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Investment Fees


Edsel

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I recently prepared a return showing 1099-B with some $550 in dividends and $300 in capital gain distributions.  There were two minor sales of funds which netted another $200 in capital gains.

The last page of the information statement showed $1600+ in brokerage fees to maintain the account.

Looking back over the last few years, I would estimate that, like the above, the investment fees are more than the income generated by the portfolio.  The brokerage firm is making more than their customer.  Until a few years ago, these firms were not required to show their fees.

I have sounded the alarm to my clients whom I find in this situation, but to no avail.  They have been told that the brokerage firm has THEM as their first priority.  I won't get into the subject of banking and financial services industry - there is plenty to tell.

Have any of you noticed how much your clients are having to pay for these charges?

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Client:  "I thought you said this investment plan is designed to fund the education expenses for the kids ! "

Broker: "Oh, sorry. I guess you misunderstood. I was telling you it's set up to fund the education expenses for MY kids."

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Don't you realize that these brokers and investment sellers get compensated based on the VALUE of the investments in the portfolio it's what they boast about "$ Under Management" - not how much earnings the investments make? It's what's called "basis points".  The riskier the investment, the more basis points they get.

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This has always been a difficult topic for so many reasons. Most people do not take the time or perhaps do not fully understand the choices they make when using investment services. After preparing taxes and observing the investment activity of a recently deceased client, after thirty years of investment 'help' from a nationally known broker, my client was proud to say he had not lost any money over that time period. Wow you say! He said to me...I ended with the same amount I started with! Never lost any money over all that time.

I thought to myself...how sad to hear that after thirty years you ended with the same amount. Sure he took some distributions in the later years but never made what he should have if he had not chosen that broker. The Law of 72 states that if you make 7.2% interest, your money will double in 10 years and the inverse.......if you make 10%, your money will double in 7.2 years. The broker pulled 2% of the balance every year in fees plus had him in expensive loaded (commissions) mutual funds.

I always point out the advisor fees when preparing tax returns even now when they are no longer deductible. People should be aware. If you give an advisor 1% of your account every year then you have given away 30% of the account over thirty years. How do you justify that?

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Link to 10 great quotes from "Where Are the Customers' Yachts?":

https://awealthofcommonsense.com/2015/02/10-great-lines-customers-yachts/

 

They're all great, but I'm especially fond of #2 (and #10 runs a close second place):

-->  2. On the value of “I don’t know”: For one thing, customers have an unfortunate habit of asking about the financial future. Now, if you do someone the single honor of asking him a difficult question, you may be assured that you will get a detailed answer. Rarely will it be the most difficult of all answers – “I don’t know.” <--

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Yes, I have been shocked more than once when seeing the fees on the consolidated 1099's.  And I usually point them out to clients. Most don't seem to realize how this affects them in the long run and how easy it is to manage your own money. That's what I do.

The money management business is a lucrative business.  In the past I thought about it briefly but personally I do not have the ability to sell something that I would not buy.  Sooo I am still doing taxes. However I am sort of  proud that several of my clients have thanked me after transferring their accounts to Vanguard.

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In my experience, that fee you are seeing is possibly also covering other expenses you aren't considering or don't know about. There may be other accounts like IRAs where they roll some of the fees into the taxable account. Trustee fees aren't cheap. They may have 90+% of their assets inside biotech or tech stocks that don't pay dividends at all to defer taxation costs. Maybe they are using some concierge services you don't know about? 

 

It's readily acceptable on this board that taxes are hard and people should be willing to pay for a professional. Oddly when it comes to managing their entire financial future and possibly that of their children and spouse those same people should go as cheap as possible because it's so easy. Would you tell someone to go to WebMD instead of their doctor to determine if they are healthy?

 

It's dumb to get tax advice from someone who has never done or studied taxes but it's perfectly reasonable to get financial or estate planning advice from a journalism major.

 

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scottmcfly:  Steering them to Vanguard is one of the most important things you can do.  Next best is getting them to read and understand John Bogle's philosophy on investing.  He revolutionized the industry with the index mutual fund - I'm referring to the Total Stock Market Index, not some of the expensive knock-offs other companies are pushing. Understanding and properly applying Bogle's investing advice will increase ones wealth exponentially without the drag associated with the fees one typically encounters.  But it takes a little work and many people just won't invest the time to educate themselves.

 

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This is mostly an investment discussion and not taxation (although suffice to say the taxation strategy associated with this is miserable).  And most of our members are not trained investment people.

But there is something inherently wrong with a brokerage firm making more money than the client is making.  There is the possibility that the value of the investments are increasing and not reflected on the 1099-DIV, but this is eventually deferred capital gains, and limited to growth funds - some of them with a turnover of less than 4%.  Very few of them exist.

Vanguard?  Yes, fees are very low, because their advisors are doing no research.  Take a look at the funds they offer - nearly all of them are index funds.  This is still a plus, because I can't see where all the research provides any benefit to the investor.

And yes, we don't know the expenses faced by a brokerage firm and its brokers, and consideration of that tends to lessen the evil we associate with greed.  But take a look downtown at the tallest and most plush facilities - they will nearly all be financial products and services.  That's where the money is going.  and slick advertising telling us how much they care about US.

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I think you nailed it with the research comment.  What passes for research in the investment field is little  more than "investment porn".  The airwaves  and internet are full of this nonsense, and it all comes at a heavy price.  As John Bogle famously repeated,  "Nobody knows nothing"" when predicting the future. Investment advisors exist to make weather forecasters and astrologers look like geniuses.

Anyone who will take the time to read and understand his speech entitled "The Dream of a Perfect Plan" in March of 2000 will know virtually all they ever need to know about investing for the long haul. The fact is, smart investing & wealth accumulation is quite boring once one grasps the basics. 

 http://johncbogle.com/speeches/JCB_AZ_Republic_3-00.pdf

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Yes, I always point out the fees.  Most clients can't seem to be bothered (and I don't understand why).  Heck, I can't even get people to update their IRA beneficiaries!  I see them year after year after year - the same accounts, showing "no beneficiary on record" or (worse yet) the name of the former spouse.  People say, "Oh, yeah, I gotta fix that" and then next year....  Inertia.

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I'll add my two cents. A long time client turned his affairs over to a son when he and wife went into a home. His son turned the management of his dad's affairs over to an existing firm but his dad strenuously warned him against employing the head of the firm as he had no confidence in him instead to use a family friend at the firm who shortly thereafter retired. The son promptly turned the assets over to the very man his father had warned him about. I pointed out to him the fees looked pretty high last year. This year was no different and the guy had LOST over $30,000 of his 88 year old mother's assets through bad stock trades !! Go figure. 

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