A common misconception is that a big brand name financial adviser gives you safety, more resources, and a better outcome for your investment dollars. The set of facts below looks at the reality of big company business models. Corporations look for economies of scale to increase their bottom line. Yet what if these economies degrade client service and hurt tax efficient growth of money? What other relationships might create conflict with client interests? 

The Facts

A big brand name institution with $2 trillion in client assets had managed John (age 65) and Jill’s (age 58) accounts for over 5 years.  During this time their assets increased about 12%-15%, while the US stock market was up almost 100%; an appropriate stock/bond mix for them was up 55%-65% net of fees. Each of the 3 accounts (two IRAs and a Trust) held 33 funds in equal measure in each account. Funds were frequently traded in each account. The adviser never returned phone calls and they could only speak to his assistant when they called. 

Bottom Line

Severe under performance due to poor fund selection and poor market timing. The big problem was motive: accounts were structured to streamline the portfolio selection and management process for the institution. Institutions design processes for economies of scale. in this case, at great cost and opportunity lost to the client. Not a safe place for your money.

How could they under perform a reasonable benchmark by 40%-50%?

What We Found Out

They weren’t receiving performance reports. To evaluate their non-performance claims we downloaded statements and looked at their contribution history, so we could approximate the prior 1, 3, and 5-year results. Two of the accounts were IRAs, one account was taxable. Each account held identical assets; 33 funds in each account! A competent adviser can’t justify owning 33 funds in equal measure across taxable and tax-deferred accounts. Not Ever.

Despite the high number of funds, the diversification benefit was minimal. Over half of the funds were nearly identical; only the fund names were different. No thought was given to tax-efficiency or future withdrawal strategies. Average fund expense ratios were close to 1.3%; plus, an additional 1.0% asset-based fee, for 2.3% all-in costs. There was no financial planning. Purely investment management. The broker never called. If they had a question it went through the assistant. Some of the under performance was explained by the excess cost structure and high trading frequency of the funds. Poor fund selection, poor asset allocation, and poor timing were the primary culprits.

Motives: The WHY of the Fund Selection?

This portfolio was designed out of pure conflict, pure stupidity, or pure boilerplate portfolio management for ease and efficiency. Or some combination thereof. None of these are safe for your money. The adviser was either ignorant of the poor economics of his design; or conflicted in serving his broker dealer or mutual fund company before the client. Or both. There may have been other compensation aside from the asset-based fees. Since John and Jill couldn’t find their agreement, we’ll never know but it would be naive to think other incentives were not part of the poor selection and trading frequency. Sales loads? Revenue sharing? 12b-1 fees? Volume-based incentives from product providers? These conflicts, and this gross misallocation of a client’s life savings should be criminal except that it’s perfectly legal under their dual-registered standard of conduct.

Let’s Add It Up: Fees vs. Service

  • No performance reporting (why isn’t this a standard feature)
  • Way too many funds; overlapping exposures with no diversification benefit
  • No tax management; no thought about distribution strategies to optimize income once retired
  • No financial planning
  • Expense ratios near 1.3%, with a 1.0% fee on top for a 2.3% all-in cost. And as noted, some type of churning scheme was likely at play that resulted in poor returns

Big Brand Solution: pay more, less service, less benefit. In this case much less. 

What Change Did We Make?

A boilerplate solution vs. a customized and common-sense solution. Let’s discover what these differences mean.

  • We eliminated over 20 of the redundant, non-performing funds and in the process cut their all-in cost by more than 50%.
  • We don’t get paid by the product or fund provider, so our focus is on client results. 
  • The streamlined asset mix and funds track relevant benchmarks, so we have better diversification and a greater measure of predictability.
  • Periodic performance reporting lets them see how we are tracking against relevant benchmarks; when there is a divergence, the explanation is communicated in plain English.
  • A written, strategic financial plan is in place. This road map helps them see all their finances in one picture, so they can make more informed decisions and examine their options as they move closer to retirement.

We couldn’t fix the past. However, we were able to simplify and streamline the poor investment lineup and align the assets within accounts for tax efficiency. Changes that will save them significant tax dollars, extend portfolio life, and put them on a safer, more predictable path to retirement.

Jerry Matecun helps business owners and individuals discover key planning and investment considerations vital to build and protect the value of your assets. For a no-cost, confidential conversation regarding your unique circumstances call or email Jerry at 949-273-4200, 616-499-2000, or jerry@compoundvalue.com.

PLEASE NOTE: This article is based on a real life situation. All names and specific circumstances have been altered to protect confidentiality. Nothing herein or elsewhere on this site constitutes investment, legal, or tax advice. For details please see Disclosure.