Author Topic: Motivation for high-expense funds in managed brokerage account?  (Read 1906 times)

pigpen

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Motivation for high-expense funds in managed brokerage account?
« on: November 19, 2019, 12:41:28 PM »
My parents have a chunk of their money invested with one of the big investment companies. Recently, I took a look at some of the investments their "advisor" has them in, and was unsurprised to see multiple mutual funds with front-end loads (up to 5.5%) and ridiculous expense ratios. No shock there.

My question is, WHY would the advisor choose those funds, presumably knowing that he'd still get his fee and make them more money over time with something lower cost? Do they get some sort of kickback for putting their clients in particular funds?

I'd like to convince them over time that they shouldn't trust this guy to act in their best interest, but having always done it myself using just a couple of funds, I don't really understand the financial advisor game very well.



marty998

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Re: Motivation for high-expense funds in managed brokerage account?
« Reply #1 on: November 19, 2019, 01:07:36 PM »
The advisor gets a cut of that 5.5% front end load.

Simple really. That cut of the 5.5% is multiple years worth of the trailing commission he'd otherwise get on a fund without the upfront commission.

Wouldn't you rather be paid a few years wages upfront?

jim555

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Re: Motivation for high-expense funds in managed brokerage account?
« Reply #2 on: November 20, 2019, 08:23:09 AM »
Front end load funds, the broker's got to eat.  I say put him on a diet.

Car Jack

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Re: Motivation for high-expense funds in managed brokerage account?
« Reply #3 on: November 20, 2019, 11:34:17 AM »
A class shares with up to a 5.95% front end load, medium level expense ratio and trailing 12b-1 fees are typically great funds.......for the advisor and his boat payments.  For the customer who owns the funds, not so much.  In the days of Yore, when everyone had to go through some kind of broker, these were no big deal.  Heck....I remember my dad helping me find a broker to sell some shares of stock I had.  I took the certificates over to the broker and he sold them for me for a trivial cost of $140.  I think the entire stack brought in less than $1000.  People remembering this kind of thing don't think it's all that out of line to pay front end loads, ERs under 2% and back end 12b-1's to get out.

To some of us, this was all a lesson to watch costs.

pigpen

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Re: Motivation for high-expense funds in managed brokerage account?
« Reply #4 on: November 20, 2019, 03:20:31 PM »
People remembering this kind of thing don't think it's all that out of line to pay front end loads, ERs under 2% and back end 12b-1's to get out.

Yes. My parents are both over 80, and I don't think they can fathom investing without a professional intermediary. When I suggested that they take a different approach, they couldn't imagine how else to go about it.

MustacheAndaHalf

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Re: Motivation for high-expense funds in managed brokerage account?
« Reply #5 on: November 21, 2019, 02:34:19 AM »
I suspect your parents see the investment guy as their friend.  It's a very costly friend, but they don't see the costs.

At some point, will they need help managing their investment and financial affairs?
It might be worth putting in place the legal documents so you can take over when it becomes necessary.

pigpen

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Re: Motivation for high-expense funds in managed brokerage account?
« Reply #6 on: November 21, 2019, 05:27:38 AM »
I suspect your parents see the investment guy as their friend.  It's a very costly friend, but they don't see the costs.

I agree. To their credit (and potentially to their detriment), they tend to see goodness in people, so they're often overly trusting of people like financial advisors, insurance agents, etc. -- business people who they have "relationships" with -- because they're nice to them. They're also not investment savvy enough to get beyond just looking at their returns over the years, which like everyone else who has a decently diversified portfolio have been positive since 2008/09. So it's "look at the great returns our guy has gotten us," not realizing that just dividing the money say, 30/70 between VTSAX/VBTLX would have done better while achieving the same goals/risk tolerance.

As far as having paperwork in place for managing their finances later, I'm pretty sure that at least one of my siblings already has power of attorney for them, but it's probably a good idea to check on that.

AdrianC

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Re: Motivation for high-expense funds in managed brokerage account?
« Reply #7 on: November 21, 2019, 08:56:49 AM »
My parents have a chunk of their money invested with one of the big investment companies. Recently, I took a look at some of the investments their "advisor" has them in, and was unsurprised to see multiple mutual funds with front-end loads (up to 5.5%) and ridiculous expense ratios. No shock there.
When we took over my father-in-law's finances his Wells Fargo advisor had him in over 20 active mutual funds, most with 1% or so expense ratios. Some with as little as $3k. We figure the advisor got kick backs from the funds, plus he was trying to make the whole thing look complicated to justify his ongoing % of assets fee. It was about 90% stocks. Father-in-law is 89 and lives on the money.

We closed it down and put it all into a single 60/40 Vanguard Lifestrategy fund.

I expect my father is doing the same with his bank. I've shown him literature from Vanguard. Can't do more than that until asked to help.

pigpen

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Re: Motivation for high-expense funds in managed brokerage account?
« Reply #8 on: November 21, 2019, 03:43:11 PM »
My parents have a chunk of their money invested with one of the big investment companies. Recently, I took a look at some of the investments their "advisor" has them in, and was unsurprised to see multiple mutual funds with front-end loads (up to 5.5%) and ridiculous expense ratios. No shock there.
When we took over my father-in-law's finances his Wells Fargo advisor had him in over 20 active mutual funds, most with 1% or so expense ratios. Some with as little as $3k. We figure the advisor got kick backs from the funds, plus he was trying to make the whole thing look complicated to justify his ongoing % of assets fee. It was about 90% stocks. Father-in-law is 89 and lives on the money.

My parents' guy actually has them in a fairly decent overall allocation/risk level for their situation, but as in your FIL's case, it's just way too expensive and complicated in terms of the sheer number and variety of investment products, including mutual funds, a closed-end mutual fund, unit investment trusts, a single ETF, and 2 individual stocks, one of which is -- big surprise -- the stock of the investment company itself. Because of course out of the gajillion publically traded stocks available, that one just happened to be the perfect one for my parents' situation.

MustacheAndaHalf

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Re: Motivation for high-expense funds in managed brokerage account?
« Reply #9 on: November 21, 2019, 10:26:44 PM »
I'm guessing your parents have roughly 60% stock/40% bonds, since their allocation is appropriate and that's a very standard retirement portfolio.  Do you have any small accounts where you could imitate your parent's allocations, but have your overall allocation be appropriate for you?

For example, if you allocate 4% bonds / 6% stocks in one account, that could match your parent's allocations.  You start it at the end of this year or early 2020.  And then you show them your percentage gains, and ask to see if they're getting good results like you are seeing.  Would that be a fair way to show them?

Notice I'm not talking about percentages listed in index funds.  I'm saying you take real money, with a real return, and show your parents the account statement.  I suspect they will believe your personal account statements, so it can get them thinking or talking about it.