Forbes (June 25, 2014 10:04 am) -- Recently, I gave a presentation to a philanthropic group where I asked this question: “Do you know how much advisors and their firms make from the investments they sell to you?”

Few knew the answer to that question. They didn’t have a clue how much in inside commissions, credits, additional fees and markups they paid for the privilege of working with their investment advisors. Not having a clue, however, doesn’t make them clueless. Investment companies make sure a veil continues to blanket their security pricing practices, making it hard for the average investor to decipher this information.

Despite all the headlines about how the financial industry is changing, commissioned investment advisors can still charge an arm and a leg if they’d like. FINRA, the industry’s self-regulator, and the Securities and Exchange Commission (SEC), which regulates Registered Investment Advisors (RIAs), pretty much disagree—in a squishy, “sort of” way.

No Commission Too High

So how much is too much? Who knows, according to the SEC? In the 2013 document Regulation of Investment Advisers by the U.S. Securities and Exchange Commission, section VI states: The Advisers Act does not provide a comprehensive regulatory regime for advisers, but rather imposes on them a broad fiduciary duty to act in the best interest of their clients. Sounds fair, right?

Well, a few lines down the document continues, “. . . the U.S. federal securities laws do not prescribe minimum experience or qualification requirements for persons providing investment advice. They do not establish maximum fees that advisers may charge. Nor do they preclude advisers from having substantial conflicts of interest that might adversely affect the objectivity of the advice they provide.

That’s so scary on so many levels. It comes down to this: RIAs can be unqualified and chock full of conflicts of interest, but they can charge you whatever they want. Don’t believe me? Read it here on page 23 of the SEC document. Well not exactly, read a few lines down and it says, “As a fiduciary, an adviser must avoid conflicts of interest with clients and is prohibited from overreaching or taking unfair advantage of a client’s trust.” What’s with the double-talk?

In essence, the SEC says your registered investment advisor must avoid conflicts, overreaching and taking unfair advantage of you. The agency just doesn’t offer guidelines to determine these boundaries.

At least FINRA offers guidelines, although you may not want an advisor who straddles the upper limits of what the organization considers to be unfair compensation. In May 2013, FINRA posted here its Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Adopt FINRA Rule 2121 (Fair Prices and Commissions), Supplementary Material .01 (Mark-Up Policy) and Supplementary Material .02 (Additional Mark-Up Policy For Transactions in Debt Securities, Except Municipal Securities) in the  Consolidated FINRA Rulebook. Say that fast three times without running out of oxygen.

In plain English, the organization left its security pricing position as is, a position that recommends no higher than a 5% markup of most securities. Yet, an investment firm can argue to FINRA that a higher markup is fair and reasonable. And, by the way, the 5% rule really isn’t a rule, it’s a guide. Some expected FINRA to perhaps lower this threshold in 2013, but alas, this was not to happen.

“The Public Investors Arbitration Bar Association commented on the proposal that eventually became rule last year when it didn’t change the 5% number or its wording on this subject. Before the rule was made final, PIABA commented here, saying it believed that “a 5% guide is simply too high and outdated, given improvements in technology and reduced execution costs.”

We agree, but agreeing is like spitting into the wind.

So how can you determine what is fair when investment advisors peddle their wares in your direction? Again, the SEC document gives investors direction on page 23. It says, “. . . . Investors have the responsibility, based on disclosure they receive, for selecting their own advisers, negotiating their own fee arrangements and evaluating their advisers’ conflicts.

Feel better now? Do you want insult with your injury? While FINRA was changing its mind to keep the 5% rule that isn’t really a rule, it also shot down making equity transaction commission schedules public to investors. Firms objected. Surprise, surprise. What’s to hide, when so many firms are lowering their costs?

And if you want to get really mad, consider the latest news to come from the business headlines.

  • A broker filed for bankruptcy, freezing customer complaints that could result in $5 million in damages .
  • FINRA fined Merrill Lynch $8 million for failing to waive mutual fund sales charges for certain charities and retirement accounts.
  • In 2013, the SEC fined firms more than $3 billion while FINRA levied $74.5 million in fines.
  • And this just in . . . FINRA withdrew its proposal that would have required most advisors to disclose signing bonuses and other compensation they get to switch investment firms.

And the hits keep on coming.

Where does this leave you? In the same place as always—a dark imposed by the financial industry. Find the light by asking questions. Demand answers, including information about the fees you’re charged. Find out if people who invest like you are also charged the same commissions, charges and fees you pay. And if you don’t get satisfaction, work with a firm that can help you get the answers you deserve.

If only the industry saw it this way.