When Baltimore disc jockey Barry Hart was looking to quickly invest $426,000 in mutual funds, he paid a visit to William Kissinger, a financial adviser he had seen give a seminar at a local university. "I had total trust in him. Whatever he said to do, I did," says Mr. Hart, 59 years old.

But he says he realized later, when the Securities and Exchange Commission called him to testify in an administrative case against Mr. Kissinger, that the recommended investment -- B shares of Oppenheimer Funds -- was a far better deal for the adviser than for him. According to the SEC, Mr. Kissinger pocketed a fat commission on the sale but failed to tell Mr. Hart that he would have had lower long-term costs if he had bought A shares. A shares, which carry an upfront sales charge in exchange for reduced long-term expenses, would have been available to Mr. Hart at a steep discount because of his large investment, the SEC alleges in a complaint it is pursuing on appeal. The complaint was dismissed by an administrative law judge for a variety of reasons, including the fact that it wasn't industry practice at the time for brokers to disclose that they got higher commissions for selling B shares. Mr. Kissinger's lawyer, Tim Katsiff, says his client did nothing to violate the law.

Mr. Hart has since hired another financial adviser. "There's a bunch of sharks out there," he says. "You don't know who is reliable and who is not."

With Americans' investments in mutual funds weighing in at a whopping $7.9 trillion at the end of April, regulators are increasingly focusing on conflicts of interest by brokers and others who sell the funds -- including payments called revenue sharing by fund companies to brokerage firms that sell their products.

For investors, the lesson is that where you buy funds can be as important as which funds you select. The wide variety of mutual-fund cost structures -- ranging from upfront commission-fee products to increasingly popular fee-based accounts -- is enough to make investors' heads spin. "Investors are understandably confused. Confusion is a rational response to the current mutual-fund marketplace," says Barbara Roper, director of investor protection for the nonprofit Consumer Federation of America.

Consumer advocates fear confusion will be heightened by an SEC ruling in April that brokers may charge annual fees for their services without becoming subject to a rigorous federal law regulating "investment advisers."

Traditionally, investment advisers, whose firms register with the SEC as such, have been paid a percentage of assets under management, while brokers collected commissions on each trade. Investment advisers are bound under federal law to act in investors' best interests and disclose potential conflicts of interest, lawyers say. Brokers must recommend "suitable" investments, not necessarily the best ones. Yet brokers can call themselves almost anything they want, as long as they steer clear of the term investment adviser.

"Brokers routinely call their salespeople financial consultants, financial advisers, investment consultants, vice president of investments -- anything to distract investors from their primary function as a salesperson," says Ms. Roper. The SEC staff is preparing a report, due in the middle of this month, outlining suggestions for studying the possible confusion that its new rule may create.

There are brokers and investment advisers who feel ethically bound to do right by their clients. And investors who ask all the right questions can improve their chances of finding one. But it isn't easy. "Right now, there is no one single thing that a customer can look at and say, 'If this is true, then I'm in good shape,'" says Daniel Moisand, president-elect of the Financial Planning Association, a trade group of financial planners.

Mutual funds can be purchased in a variety of ways. The cheapest is often to go directly to a fund company, such as Vanguard Group or Fidelity Investments, to bypass front-end sales charges. And the lowest-cost funds available directly from fund companies, such as the Fidelity Spartan 500 Index and the Vanguard 500 Index, have dramatically outperformed their large-cap peers over the past decade, according to Chicago investment researcher Morningstar Inc. "They do better than most funds because most funds have higher costs," says analyst Russel Kinnel.

Another low-cost option is a "fund supermarket." Supermarkets are a convenient way for investors to buy funds from multiple companies, says Roy Weitz, a lawyer and publisher of the FundAlarm Web site. Among the largest supermarkets are Charles Schwab's OneSource, which offers 5,200 funds, and Fidelity's FundsNetwork, which offers 4,500.

Many can be purchased with no transaction fees or at a nominal additional cost over buying directly from the fund company. Do-it-yourselfers can use online tools, such as software to calculate the recommended mix of stocks and bonds for their age and goals, to pick funds. Yet only 21 percent of the $1 trillion in gross sales of mutual funds last year outside of pension plans and 401(k) retirement plans was purchased directly from fund companies or through these low-cost channels, according to Boston consultant Financial Research Corp. The remaining 79 percent was sold through intermediaries offering service or advice, such as a broker, a registered investment adviser, a bank or an insurance agent.

The reason, industry veterans say, is advice. "I'm not astute at purchasing mutual funds or stocks, so I rely on others," says Atlanta chiropractor Cliff Malina, who holds his investments at Smith Barney and recently hired an independent adviser to draw up a financial plan. Investors pay for mutual-fund advice in varying ways, some transparent and some less obvious. One way is by paying a commission called a load, usually 4 percent to 6 percent, on fund purchases.

Another alternative is to pay the adviser a fee, generally ranging from $75 to $600 an hour, to draw up a plan and recommend investments. This is a good option for investors who need help setting up an initial mutual-fund plan but don't need much continuing advice, consumer advocates say.

A third option, becoming increasingly popular, is the "mutual-fund wrap," in which investors pay an annual fee as a percentage of assets for an adviser to select a fund portfolio and keep on top of it to make sure it stays balanced among different types of investments. Total assets held in mutual-fund wraps at the end of last year was $234.8 billion, up 80.6 percent from the $130 billion at the end of 2002, according to Cerulli Associates of Boston.

Some wraps offer a fully individualized plan for each investor, while others simply assign the investor to a number of pre-chosen portfolios that the adviser feels best fit the person's needs. Investors' input varies. Fidelity, for example, offers only "discretionary" management, in which investors leave all decisions up to managers. Based on an investors' age, goals and risk tolerance -- and a detailed personal interview -- Fidelity places the person's money into one of 55 different mutual-fund portfolios.

The program, with $30.2 billion in assets under management, is comforting for investors burned by too much freedom during the 2001 stock-market crash, says Sarah Libbey, Fidelity's senior vice president of advisory services. "All this sexiness around 'Oh, I got in on this Nasdaq stock' may seem really cool, but it is not really going to get you where you want to go," she adds. Minimums to enter a wrap vary; Fidelity and Schwab require at least a $50,000 initial investment.

The average cost of a wrap nationally is 1.17 percent of assets a year, according to Cerulli. In general, commissions and sales loads on fund purchases are waived. For example, a consumer wishing to invest $25,000 in Growth Fund of America, the nation's most popular mutual fund, with assets of about $100 million, would pay a 5.75 percent front-end charge -- or a one-time fee of $1.437.50 -- to buy standard A shares of the fund. In mutual-fund wraps, American Funds offers special shares of its Growth Fund free of that sales charge.

But some consumer advocates think the wrap fees are too much to pay on a continuing basis, particularly given that each fund in a portfolio also charges fees that are deducted from fund assets and can easily add 1 percent or more to the annual cost. "If people sat down and did a little self study, they'd learn something, they'd get more confidence and realize that, at a base level, mutual-fund investing is very simple," says FundAlarm's Mr. Weitz.

For those who choose to pay in some way for advice, the newest hot-button issue is whether to choose a broker or an "investment adviser." Investment advisers, regulated under the federal Investment Advisers Act of 1940, legally have a "fiduciary duty" to their clients, according to Mercer Bullard, assistant professor at the University of Mississippi School of Law and chief executive of Fund Democracy, a consumer-advocacy group. That is the highest possible standard and means that they must put their clients' best interests above their own. Brokers, on the other hand, are held to a lower standard of "suitability" in which they must recommend appropriate investments -- not necessarily the best ones, Mr. Bullard adds.

Brokers, for more than 70 years, have been allowed to offer some advice to their clients without being regulated under the Investment Advisers Act -- as long as the advice was "solely incidental" to their brokerage business. In general, brokers made money from commissions and sales charges, and investment advisers -- offering a heavier advice component -- charged an annual fee based on assets.

But in 1999, the SEC, concerned that brokers were "churning" accounts, or making unnecessary trades to earn more commissions, proposed that brokers be allowed to charge an annual fee without being regulated as investment advisers. The agency told brokers that, while the rule was being debated, they could go ahead anyway without risking prosecution. Last year, the Financial Planning Association sued to block the rule.

In April, the SEC formally adopted the rule and now faces another suit from the financial planners' trade group. Meanwhile, a growing number of brokers have begun charging annual fees and are billing themselves as "financial consultants" or "financial advisers." The possibility that investors would be confused prompted the SEC to include in its rule a requirement that brokers who charge fees for their services must issue a strongly worded consumer warning. It reads, in part: "Your account is a brokerage account and not an advisory account. Our interests may not always be the same as yours."

But some say the warning may not be enough to clear up the muddle. Four SEC focus groups in Baltimore and Memphis, Tenn., found that investors don't understand all of the different terms used to describe financial professionals. "I don't know the difference," one participant said, according to a consultant's March report to the SEC. "I mean, I've got a guy who gives me advice. I don't know what he is."

The Securities Industry Association, a trade group for brokers, disputes the contention that investment advisers have a higher duty to investors. Brokers, it says, are heavily regulated by the SEC, the New York Stock Exchange and the National Association of Securities Dealers. They are subject to numerous antifraud laws and a panoply of federal regulations. "This notion that you have somehow less protection if you do business with our financial advisers is untrue and a red herring by those who seek to limit competition," says Merrill Lynch spokesman Mark Herr.

Merrill Lynch, the nation's largest brokerage, promises on its Web site "advice that looks at your complete financial life to help you achieve your goals." Yet many of its 14,100 "advisers" are acting as brokers, not investment advisers. Merrill says many of its advisers are registered as investment advisers with state governments.

Merrill Lynch, the nation's largest brokerage firm, promises on its Web site "advice that looks at your complete financial life to help you achieve your goals." Yet many of its 14,100 "advisers" are brokers, not investment advisers. Merrill says many of its advisers are registered as investment advisers with state governments.

Investors should ask careful questions of brokers in order to make sure their advice is objective, consumer advocates say. Longstanding incentives to brokers to sell products with higher commissions, such as Mr. Hart's B shares, are just the tip of the iceberg. Over the past two years, regulators have reached settlements with some of the best-known brokerage firms in the country, including Edward Jones & Co. and Morgan Stanley, for secretly receiving payments called revenue sharing in exchange for selling their products. In some cases, brokers' bonuses have depended on how well they sell funds from the companies paying their employers.

The SEC has proposed a rule that would force brokers to disclose revenue sharing at the time they sell funds to investors -- but so far, it is still being debated exactly how disclosures should be worded and whether they should be given orally, in writing or on the Internet. Some companies have voluntarily disclosed their revenue-sharing payments and others have been forced to do so by the SEC. But, as of now, consumers aren't fully protected, says Mr. Bullard.

Hiring an investment adviser is no guarantee of objectivity either, consumer advocates warn, in part because some people are both brokers and advisers. Many advisers wear different "hats" -- one as an adviser and one as a broker and are subject to different standards in each role. For example, Mr. Kissinger is registered as an investment adviser but was acting in his capacity as a broker in his dealings with Mr. Hart. In dismissing the case, the administrative law judge ruled that he didn't have a fiduciary duty to Mr. Hart, saying he had made an effort to make clear that he was acting as a broker.

"You expect the advisers to be wearing the same hat, and it is ridiculous to think that the investor will understand they are not. It is affirmatively misleading," says Mr. Bullard. Mr. Hart says he regarded Mr. Kissinger as an adviser, not as a broker.

Revenue sharing can also influence the advice of investment advisers working for large firms. In February, New Hampshire filed an administrative complaint against American Express's advisory unit. The complaint alleges that the company's fee-based advisory service, which cost clients from $300 to several thousand dollars, was "primarily a vehicle to promote and sell American Express and specially selected security products -- many with mediocre performance." American Express advisers' bonuses depended on how effectively they sold the company's proprietary funds, as well as those of a group of outside fund families that made revenue-sharing payments to American Express, the complaint alleges.

American Express didn't disclose the revenue sharing to clients, according to the complaint. Company spokesman David Kanihan said the company is "continuing to cooperate with the state of New Hampshire to bring this matter to resolution."

What You Should Ask

Here are some questions you should ask your broker or financial adviser:

How do you get paid for giving me advice?

Are you registered as an investment adviser and do you have a fiduciary duty to me?

Are you giving this particular advice to me in your capacity as a broker, or as my investment adviser?

Do you or the firm you work for receive any payments from mutual-fund firms to sell their funds?

What are your credentials in financial planning?

Source: Lawyers and consumer advocates