Scott Burns: "What 'Financial Adviser' Means 95 Percent of the Time"

Scott Burns, whose site is here, is one of my favorite writers for one main reason--he can explain complicated subject matter to laypeople.

In this article, Burns explores the term "Financial Advisor." He writes that only about 5% of the people using this title have a fiduciary responsibility to the clients. In other words, this 5% minority of financial advisors has a legal obligation to act in the best interests of their clients. Conversely, the 95% majority of FA's are held to a much lower standard--the suitability standard. Unfortunately, many investors assume that the term "Financial Advisor" means that their FA is looking out for them. In reality, many are only trying to maximize their commissions, not investor returns.

Later, Burns states that FA's cost at least 2% (200 basis points) on averages. This is not an insignificant percentage. If you are earning 10% on your investment, that represents 20% of your investment earings (2 of 10 = 20%). If you are earning less, these expenses are even more costly. Burns also cites a Harvard Business study suggesting that mutuals sold by intermediaries (brokers, FA's, etc.) between 1996 to 2002 had an average annual return of 2.9% while those bought directly had an average annual return of 6.6%. (Read it for yourself here; be sure to check the figures on page 50 of this 61 page PDF file) So much for expert advice! I thought FA's and brokers were supposed to increase my return...YEAH RIGHT!

I wonder what John Bogle would say about this. Actually, I already know what he would say.