One of the things you learn early in a business career is to not give free advice to your friends or family. For whatever reason, either they never listen or they do and it goes wrong, as it always seems to with them. That can cost you friends.
So when a good buddy came to me recently asking for advice, I was cautious. But when he explained his situation, I had no qualms answering his questions and making recommendations.
His situation is so common among small investors that I had to share it with you.
He’s a very smart guy with a long and successful business career, and he has amassed a lot of money that was being managed by a big-name brokerage house.
He had given his broker discretion over his account, which is a definite no-no because it means that his broker does not have to consult him before he buys and sells.
My friend recently took his account statement to a different brokerage – a small group in our town – to have it reviewed, and he got a not-so-nice surprise.
It seems that his broker of many years had him in 67 different mutual funds. Worse, many were in-house funds offered and managed by the broker’s firm.
(As a side note, in-house funds are rarely designed to benefit the client. That’s for another time.)
The really bad news was that the broker’s management fee, along with the fees charged by the funds he purchased for my friend, added up to $50,000 per year.
No matter how much money he has, spending $50,000 in fees is insane. As my friend said, he could live for a year just on what he is paying his financial advisor.
If this situation were the exception, it would still be bordering on criminal. But in too many cases, this is the rule for the average guy.
Too many people are paying a management fee to hold only mutual funds in their accounts. It makes no sense to pay a management fee when funds are already managed.
My first recommendation: Get a new broker.
If any investment advisor tells you that they have to charge a fee to buy and sell mutual funds, it’s time to move your account.
My advice to my friend was to manage his assets himself. He has the background and is capable of it. Or at the very least, he should get an advisor who adheres to the fiduciary rule.
The fiduciary rule states that an advisor can do only what is in the best interests of their clients. In my buddy’s case, it was all about his advisor.
One of the biggest account mismanagement red flags is an annual fee for an account that holds all, or primarily, mutual funds.
But it is only one of many ways that brokers can fleece their clients.
If this can happen to a person like my buddy, who has years of business experience, it can happen to you.
Shop around for an advisor, preferably one who adheres to the fiduciary rule. Account reviews should always be free, and they can only help.
Watch your costs.