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The Price of Advice

Ken Cutler

WHEN I TOOK OVER responsibility for my developmentally disabled uncle’s finances, following my father’s death in 2001, I inherited the stock broker that my dad was using. The broker was associated with a well-known financial company. I’d never used a broker before. Any investments I personally owned were held in my employer’s 401(k) plan.

The first time I met the broker, whose name was Jim, I took notice of the large and finely appointed office he had. I figured that, since his title was senior vice president, this was to be expected. He was pleasant enough, although occasionally hard to follow when he started throwing financial jargon around.

Jim and his staff were helpful to me, especially since I was new to the game. They took care of retitling the accounts based on the appropriate legal documents. I found that one of the trusts benefiting my uncle included a physical stock certificate for some bank shares. They converted the certificate into electronic shares and deposited them into the appropriate account without much effort required on my part.

After a few months, everything seemed in order. Initially, I didn’t make any drastic changes to the portfolio. Jim would periodically give me recommendations on moves to make. When a bond matured, he’d present another option, which I’d usually accept. I didn’t have any particular strategy for managing the trust accounts and generally relied on the broker’s recommendations. After all, he knew a lot more than I did.

After I’d worked with Jim for a few years, I decided to open a Roth IRA for myself with his brokerage firm. I felt secure dealing with a brick-and-mortar company that had familiar staff I could contact or meet with as necessary. Opening a completely online account with a different company seemed vaguely risky to me. The internet had only been around for about 10 years.

Several years after I’d taken over financial responsibility for my uncle, Jim proposed investing a portion of the trust funds more aggressively. He would actively manage a portion of the portfolio for a fee, which was 1% of the funds under his control. I thought, why not?

In the beginning, I didn’t pay much attention. The portfolio was increasing in value, so everything was good. But when the 2008-09 downturn hit, the portfolio, of course, lost money. A lot of money.

I started looking more closely. Jim was rapidly churning funds, keeping some for only a month or two before he’d sell them and buy others. I found he sometimes was investing in things that I wouldn’t care to be associated with.

I was getting more uneasy and I’d been growing in my understanding of the importance of low fees. Some of the funds he was buying and selling had very high expenses. Looking back, I suspect that—even though it was a fee-based account—Jim had a special financial incentive that drove at least some of the purchases.

I ended the agreement, pulled out some funds and purchased bank certificates of deposit. I was still gradually converting funds from the brokerage accounts to CDs when my uncle suddenly passed away. At that point, all the assets needed to be liquidated and converted to cash for estate settlement.

The brokerage firm was helpful as I wound down the remaining stock and bond holdings, and moved money to bank accounts. It was a comfort to be able to call the local office and get prompt attention from an assistant I’d worked with before. After settling my uncle’s estate, the only account still with the firm was my small Roth IRA.

One day, out of the blue, I got a package in the mail from Jim indicating that he and some of his staff were leaving for another firm. There were forms for me to fill out that would authorize the transfer of my Roth IRA to the new firm. I ignored them. It seemed like too much trouble with no particular benefit for me. A few weeks later, I got a call from Jim.

He reminded me about the forms and talked a bit about his new firm. I told him I was staying with his former company, but didn’t really want to explain why. He asked me who had been assigned as my new broker. When I told him the name, he said some negative things about the guy and recommended I ask for someone else.

I didn’t have any issues with the new broker. He never recommended tinkering with my Roth IRA. His approach of doing nothing, unless I asked him to, worked fine for me.

When the new broker retired, rather than being assigned another broker from the local office, I was given a corporate number to call. Apparently, my small IRA balance no longer entitled me to personal treatment. It wasn’t long before I moved my funds to another institution. By this time, I was comfortable managing my financial accounts online.

I learned a lot through the experience. For starters, don’t be overly impressed by the lavish office of a person who’s making money off you. Pay careful attention to fees, especially if someone else is picking the funds. Even better: Pick your own funds, and make them low-cost index funds. Finally, don’t let activity—such as excessive trading—masquerade as a substitute for superior results.

Ken Cutler lives in Lancaster, Pennsylvania, and has worked as an electrical engineer in the nuclear power industry for more than 38 years. There, he has become an informal financial advisor for many of his coworkers. Ken is involved in his church, enjoys traveling and hiking with his wife Lisa, is a shortwave radio hobbyist, and has a soft spot for cats and dogs. Check out Ken’s earlier articles.

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