In most relationships there comes a time that you both need to face reality. It’s just not working for you anymore. You’ve been together for years, so it’s hard, but you’re ready to face the fact that you can’t keep limping along, pretending everything is fine. It’s not your fault; it’s not their fault either. Be honest with yourself: the system is working against you, and you’re losing money every day.
If you think about it, money is the #2 reason why long-term couples break up – so why shouldn’t this apply to your relationship with your broker? It’s tough to think about ending this type of relationship. Many Americans have close relationships with their brokers – after all, their broker knows everything about their families, finances and big life events. But sometimes that relationship can get in the way of knowing when to break things off.
The truth is, many brokers are incentivized to place you in expensive products, instead of a portfolio best suited to achieve your long-term goals. So even while they may see you every holiday season or come over to watch the game on Sundays, they may be working within a system that doesn’t put your best interests first. At the end of the day, this could mean you won’t be able to buy that dream house, pay for your kids’ college, or retire when you had planned.
So how do you know when your relationship with your broker has run its course? Here are some questions to ask yourself to help figure out if it’s time to move on to greener pastures:
- What are your annual costs? Even if you’ve been paying your broker an annual fee, it’s possible he is making extra money by putting you in certain mutual funds that pay him to do so. These tend to be the more expensive mutual funds, which can make your total annual costs much higher than they should be.
- What are your sales loads costs? If your broker isn’t charging you an annual management fee, you’re probably paying a commission every time you buy or sell a stock or mutual fund. For every “class A” mutual fund you own, if your broker charged you a typical fee, he or she likely made about a 5.5% commission when you purchased shares in the fund. So that means if you gave your broker $1,000 to buy that A-Share mutual fund, you ended up with $945 of it, after he’d taken his cut. If your broker steers you into “Class C” mutual funds, he or she can make an ongoing 1% every single year, in addition to the commission they receive to place you in that fund.
Think about 10 cooks all ignoring each other as they try to cook you the same meal. Because of the lack of a coordinated strategy, your portfolio may end up being very inefficient, and inefficiency costs money.
- How are your assets allocated? You can hardly blame your broker for putting you in the funds that make him the most money. But what about your portfolio’s asset allocation? Each mutual fund manager has a different agenda, so the funds you own can come together without proper coordination. Think about 10 cooks all ignoring each other as they try to cook you the same meal. Because of the lack of a coordinated strategy, your portfolio may end up being very inefficient, and inefficiency costs money. Your long-term growth can be stifled by this inefficiency, and as long as you stay with your commission-focused broker, there may be little you can do to create a more efficient portfolio.
- Does your broker have your best financial interest in mind? Personal Capital was built around the fiduciary standard, a promise to provide advice that is always in our clients’ best interest. Because we are a Registered Investment Advisor (RIA), it is our obligation to follow the fiduciary standard and to not push products or serve our own bottom line first. Many brokers – or “financial advisors” who are not fiduciaries – simply have to meet a “suitability standard,” meaning that they can conceivably steer clients into products that pay the advisor a higher commission, as long as the product is “suitable.” Your broker likely isn’t steering you into these products with malicious intent. It’s the system in which he works, instead, that incentivizes him to put you into these types of products. But if he can’t answer the question “Are you a fiduciary?” with a “Yes” response, then you should be aware that his compensation structure makes it difficult for him to act without conflicts of interest.
- Does your broker use the right technology? Oftentimes, traditional brokers lack the technology to give you a sophisticated allocation in an efficient way; it’s one of the reasons they turn to mutual funds. Since most brokers don’t have the resources to manage your assets themselves, they rely on mutual fund managers who charge one of the fees that we discussed earlier. If your broker did have access to the right technology, she would be able to manage your portfolio without “outsourcing” the management to someone else. At Personal Capital, we use our unique technology to provide service and portfolio management all in one – effectively cutting out any kind of middle (wo)man and thereby providing you the proper portfolio allocation without the accompanying management fee of most mutual funds and managers.
- Can your broker see your whole financial picture? You are more than just the number on your bank account statement. You’re the sum of everything in your life. And that means your financial accounts as well as your family, your charitable donations, and your long-term hopes and dreams. Personal Capital takes a holistic view, to help you reach those long-term goals by approaching your finances in a comprehensive manner. While your broker may have offered you holistic financial planning, this requires a lot of work on both your parts, and often she isn’t able to follow through on that offer. With Personal Capital’s technology, we are able to see the moving parts of your unique financial life through a single pane of glass, which allows us to be comprehensive in our financial recommendations.
- What about taxes? Mutual funds tend to have high internal turnover, which adds another expense in the form of capital gains taxes. If you hold mutual funds in your taxable account, it’s possible to end up paying taxes on gains you didn’t participate in. Did you know that tax management, just within the realm of investing, can increase your annual portfolio return by 1%1? The chart below shows the growth of $100,000 over a 35-year period. As you can see in this example, the difference between a 6% return and a 7% return over 35 years equates to a 40% difference in portfolio value ($770,000 versus $1,070,000) over that period. This is too much money to leave on the table. Does your broker work with you to reduce your portfolio’s tax burden? At Personal Capital, we work with you to build an investment plan that takes into account the impact of taxes on your bottom line. One way we do this is by using tax loss harvesting to help our clients achieve greater efficiency in their taxable investment accounts.
Breaking up is never easy, whether it’s with a significant other or the person who manages your money. But armed with the right information and the right questions to ask, you can at least make one of your break ups a bit smoother – and more financially gainful.
1. Personal Capital Investment Strategy, March 13, 2017, p. 16 / p. 22