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“YOU’RE FIRED” WAS made famous by Donald Trump as host of The Apprentice. Imagine my surprise when my broker delivered the same message to me two years ago.
In 2015, my job was transferred to Texas. I opted to become a long-distance commuter, while my family stayed in Maryland. Around that time, we moved homes, so our son could attend a better high school. In addition, I was helping to launch two huge long-term work projects. In the midst of this, my father passed away. That meant we also needed to settle his estate, sell his car and house, and deal with my parents’ countless possessions. I inherited his financial accounts, but didn’t have time to deal with them, as our life was on overload.
Fortunately, my father’s investments were well diversified and didn’t overlap with our own portfolio. He had a broker that he especially liked. The broker was attentive, called regularly and took my father out for a couple of lunches each year. I likewise found his—now my—broker to be knowledgeable, a good communicator and likeable. Since I didn’t need to make any immediate changes to the accounts, I thought I’d give the broker a shot.
A year later, when our family life was more settled, I began to review the inherited accounts and consider how they fit with our portfolio. For example, a modest-sized IRA was invested in eight different mutual funds, which together offered excellent diversification.
I started to research the funds, which were mostly C shares, one of the three main broker-sold load fund share classes. The first thing I discovered was that the average annual management fee of the eight funds was a whopping 1.6%. The fees ranged from around 1% to more than 2%. Some of the funds had sales charges of up to 5%. Many funds had high annual turnover rates, with one fund at 74%—much more trading than I did in my own account. Finally, when analyzing each fund’s historical performance, my most disconcerting discovery was that each fund’s summary prospectus included a disclaimer to the effect, “If sales charges were included, performance would be lower.” Ouch.
Better informed, I rang the broker to discuss the account. The conversation went something like this:
Me: “The IRA portfolio is 100% invested in stock funds, which is good for a tax-deferred account. In addition, it’s nicely diversified across stock sectors. Do you know how each of the eight mutual funds have been performing versus their benchmarks?”
Broker: “I don’t know about the funds individually, but the account’s portfolio has delivered a solid 7% to 8% increase each year over the last five years or so.”
(Not mentioned: During this stretch, the S&P 500 increased something like 10% to 12% a year.)
Me: “Yeah, that’s not bad, but I believe we should review the performance of the eight funds themselves. How do you think they have performed? For example, do you know how many of these funds might have performed better than their benchmark in at least five of the last 10 years?”
Broker: “Sorry, I don’t know the exact answer. But if I had to guess, I would reckon perhaps half the funds beat the benchmark they are measured against over five of the last 10 years.”
Me: “Well, I spent some time researching their performance, and discovered that not one of the eight funds beat their benchmark in five out of the last 10 years.”
Broker: “I caution that you have to be careful in analyzing 10 years of data, which includes the 2008-09 downturn period, when essentially all funds declined. Some of these funds may have declined less than their benchmark.”
Me: “Yes, indeed, I even accounted for the declining years and, in nearly all cases, these funds declined more than their benchmarks. In fact, I found only one fund that beat its benchmark in three out of 10 years, while all the rest underperformed their benchmark in eight, nine and several of them even 10 years running.”
Broker: “Oh….” (long silence)
Me: “What might you advise would be the best way forward with these funds?”
Broker: “You raise some interesting points about these funds, which I’ll have to look into. Please give me a few days to research them further and get back to you.”
Me: “That would be absolutely fine. Thanks.”
The broker called me back the very next day and informed me that the account had been moved to the company’s self-directed platform, which the broker suggested would “better serve my needs.”
I’d been fired.
John Yeigh is an engineer with an MBA in finance. He retired in 2017 after 40 years in the oil industry, where he helped negotiate financial details for multi-billion-dollar international projects. His previous articles include Getting Schooled, Bracketology and Don’t Concentrate.
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99.9% of financial advisors are better at sales quotas than being a fiduciary.
Congratulations! You have taken a big step toward becoming an educated index fund investor.
“Fine! If you know so much, why don’t you just do it yourself?”
Sounds like your father was invested in American Funds? In 2013, I read Burton Malkiel’s book, The Random Walk Guide to Investing, and realized that I had not been paying attention to the impact that fees were having on my returns. Kudos to you for even taking the time to discuss this with your father’s advisor because I didn’t even bother. I just moved everything to my newly opened account with Vanguard and immediately began investing in low-cost index funds.