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Watch Your Fees

Mutual funds are often expensive -- they charge management fees and marketing fees that are too burdensome for the performance they typically deliver. There are some exceptions to this, but people like John Bogle, the founder and former CEO of the Vanguard Group, have made a very convincing case that low-cost, passively managed index funds are a far superior investment for most investors than actively-managed, high-cost mutual funds. The majority of fund managers under-perform major market indices, after all.

Investment advisers are a good option for people who want help and guidance with their investments, but the customer needs to make sure the adviser is truly independent. As The New York Times recently reported , former J.P. Morgan Chase (JPM) advisers say they were encouraged to funnel customers into the bank's mutual funds even when the advisers knew it was not in the best interest of the client.

"I was selling J.P. Morgan funds that often had weak performance records, and I was doing it for no other reason than to enrich the firm," Geoffrey Tomes of Urso Investment Management told the Times about his tenure at the bank, which ended last year. "I couldn't call myself objective."

That's a damning indictment of the quality of J.P. Morgan's commitment to serve its clients, but once again, it comes as no surprise in this era of financial malfeasance and overwhelming public distrust of major financial institutions, like J.P. Morgan, Goldman Sachs (GS) and Citigroup (C).

It also underscores an important point about investment advisers. They collect their own annual fee but if all they're doing for clients is shoveling money into funds and other vehicles, which charge their own set of fees, the real cost to the client is in fact much higher -- and it's very damaging.

So, investors that are evaluating advisers to manage their investments should question them carefully on their independence. Are they incentivized in any way to put clients into one type of investment as opposed to another? And how expensive are the investment vehicles that the adviser would prescribe?

If an adviser is less-than-forthcoming on such questions, I would find someone else.

At the time of publication the author had positions in JPM and C but not in the other stocks mentioned.

Follow me on Twitter @NatWorden

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

This contributor reads:
The Oil Drum
The Baseline Scenario
I Want Media
Zero Hedge
Gregor Macdonald
Chris Martenson
On Twitter, this contributor follows:
Doug Kass of TheStreet
Jesse Eisinger of Pro Publica
Daniel Alpert of Westwood Capital
Barry Ritholtz
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