Yesterday, I posted a piece in our online newsletter, Vestories (subscribe here), pointing to a Bloomberg investigative article on the evil perpetrated, on those rolling over 401k plans, by many in the financial sales industry. The report points out that far too many of those who claim to be investment advisors are nothing more than slightly greedy, poorly informed product pushers for giant firms like AIG, UBS, and Met Life (I would like to add to that list; LPL, Ameriprise, Edward Jones, and dozens of others).
After reading the Bloomberg piece for the third time and perusing the often ridiculous comments, I couldn’t resist adding my two cents and posted the following comment hoping to provide a positive direction (and, yes, drive some listeners to the podcasts):
“I'm been in this business for almost 30 years and have heard from every segment of this industry (I've hosted a radio show since 1988 - now at talkingrealmoney.com) and there are a few lessons we all need to learn:
- Any return over 0% net will carry some risk.
- The higher the return, the greater the potential for loss (I don't care what someone promises).
- If you are capable of investing on your own, (that means understanding and investing for your risk tolerance, controlling emotions, rebalancing, creating your own dividends in retirement, etc.) then ONLY use Vanguard index funds to create a globally diversified portfolio.
- If you need help, always use a fee-ONLY (not fee-BASED) advisor (preferably charging 1% or less per year) using no-load, low-fee funds who is required to act as a fiduciary.
- Never pay a commission on investments.
- Rarely, if ever, are annuities, of any type, appropriate investments. NEVER should they be used within a qualified retirement account.
- If you don't totally understand it, run away!
- Timing, trading, option, buying individual stocks, commodities, or exotic products are not investing. These "strategies" and "products" are the equivalent of a trip to a casino without the free drinks.
If you can think of others let me know at talkingrealmoney.com”
Expecting a response, I watched checked back later in the day and I was not disappointed. Someone going by the indignant moniker, “whatdidyousay” took me to task for, what he believed to be, hypocrisy:
“How about that you are not supposed to advertise your RIA on blogs? You just lost credibility with me. And your answer to #5; do you not consider your quarterly fee a commission?? There is no difference, and I hate when an Advisor who no longer has a Series 7 license will come and tell everyone "don't pay a commission, simply pay us a quarterly fee." You are manipulating the public with these statements and providing a poor example for the industry. There is a charge for all advice, whether you call it a commission, fee, charge, tax, etc. Don't try to cloak your costs and pretend you are different. And just because you are supposed to act as a fiduciary, it doesn't mean you do.”
Properly baited, I had to set the facts straight:
“First, I never mentioned that I was part of an RIA firm, but RIAs are allowed opinions on blogs and news stories, just like everyone else. Just check out all the blog posts by Larry Swedroe, Dan Solin, and Rick Ferri (to name a few).
Next, let's run the numbers: a typical mutual fund commission is 5%. Fees average about 1.2% annually (not including internal transaction costs (which can add 1% or more on actively managed funds). Compare that to an RIA charging 1% per year (0.25% quarterly) using no-load index funds that average 0.20% a year. Which is the better deal? Plus, the RIA MUST do what's best for the client, not merely what is "suitable." This means that rarely will a responsible IRA put an 7% commission annuity in an RIA or sell a non-publicly traded REIT with a 9% load.
You are right, nothing is free, but you need to make sure you are getting something for that annual fee that EVERYONE charges.
In addition, I always post under my real name. It makes me personally accountable.
And yes, I am a partner in an RIA (and once had a Series 7). My firm charges no more than 0.9% annually and always uses no-load, low fee funds with annual expenses that average about 0.2% per year. What are the TRUE commissions (let's not forget 12b-1 fees masquerading as a "sales load in drag" - quoting SEC Chairman, Chris Cox -http://www.sec.gov/news/speech/2007/spch041207cc.htm ) and fees for the funds you or those you know sell?”
- So far, the conversation has come to an end. Although I am dying to know how anyone in the insurance or brokerage industry would respond to the facts as laid out:
- Lower fees generally lead to greater returns.
- While nothing in life is guaranteed, working with a fiduciary is better than working with someone who has no legal obligation to do what’s best for you.
- You must pay anyone you hire to work with you, in any capacity. You need to know exactly what those costs are. They should NEVER be hidden from you.
- Complicated investments are designed that way for two reasons; to confuse you and make you need them.
- And finally, because it is such an incredibly lucrative business, the investment product peddlers will not go down without a fight.
If there are any responses added of note, I'll let you know.