Below I will describe the fees investors can expect, from most overt to most hidden. But first, a word on the fiduciary rule. No matter if you are trading through a hedge fund, a big bank, an investment advisor, or doing your own trading at an online broker, the process is the same. You will add money to a platform and the conversion from cash to anything else will command a fee. The difference between a hedge fund, a big bank, an investment advisor, and yourself, is only execution and “prudent man” investment ability. That’s really all it boils down to. If you trust yourself to make better investment decisions based on your goals and your industry knowledge, you absolutely should trade for yourself. This is the slimmed-down version of the fiduciary rule. When I was working at Merrill Lynch, almost daily the Fiduciary rule was creating change in procedures and the older advisors were outraged. The rule was designed to force all advisors to be more transparent about best execution and “prudent man” standards. Most big banks spent billions in infrastructure and reporting changes over the rule – no small sum in the aggregate. Insurance companies had arguably the most to lose and lobbied extensively to kill the rule before it passed. The rule died under President Trump, but the damage had been done – consumers had realized that “conflicts of interest” got in the way of best execution and “Prudent Man” standards. 

 

Here are some of the larger fees in financial transactions.

Robinhood has been all the rage lately with everyone from 13 to 40 years old. I am such a fan of the app that I have encouraged it at multiple presentations. However, there are at least three  hidden dangers. To reiterate, I am a fan of anything like Robinhood that gets people to invest.

 

First, the trades are not free. Robinhood makes virtually all of it money on ‘selling order flow’ to High Frequency Trading firms. For more info, check out their SEC file – its all laid out. If not for the order flow payments, Robinhood would not be worth $6 Billion… The tag, “free everything” that everyone will tell you is obviously the result of marketing rather than reality. Nonetheless, nearly every broker dealer in the world does exactly the same thing, especially Goldman Sachs, Bank of America, Stash, Betterment, Wealthfront, and Fidelity, to name a few. Do some research on why IEX (exchange) is different and you will be amazed what you will find. Vanguard has never used HFT firms, and I hope people use Vanguard more than any other Broker for this reason.

 

Second, Robinhood recently notified users of a 3% savings account. The footnotes read that the accounts are SIPC protected. I was shocked at the audacity by Robinhood at this presentation. SIPC and FDIC insurance are virtually opposites, but younger/ less sophisticated investors probably wouldn’t know the difference. Again, great market, but divergent from reality.

 

Third, there is the user interface (UI). I love the UI and so does everyone else. It is impossibly easy to make trades, and since it’s ‘free’, investors don’t mind short term holding. This may lead to gambling – type behavior. Some people I know tell me that around $100,000 and up, they will seek professional advice. I encourage any investor to do so, considering the two standards I mentioned at the outset.

 

Overseeing investor accounts may be an in house job, or many parts can be delegated. ‘Wealth Management’ has come to be understood as one manager allocating roles to subcontractors. Thus, often investment advisory is moved to a mutual fund or “separately-managed” account. So often at Merrill Lynch, advisors didn’t know the difference between one industry and another. Nothing wrong with that, since the client account was supervised by professionals (at other companies like Eaton Vance). Insurance policies are likewise farmed out, as is banking at some firms.

 

The point is, these wealth managers often command between 0.5% and 1.5% of Assets Under Management to allocate your money to third parties that generally tack on their own fees of 0.5% to 1.5%. This management has never made sense to me, due to poor execution. Best execution would dictate that the manager reduce costs as much as possible without taking on more risks. However, these issues will always be blurry among professionals, though I prefer using models guided by Investment Policy Statements (IPS). Further, I predict that mutual funds will slowly become extinct because of the aggregated fees.

 

In summary, is an advisor worth it? Over the long term, I believe using a professional is worth far more than payment, because both potential net financial gains, but most importantly improved quality of life. Having said that, your professional should have a set process, such as: