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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