norm amongst their peers, therefore must be acceptable!
The purpose of a ‘wrap’ product or portfolio bond is to allow you to buy funds and stocks at favourable terms and reduced costs, e.g. without bid/offer spreads. Despite, this I regularly meet clients who have been advised to buy full commission classes of funds through their wrap product. To hide the fact that the client is paying a second layer of unnecessary charges the fund management industry obligingly came up with the “back-end charged” fund so it is not immediately apparent to the client that the adviser is getting paid twice.
As if this wasn’t enough, many of these advisers also charge their clients a portfolio management fee for selecting funds and then pick funds that pay them (the adviser, not the client) the highest commission! Very often this is on-top of the trail fees that many funds pay to the introducing adviser.
Add these fees together and it can very easily mean that 12% to 15% of your investment has been paid out in commissions in the first year. With some active switching or the liberal use of questionable ‘structured notes’, such as auto-calls, the commissions can easily exceed 25% of the amount you invested in just a few years.
Financial advisers need to earn a living like any other profession but I firmly believe they should be paid for giving financial advice and not for selecting funds that pay them soft commissions. Most financial planners are not qualified wealth managers anyway so not only does appointing them to select your funds produce a conflict of interests but chances are that they will also do a pretty lousy job of it.
To ensure that you are getting the most out of your investments make sure that an independent, qualified investment professional is managing your portfolio and check that they are not taking commissions on the funds they buy on your behalf. Otherwise there is a clear conflict of interests and your investments will disappear as quickly as that double-dipped salsa.