J. H. White – Financial Services LLC

Consumers should be fully aware how their advisor is compensated. The method of compensation, its disclosure to the client, and whether it serves the client’s best interest are factors that should be considered prior to entering into an advisor-client relationship.

Generally financial advisors operate under one of three basic compensation structures:

Commission-Only Advisors earn their income by selling financial products such as insurance or mutual funds, or may also earn a fee for trades that they execute.

Fee-Only Advisors earn their income by charging fees. Some common methods include an hourly rate, an annual or retainer fee or as a percentage of investments under management.

Fee-Based Advisors earn their income using a combination of fees and commissions.

Common Mutual Fund Investment Terms:

Expense Ratio: The expense ratio is the percentage of the total fund assets that is used to cover expenses. These include management fees, which are paid to the fund manager, and operating expenses.

12b-1 Fees: These are additional marketing and distribution fees that are added to a fund. These are included in the calculation of expense ratio and sometimes called a “hidden load.” Often, a portion of these fees is used to compensate financial advisors, so this is an additional expense you may not be aware of.

Loads: A “load” is another term for a sales charge. Loads can be assessed to you in several different ways through your purchase of either an A, B, C class shares of a particular mutual fund.

A class shares: If you buy an A class share there is an up-front sales charge (front end load) of typically 5%, but can be as high as 8%. You may also be assessed an annual 12b-1 fee.

B class shares: B class shares do not have an up-front charge, but require you to own the fund for a certain period of time, typically 5 to 7 years. If you wish to sell the fund before then, you will pay a sales charge (back end load or deferred sales load) at that time. B class shares also typically have a higher annual 12b-1 fee than A class shares that lasts until the back end sales charge period ends. B class shares often convert to A class shares after the back end sales charge period ends.

C class shares: C class (level load) shares usually have either a reduced or no up front or back end sales charge, but usually have a higher annual 12b-1 fee that continues for as long as you hold the fund.

Institutional class shares: Institutional or “I” class shares have no front or back end sales charges and often feature lower annual fees than other classes of shares. Unfortunately these shares often are available only to investors who can commit a substantial amount of money to that fund. Your Financial Advisor may be able to provide you with access to these shares, at a lower contribution level, through their relationship with the firm where they custody client assets. We do provide our clients with access to Institutional shares, when available, through our institutional relationship with TD Ameritrade, who is our broker dealer.

Exchange Traded Funds (ETF’s): ETF’s, while not a share class of a traditional mutual fund, is a security that tracks an index, commodity, or collection of assets. It is like a mutual fund in many ways, but differs from a mutual fund in that it trades on the equity market throughout the day, much like a stock. On average, ETF’s have lower annual fees than mutual funds. You will pay a transaction fee, like a stock, to purchase an ETF.

For more information on mutual funds fees and expenses check out the Investment Company Institute website at: http://www.icifactbook.org/fb_sec5.html

At J.H. White Financial Services, LLC

We use “no-load” mutual funds and exchange traded funds. Any transaction fee to purchase an investment that we recommend to our clients goes only to our custodian, TD Ameritrade. We do not rely on sales charges or transaction fees for our compensation. This allows us to remain objective and select investments that are in the best interest of fulfilling your personal financial goals. There are many advisors who offer their services to you for “free”, but are really being compensated in a way that is unclear to you and this form of compensation may be detrimental your financial goals.

The Fiduciary Difference

Federal and state law requires that Registered Investment Advisors are held to a Fiduciary Standard. This law requires that an advisor act solely in the best interest of the client, even if that interest is in conflict with the advisor’s financial interest. Investment Advisors must disclose any conflict, or potential conflict, to the client prior to and throughout a business engagement. Investment Advisors must adopt a Code of Ethics and fully disclose how they are compensated.

Most people ask, “Don’t all financial advisors have to do this?” Unfortunately, the answer is, “no, not even close,” only a small proportion of “financial advisors” are federally or state-registered Investment Advisors. Most so-called financial advisors are considered “Broker-Dealers” by the United States Securities and Exchange Commission (SEC). They are held to a lower standard of diligence on behalf of their clients. In fact, they are required by federal law to act in the best interest of their employer, not in the best interest of their clients.

Because broker-dealers are not necessarily acting in your best interest, the SEC requires them to add the following disclosure to your client agreement. Read this disclosure, and decide if this is the type of relationship you want to dictate your financial security:

“Your account is a brokerage account and not an advisory account. Our interests may not always be the same as yours. Please ask us questions to make sure you understand your rights and our obligations to you, including the extent of our obligations to disclose conflicts of interest and to act in your best interest. We are paid both by you and, sometimes, by people who compensate us based on what you buy. Therefore, our profits, and our salespersons’ compensation, may vary by product and over time.”

If this disclaimer appears in agreements you are signing, you should ask questions of your advisor. Obtain complete disclosure about how he or she is compensated, and where his or her loyalties lie. Then decide if the relationship is in your best interest.