Fee-only financial advisors talk about commission-based advisors’ hidden fees. But where are those hidden fees hiding?

In 2011, the SEC required a new disclosure form called the ADV Part 2, an addition to the previous ADV Part 1. Both forms are public record and can be helpful in determining if a firm is a fee-only financial planning firm. Among other things, this form requires firms to disclose how they are paid for their services.

Large FINRA commission-based financial firms often have multiple filings making it very difficult to know which record applies to your particular service. Very few consumers actually read the SEC filings for the firms they have engaged. If their clients did read them, commission-based advisors would have a much smaller client base.

The Client Disclosure Brochure for Ameriprise Financial Planning Services‘ (CRD#6363) 2016 ADV Part 2 has a list of hidden fees running from page 13 through page 19. This describes how they get paid. The list is broken down by who pays them and then describes the various types of payments. Here are their subject headings:

Payments from clients

• financial planning and advisory service fees
• sales charges
• periodic fees
• periodic expenses
• interest

Payments from product companies

• mutual fund and 529 plan marketing and sales support payments
• marketing and sales support
• marketing and sales support payments
• full participation firms
• limited participation firms
• mutual fund and exchange traded fund recommended list participation aka the “Starting Point List”
• Investment Research Group as Portfolio Strategist

Other financial relationships

• distribution support relationships
• Columbia Funds
• etc.

Payments from other non-proprietary product companies

• payments from hedge fund offering sponsors
• payments from Unit Investment Trust sponsors
• payments from non-proprietary annuity and insurance companies
• payments from non-traded REIT and non-traded business development company sponsors
• payments from structured product sponsors
• payments from managed futures fund sponsors
• payments from exchange fund sponsors
• payments from private equity offering sponsors
• payments from non-traded closed-end fund sponsors
• payments for referrals to structured settlements agents
• underwriter’s compensation
• transaction charges

It is difficult to comprehend the number of conflicts of interest generated by each of these payments. Ameriprise employees even sued their own company over excessive 401(k) fees.

Each bullet point listed above contains an overwhelming amount of information. For example, Ameriprise’s explanation of how they are paid for “distribution support relationships” reads:

Ameriprise Financial Services also has arrangements with firms for distribution support services. These firms make payments of up to 0.18% on sales and 0.10% on assets to Ameriprise Financial Services for these services, which support the distribution of the fund’s shares and 529 Plans by making them available on one or more of Ameriprise Financial Services platforms, commonly known as “shelf space.” These mutual fund firms do not provide marketing and sales support to Ameriprise financial advisors and do not participate in the mutual fund list (as described in the section above).

Ameriprise Financial Services sells 529 Plans from five firms that neither have wholesaling access to Ameriprise financial advisors nor pay marketing or distribution support. Moreover, plans offered by these firms are available for sale to in-state residents only. Those firms are: American Funds, Ascensus, First National Bank of Omaha, NorthStar Financial and Union Bank & Trust. Certain 529 Plans may pay Ameriprise Financial Services a fee of up to 1% assets for NAV rollovers.

The mutual fund’s distributor or affiliate may also make payments to AEIS for networking and/or omnibus support and other client services and account maintenance activities. See the “Revenue Sources for other Ameriprise Financial, Inc. companies” subsection in the “Client Referrals and Other Compensation” section of this Disclosure Brochure for more information about these payments to AEIS.

Ameriprise Financial Services also provides clients with access to mutual funds offered by other firms through the relationship AEIS has with Charles Schwab & Co., Inc. (“Schwab”), and Schwab’s mutual fund program. Ameriprise Financial Services receives an asset based fee of up to 0.40% per year on some or all of Ameriprise Financial Services clients’ assets managed by participating mutual fund firms.

Ameriprise Financial Services and its affiliates may have other relationships with firms whose mutual funds Ameriprise Financial Services offers. These relationships may include affiliates of firms acting as a sub-adviser to Columbia Management, Columbia Management acting as a sub-adviser to a third party firm, or affiliates of a firm managing an investment portfolio within another Ameriprise Financial Services or affiliated product, such as a RiverSource variable annuity. Firms may use CMIA to manage an underlying investment option in products offered through the Program.

Ameriprise Financial Services has a marketing support agreement with BlackRock Advisors, LLC, and Fidelity with respect to mutual fund positions held by Ameriprise Financial Services customers. BlackRock, Inc. owns more than 5% of the outstanding shares of Ameriprise Financial, Inc. stock.

Ameriprise Financial Services may refer clients to certain third-party lenders for extension of credit secured by assets held in their Ameriprise Financial Services accounts. We will receive compensation from these lenders based on the amount of credit extended to our clients.

Ameriprise Financial Services receives compensation when you open a credit card account with certain financial institutions and for certain transactions in that account. We also receive compensation for promoting these credit cards and are reimbursed for expenses related to rewards programs.

Just the knowledge that “distribution support relationships” refers to plans and funds paying to be featured on Ameriprise’s “shelf space” is enough for me to know that Ameriprise’s clients are not getting what is best for them. Ameriprise has an incentive to sell clients only the plans that pay Ameriprise for the opportunity to be offered to clients.

And just in case you don’t understand how all of these revenue streams can affect your so-called financial advisor’s decision making, Ameriprise makes that clear as well:

Generally, Ameriprise Financial Services receives more revenue for securities or products sold in a fee-based account than for those sold with only a sales charge or commission…

Both Ameriprise Financial Services and individual financial advisors are compensated when clients buy mutual funds through Ameriprise Financial Services. Generally, financial advisors receive a portion of the sales charge and 12b-1 fees paid to the firm in connection with mutual fund purchases for as long as clients own the mutual fund shares. Sales charges and 12b-1 fees vary from mutual fund to mutual fund and from class to class.

We believe that every client deserves a fiduciary standard of care. One of the requirements of a fiduciary standard of care is to eliminate conflicts of interest whenever possible and to avoid any kind of self-dealing.

Our firm, Marotta Wealth Management, also describes the fees that we charge our clients. After describing the fees we are paid directly by clients, our 2016 ADV Part 2 reads:

As fee-only financial planners, we receive no other form of compensation.

We believe this policy helps mitigate the conflict of interests inherent when a firm receives compensation based on the sale of specific securities or investment products. We do not receive any payments or commissions from fund or insurance companies. Our only compensation is from the clients we serve.

Don’t be fooled by a watered down standard of care. Find a fee-only fiduciary with whom you can entrust your financial future.

Photo used here under Flickr Creative Commons.

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