Brokerage rip-off datapoint of the day

By Felix Salmon
May 11, 2011
SigFig, which is aimed at saving investors money. And it turns out there's a lot of money to be saved.

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At the Finovate conference today, Wikinvest released their latest product, SigFig, which is aimed at saving investors money. And it turns out there’s a lot of money to be saved.

A lot of people have signed up for Wikinvest and handed over access to their brokerage accounts. I spoke briefly to SigFig founder Parker Conrad, who explained that it’s incredibly easy to flick through those accounts and come up with examples like the one he pulled up, of a man with $2.3 million in his Merrill Lynch account.

This guy probably knows that he’s paying his Merrill broker an annual management fee of 1.75%, which alone is more than $40,000 a year. But he doesn’t know that other Merrill clients in his position are paying far less — that Merrill brokers basically charge as much as they can, and the average Merrill client on Wikinvest pays less than half that, just 85 basis points.

And there are other things this guy doesn’t know, as well, because they’re buried in his statements — things like the fact that Merrill charged him $5,763 to make 24 trades last year, over and above that $40,000 management fee. That’s about $240 per trade.

Other fees are even higher. The Merrill broker bought something called the Fidelity Advisor International Capital Appreciation Fund, which charges 1.45% per year on top of a 5.75% fee payable when you buy the thing in the first place. The fund is substantially identical to the Fidelity International Capital Appreciation Fund, which has a 1% management fee and no front-loading at all. Why would any advisor with his client’s best interests at heart put that client into FCPAX rather than FIVFX? He wouldn’t — FCPAX is simply a vehicle invented by Fidelity for advisors which allows them to skim off hefty commissions.

SigFig, then, looks like a good tool to use on any brokerage account which you’ve had for a while. Upload your information, and it’ll tell you immediately if you’re getting ripped off.

There are lots of other aspects to SigFig too, most of which are designed to appeal to more active investors, or people who like to keep close tabs on their money. I’m not convinced there’s a lot of value in that, but it’s clearly something which is well targeted at the existing Wikinvest user base. But at the very least, SigFig is a great way of identifying some of the billions of dollars in rents which are extracted each year by brokerages and financial advisors across the country. Mother Merrill has historically been good to its employees. But that doesn’t mean it’s good for its clients.

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Comments
10 comments so far

“And there are other things this guy doesn’t know, as well, because they’re buried in his statements — things like the fact that Merrill charged him $5,763 to make 24 trades last year, over and above that $40,000 management fee. That’s about $240 per trade.”

jeezus.. that stuff still happens?!?!

by the way Felix – this is one reason why I defend ETFs so vociferously – because one reason people attack them is to keep this mutual fund load racket going… ETFs should make mutual funds obsolete.

Posted by KidDynamite | Report as abusive

Sorry, but unless this guy has Alzheimer’s, with $2.3M on the table he should read his brokerage statement. I read my phone bill every month, which has got to be worse.

Posted by maynardGkeynes | Report as abusive

maynardGkeynes – that’s the paradox, isn’t it. Part of the point of paying someone else to handle your money is precisely so you don’t have to spend lots of time reading statements.

Posted by BarryKelly | Report as abusive

A large portion of brokerage clients are older people who have been with the broker since before online/discount options existed. In many cases the only reason the relationship continues is that the client doesn’t feel confident enough to change everything at an age when he feels less sharp than he used to, while the client’s kids don’t want to walk into the minefield that is money conversations with older relatives (it’s hard not to look money-grubbing even if you actually do have the best interests of your elders at heart).

Posted by najdorf | Report as abusive

Your second paragraph basically says “I spoke to the founder of the company, who said it’s really easy to come up with lots of examples just like the one he brings out in presentations and conversations with journalists”. Maybe it is, maybe it isn’t, but I’m not sure with the best will in the world that a hand-picked example presented at a conference can be uncritically taken to be typical.

Posted by dsquared | Report as abusive

“The Merrill broker bought something called the Fidelity Advisor International Capital Appreciation Fund, which charges 1.45% per year on top of a 5.75% fee payable when you buy the thing in the first place. The fund is substantially identical to the Fidelity International Capital Appreciation Fund, which has a 1% management fee and no front-loading at all. Why would any advisor with his client’s best interests at heart put that client into FCPAX rather than FIVFX? He wouldn’t — FCPAX is simply a vehicle invented by Fidelity for advisors which allows them to skim off hefty commissions.”

Yes, he chose the fund with the load because that has a compensation component. I don’t necessarily have a problem with that. If you are an advisor that gets compensated by commission, than loads are necessary for compensation. Would you have the advisor put him in a no load and not receive compensation?

No evidence has been given that the advisor was churning the account or arranging the investments in a way to avoid load breakpoints. If either of these were in play, that would be a different story.

Posted by ReuterReader76 | Report as abusive

ReutersReader76 wrote: “Would you have the advisor put him in a no load and not receive compensation?”

My god, spoken like a true sales-based financial adviser. Do you even understand Felix’s point of this entire article? It’s that sales-based financial advisers are a broken model, are generally bad for the investor, and most of that badness is unknown to the investor.

And then you complain “but how else are we going to get paid if we can’t can’t skim the investor?” Unreal.

Posted by SteveHamlin | Report as abusive

Actually, I did misread the piece. My post was written under the incorrect notion that each of Felix’s paragraphs were separate Merrill incidents with different customers. On that notion, getting charged a commission isn’t necessarily scandalous. On reread, I see that it is the same customer getting shafted on every incident. Obviously, getting AUMed and commissioned is wrong and probably illegal.

Posted by ReuterReader76 | Report as abusive

@dsquared I don’t think this guy is typical. In fact, I assumed he was an outlier. But after talking to these guys I think it’s probably best to say that he’s typical of an important subset.

Posted by FelixSalmon | Report as abusive

From a European perspective this case would not even be among the most expensive fee arrangements. Looking at European private banks, overall fees of 200 basis points (2% of invested assets plus hidden fees, that come with the products) are not so uncommon. Check our research on open and hidden fees in wealth management accounts and what to do about it. (http://www.myprivatebanking.com/Report/ wealth-guide-2)

Posted by MyPrivateBankin | Report as abusive
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