Common Problems with the Retail Brokerage Industry
What Wall Street Doesn’t Want You To Know
- Has your financial advisor placed “mutual fund B-shares” into your portfolio? If so, you should be concerned. The National Association of Securities Dealers has issued a warning to investors about financial advisors selling B-shares instead of A or C shares into accounts where B shares are not appropriate. (view: NASD Alert Document on B shares) Your advisor can make more money if he (or she) sells B-shares and then advises you to frequently switch between different B-share mutual funds. This is because B-share mutual funds charge the investor a fee if the fund is not held for a minimum number of years. B-shares can also have higher fees than A or C shares depending on the timeframe over which the fund is held in the portfolio.
- Does your financial advisor suggest portfolio changes every month? If so, he (or she) may be churning your account to increase their take on fees and commissions. Successful long term investors choose their investment choices carefully and rarely make changes except on a quarterly or bi-annual frequency.
- Is your portfolio comprised of actively managed mutual funds instead of index based funds? Standard and Poor’s continually studies the performance of actively managed funds and index based funds in a study named the SPIVA Report. Over the years, the index based funds have outperformed the majority of actively managed funds. Furthermore, most of the actively managed funds that do beat their index are closed to new investors and/or only work with institutional investors who have millions to invest. (see: SPIVA study)
- Why do financial advisors continue to recommend actively managed funds which do not consistently beat the index? Well, these funds have high management and 12b-1 fees that they use to compensate your financial advisor for recommending their mediocre mutual fund. The best actively managed funds usually have lower 12b-1 fees because they do not need to pay others to sell their funds… their track record is all that is necessary to sell the fund. (read: 12b-1 Fees Are Not Your friend!)
- Has your financial advisor put an annuity into your IRA account? If so, he (or she) is doing this to generate large fees and commissions even though these annuities are already tax deferred investments and do not belong in a retirement account. (Annuities are already tax deferred and thus should be in taxable accounts).
- Is your financial advisor pushing exotic investments like hedge funds, private equity funds, and managed futures funds? While there is a role for these alternative investments in large institutional portfolios, these investments require a great deal of scrutiny and due diligence which usually exceeds the experience level of the typical non-institutional investor.