A Wealth Drainer Lurking in Your Portfolio

Here’s another tale from the retirement belt about how brokers are putting it to their clients.

This one is compliments of a neighbor who asked me to review his portfolio. It’s a situation that just flips my switch big time.

When I was working with clients back in the ’90s, the rule of thumb for deciding if you should use mutual funds or use individual stocks was whether you had $100,000. You could diversify into individual stocks nicely with that kind of money – any less and you needed to use mutual funds.

My neighbor has about $1 million in the stock portion of his portfolio. Based on my old rule of thumb, that’s 10 times more than necessary to allow for good diversification in individual stocks.

Imagine my surprise when I looked at his holdings and half of his money was in stock and high-yield bond mutual funds. I couldn’t conceal my contempt for his broker.

It gets better.

When I was managing money, we weren’t allowed to be paid twice. In other words, if we bought mutual funds for a client and were paid a fee by the fund, we couldn’t charge a management fee too.

This guy’s broker was charging a management fee of 1% per year, and he was being paid a fee from the funds as well.

He has half of my friend’s money in actively managed funds, and he’s charging a management fee? I don’t get it.

That’s outrageous. That’s like being charged by the guy who paints your house and paying another painter who does nothing.

Maybe I should go back into managing money.

This sounds too good to be true. Put someone’s money in a fund that is professionally managed and then charge them again for managing the managers? I don’t think so.

The saddest part of this story is that even though I blew my top when I saw this and advised my neighbor to have a conversation with his broker, I’ll bet he does nothing. That’s why brokers and advisors get away with this kind of thievery. No one calls them on it.

Check out your situation and see who’s actually doing the work of managing your money, how many times you’re paying for it and how many people are getting paid.

Unbelievable.

Good investing,

Steve