A brand new investor had just come in to see a famous stockbroker…
“Can you tell me how much you charge?” the investor asked.
“Of course,” the stockbroker replied, “I charge $500 to answer three questions.”
“Well, that’s a bit steep, isn’t it?” the investor replied.
“Indeed it is,” said the stockbroker, “And what’s your third question?”
The joke would be funnier if it weren’t completely true.. and it wasn’t our precious retirement money at stake. If you have a broker, you are paying them way too much money for moves you can totally make yourself.
They’ve stolen around $150,000 from your retirement funds…
They’ve charged you for their own advertising fees…
And now, they are ripping off our military heroes…
You see, major brokerages have been trolling for business by aggressively encouraging “uniformed” investors to move their retirement money out of their cushy government plans and into hideously overpriced money management cartels.
Thankfully, one man has gone undercover to expose their greed…
Former U.S. Labor Department economist John Turner was tipped off to the fact that some of the world’s biggest brokerages were singling out military members and government workers to shut down their very attractive, low-fee government retirement accounts from the Thrift Savings Plan and switch to their money-sucking, stock-moving packages.
The Thrift Savings Plan is available to uniformed services — military, police, firefighters, and EMTs and paramedics. You know — the guys that save and protect our lives (save a few maniacs who do quite the opposite.) It is commonly known as “the gold standard of 401(k)-type programs”.
So why would you ever move off the gold standard?
Well, the main difference is — and it’s been a huge selling point for the hucksters — the Thrift Savings Plan puts the burden on the individual investor to choose what is best for them. They have to manage it, and they have to keep an eye on their accounts. They are given a slew of index funds, stocks, and tools to use to provide themselves a comfortable — and essentially fee-free — retirement account.
It’s a great selling point: it’s nice not to have to worry about managing your portfolio. We all have a million other things to worry about: kids, work, mortgages, medical expenses… or in the case of some of our service members — not dying at work!
But how much do these brokerages charge for peace of mind? A few hundred bucks more? Double the fees?
These plans are 50 times more than the government plan!
“It’s a scandal,” Turner told Bloomberg. “They are trying to sell me an IRA clearly not in my interest. It’s in their interest. They want to get the fees.”
Turner decided to try it out for himself, and called up Bank of America, Wells Fargo, and Charles Schwab. He told them he was part of the Thrift Savings Plan and wanted to know if there were any better options. There was only one company that told him he was making a huge mistake. The rest licked their lips and tried to sell him on one of the “50 times as much” plans…
Now, if I were paying those kind of fees, the returns would have to be gangbusters each and every year to justify such costs…
News flash… they aren’t. And once you unpack all of the expenses you’re being charged, I bet you’ll be more than willing to manage your own account, and tell these paper pushers to go get a real job…
If you’ve ever looked at your retirement account rundown, you would have noticed a series of fees; fair enough, these guys don’t work for free, and the fact that their clients’ entire retirement hangs in the balance is certainly as important as it gets. Surely they should be compensated. But did you know that on average, you shed up to $150,000 of your retirement money on assorted fees — many of which don’t even apply to your personal investment account?
Let’s take a look…
The total percentage of fees is rolled up into your “expense ratio.” Here’s what they’re spending your money on:
Administrative Fees
This is a pretty typical expense that covers customer service, record keeping, and ensuring regulatory compliance. Fair enough.
Asset Management Fees
Your money is going to the portfolio managers and investment researchers who act as the architects of your retirement plan. If you aren’t doing it yourself, someone has to put together your investments… and you can expect to pay them something.
Marketing Fees
Here’s the one that really burns me. We’re paying so you can advertise your product to other people? That’s like a fee on your monthly car payment to buy ad space for the next year’s model of the car you bought. What kind of madman would have the cojones to do that?
One sneaky fee is conspicuously absent from your expense ratio, and that’s the Trading Fee.
This fee can add up to massive costs for you, especially if you are in an actively-managed fund that makes a lot of moves. On average, the trading fees can run you another 1.2% on top of your expense ratio. Brokers get paid on every move they make on your account. But that kind of action almost never beats out basic index funds.
In a study of investment brokerages, two researchers at the Dongling School of Economics and Management in Beijing found that the annual return for overtraders was 11.4%, while the average market return was almost 18%.
Another study out of the University of California found that 20% of investors who traded most actively earned an average net annual return 5.5% lower than those who kept their moves to a minimum.
That shows that overtrading can indeed hurt your overall returns, or at the very least all of that extra work (and extra trading fees) doesn’t add to your bottom line.
But there is an easier way to manage your money, with practically no fees at all.
Do it yourself…
Hell, even Warren Buffett himself knows that overtrading and fees will eat up your investments. That’s why he made a bet that a basic index fund would beat a slog-it-out, dogged, high frequency investing style. Buffett bet Protégé Partners — an asset management firm — that a Vanguard S&P 500 index fund would have better returns than a group of five hedge funds. This wasn’t just lip-service; Buffett put a cool million where his mouth is.
So, how’d he do?
Well, right now, Buffett’s little index fund is up over 40% while Protégé’s five funds gained an estimated 12.5%. And that doesn’t even include the immense fees!
So you’d be better off just buying an index fund like Uncle Warren and telling these high-fee brokerages: “I got this”.
All told, Warren’s index choice, the Vanguard S&P 500 (NYSE: VOO) is up 76.29% in the last five years. Here’s the chart:
Take that to your overpriced broker and ask him what he’d charge you for those returns…
Here’s the rundown on the Vanguard S&P 500 (NYSE: VOO):
• Invests in stocks in the S&P 500 Index, representing 500 of the largest U.S. companies.
• Goal is to closely track the index’s return, which is considered a gauge of overall U.S. stock returns.
• Offers high potential for investment growth; share value rises and falls more sharply than that of
funds holding bonds.
• More appropriate for long-term goals where your money’s growth is essential.
Plus, the expense ratio is a measly 0.05%. This is 95% lower than the average expense ratio of funds with similar holdings and infinitesimal compared to what money managers would charge you for doing the exact same thing.
So, rely on yourself. If these brokers can sweet-talk a hardened military warrior out of their sweet pension agreements, think about all of the other folks out just there like you and me who have handed over their livelihoods to these guys.
I started with a joke, so I’ll end with one: You can’t spell BROKER without B-R-O-K-E.
It’s time to take matters into your own hands.
Godspeed,
Jimmy is a managing editor for Outsider Club and the Investment Director of the personal finance advisory The Crow’s Nest. You may also know him as the architect behind the wildly popular finance and investing website Wealth Wire, where he’s brought readers the stories behind the mainstream financial news each and every day. For more on Jimmy, check out his editor’s page.
