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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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Great article! And I am truly amazed,call me naive or worse, but, there are still many mutual funds that charge front or back end loads. Also, I cannot recall the fund family that charges an annual fee of 1.25 percent for an S and P 500 index fund.
But, I suppose in a world where bottled water sells for as much as $ 120.00 a gallon, a sales charge might be fine? ( A friend attended an event in San Jose where a pint of water went for 15 dollars,which he gladly paid. He complains about the price of gasoline, frequently. Less than 5 a gallon)
Thanks Michael. I spent a good bit of time in San Jose 20 or so years ago. I could never figure out how a Big Mac could be offered at the same price there as in Pennsylvania, given the inflated housing prices and cost of living in SJ.
Ken…reminds me of the book, “Where are the Customers Yachts” by Fred Schwed. A rare combination of wisdom and wit.
Marjorie, I have that one in my financial library, purchased a couple years after I took over my uncle’s affairs. Pretty sure it played a part in my reassessment of the broker relationship.
Great…can be purchased on Amazon,used, for $5.00 if others interested.
I have always been a customer of Fidelity, who charged low fees when I joined, and charges no fees today. You pick the stock you want to buy, put in your order, and it gets executed at a good price. The phone reps are OK if you need something, particularly if you are in the $1 million plus tier.
Whenever I read about these brokers, I always think of Jed Clampett and Mr Drysdale. Why do you think Mr D fawned over an old ignorant hillbilly like Jed Clampett? That was his meal ticket, that’s why.
Streamlining my financial accounts, including my 401(k), Roth IRA, and taxable brokerage, has been a game-changer in simplifying my financial life. Previously, I was shelling out more than 1% of my assets to a financial advisor for asset management. However, after independently managing my Roth IRA with straightforward index funds for five years, it became evident that the advisor’s contributions were minimal, primarily serving to pad their own profits.
Ultimately, I decided to part ways with the advisor and commit to an all-index fund approach across the board. Transitioning my taxable brokerage account proved more intricate, given that the advisor had invested in individual securities. Nonetheless, I’ve been diligently working on a strategy to standardize this portion of my investments as well.
If you need an advisor, I would highly recommend you pick a fee only advisor .
I’ve used a fee only advisor every couple of years to run a Monte Carlo to see how I was doing. Now that I can run a Monte Carlo through Retirement Revised website for a fraction of the cost I will utilize the advisor even less.
I figured an asset under management fee (of one percent) relationship could not appreciably beat my preferred mostly passive index fund approach to my portfolio
I rolled over all my investments from several sources, 401k, IRAs, individual stocks, brokerage account and annuities to Fidelity three years ago. At our meeting to sign papers, I, not the account manager, asked what it would cost for them to manage the funds. He gave me a percentage – I think 1.5% which included legal and estate services.
I was not interested. I did it all myself for decades for better or worse.
I never heard him bring up the subject again, he called occasionally to see if I needed anything, but no pressure. Last month I had a minor question about a dividend reinvestment and called the office and left a message. The next day he returned the call and gave me a detailed explanation to my question.
Frankly I was amazed at the good service given. I had not given him direct business other than holding investments.
Whenever I see a fancy office like Ken mentioned, I always ask “who is paying for this?” The answer is his customers!
I inherited a very small, actively managed IRA. Amongst the typical holdings, it had an allocation to muni funds. Tax free muni income that would someday end up being taxed as ordinary income. Am I right in thinking a muni only belongs in a standard brokerage account?
My conclusion was that a small account gets managed by the newest, least experienced account executive.
I switched to a self-directed account. Now it rises and falls with the market. (minus the 1% fee).
Did you say you are paying a 1% AUM fee for a self-directed account?? My accounts are at Vanguard and my fees are 0.09%, which is actually worse than the Vanguard average of 0.08%.
Have you calculated what a 1% fee will cost you over ten years? Twenty? Plus lost compounding? No way am I willing to pay that.
And you are right, munis belong in taxable accounts, and there is no reason to hold them at all (instead of Treasuries) unless you are in a high tax bracket.
@mytimetotravel, Perhaps I didn’t write that clearly enough. I switched to a self-directed account to avoid the 1% fee.
Oh good, it really didn’t read that way.
Whew
Good stuff. Is it worth 1% of AUM? Some folks I know feel it is.
Others, not so much.