Posts tagged ‘commissions’

Investor Wake-Up Call

Source: Photobucket

The Pre Wake-Up Conversation

“Hey Milfred, did you see our brokerage statement? There must be a misprint. It says our portfolio of bonds is down.”

“Buford, how can that be, when our bond portfolio has been up for 30 consecutive years? I hear Jim Bernanke is trying to artificially inflate the economy by printing money and using it to buy bonds.”

“Sweetheart, you got it wrong…it’s Ben Jernanke.”

“Ohhh, yeah honey, you’re right. I never expected prices to go down after government bond yields were up almost 50% in a few months.”  

“Sweetie, maybe we should give our broker a call?”

“Oh you mean Skip? I think he wants us to call him a financial consultant or financial advisor now…not a broker.”  

“Well anyway, I just read the largest fund manager in the world, Bill Gross, is trying to convert his bond fund into a stock fund  (read article). I can’t imagine why Mr. Gross would want to do that (see PIMCO article), but maybe Skip knows?  You know, after Skip sold us that high commission annuity and Class-A mutual fund with that 6.25% load, he decided to take his wife, kids, parents, and in-laws to Tahiti for the holidays.”

“Oh I know, Skip is such a nice young man, and so thoughtful.”

“You’re right Pumpkin, I just wish we could hear from him more than once every two years.”

“That’s right Snookum, but at least we get to talk to him when he drops off the paperwork, and his secretary is sure nice.”

“What I really like about Skip is that he always makes so much common sense – he always tells us to buy investments that have already done really well like bonds and gold.”

“Exactly Buford. I just wonder how much longer it will take for stocks to become popular again, given the stock market is already up about 100% from the beginning of 2009? Perhaps with another +30% or so, maybe Skip will switch all our money out of bonds back into stocks?”

“What I love even more about Skip is that not only does he have us buy the popular investments, but he really protects us from buying the low-priced investments that are selling at bargain prices.”

“I hear you Muffin – come to think of it, maybe I should return that sweater I recently purchased at Marshall’s for 50% off – there may be an awful reason I do not know about.”

“Good idea Sweet Pea. The other thing I love about Skip is that he is so knowledgeable…he says the exact same thing I hear from those smart news people on TV. Good thing we have a reliable professional to protect our entire life savings.”

“You’re right as usual dear. He may only have a high school GED, but we’re lucky he has these fancy letters behind his name that I never heard of like PFS, AFC, and RFC… those must be some important credentials.”

“I feel better after our conversation. Maybe we’ll hear from Skip, and if not, I’m sure he’ll drop-off some paperwork for a new investment, if our portfolio goes down by another 10%.”

The Wake-Up Reality

I make some of these comments with tongue firmly in cheek, but the fact remains we live in a financial world with a structurally flawed system of loosely regulated, banks, brokerage firms, insurance companies, ratings agencies, hedge funds, mutual funds, and other financial institutions that continue to repeatedly place their interests ahead of clients. If the 2008-2009 financial crisis hasn’t taught you anything, then you should realize it behooves you to take control of your financial situation. At least ask tough questions that result in answers you can understand – not a lot of technical mumbo-jumbo that makes an advisor sound smart. Make life easier on yourself and have a blunt wake-up call conversation, otherwise grab a pen and get ready for Skip’s call – he’s about to come over with some more paperwork.

Related articles:

Beating off the Financial Sharks

Fees, Exploitation and Confusion Hammer Investors

Investment Credentials: The Letter Shell Game  

Wade W. Slome, CFA, CFP® 

Plan. Invest. Prosper.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct position in TJX, or any security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

December 19, 2010 at 11:43 pm 2 comments

Paper Cut to Death with 12b-1 Fees

Paying all these 12b-1 fees and other expenses found in the small-print can be a lot like getting paper-cut to death.  The Securities and Exchange Commission (SEC) is looking to put a Band-Aid on the problem by capping these nonsensical fees and proposing more disclosure, albeit three decades after these fees initially got introduced. According to InvestmentNews, the SEC has proposed a .25 percent cap on 12b-1 fees, which may save investors upwards of $857 million per year if the proposal is enacted. That’s all good and great, but aren’t investors already getting pillaged and plundered with load expenses and other investment management fees?

The Original Rationale

The original thought process behind the 12b-1 fee movement was designed to allow the little guys (small fund management companies) to compete on an even playing field against the big guys (think of Fidelity, Vanguard, and the American Funds) when it came to product distribution. The SEC says about 2/3 of the 8,000 mutual funds in the industry charge 12b-1 fees, which reached over $13 billion in 2008. These 12b-1 fees generally account for 18% of the total annual fund expenses (ICI – Investment Company Institute).

Source: ICI. The general trend in 12b-1 fees was upwards until the financial crisis hit.

 So are small fund management companies truly benefitting from the customer kickbacks after 12b1-fees were unveiled in 1980? It appears the small fry fund companies have indeed scraped up some extra fees as ammo to market products against the big guys, but the big guys are receiving the same 12b-1 fees. It’s like giving both me and Alex Rodriguez (New York Yankees) an aluminum bat in the game of baseball. There’s  a good chance I may be able to clear the infield now, but A-Rod will instantly have the power to hit one out of the stadium – I have effectively gained no advantage with my new metal bat.

The Investor Perspective

If I’m an investor, what do I care if my mutual fund company has one investor or one million investors? I just want the best products at the lowest price. Yeah, there are these special items used in other industries that help pay for marketing and distribution expenses…they’re called sales and profits. What a novel idea. 

Deciphering all the mutual fund class flavors is tough enough. Like trading in a used car when buying a new car, the juggling of prices, fees, and taxes can become a head-spinning exercise in discovering the true component costs. The cards become even more stacked against investors, if you consider alternative products like the shady world of annuities (see Annuity Trap article).  If translating 12b-1 and load fees is not challenging enough for you, try digesting a slice of legalese heaven by examining this 259 page annuity prospectus gem.

The Flawed Structure

Unfortunately, the financial industry is rife with conflicts and opacity, with the investor getting the short end of the stick. The industry’s main incentive is all about generating commissions for the broker (salesman) and financial institution – not about generating the best return for the client. Here is how I see a typical conversation playing out between a broker and prospect:

Broker A:  “This is a slam dunk investment with guaranteed returns.”

Prospect XYZ:  “Wow, that sounds great – guaranteed returns in a world that everyone is talking double-dip. How do I learn more?”

Broker A:  “You can sign here on the dotted line, or borrow this forklift and take two months to review this gargantuan 259 page prospectus that I don’t even understand.”

Prospect XYZ: “If I have questions about 12b-1 fees, administrative fees, up-front commissions, management fees, mortality charges, trail expenses, or other costs, can I give you call?”

Broker A: “Oh sure, but I’ll probably be in the Bahamas drinking umbrella-coconut drinks with all the commission dollars I’ve earned, so if I don’t answer, just leave a message.” 

Why do 12b-1 Fees Exist at All?

OK, now that I’ve returned from my annuity rant, let’s get back to the pointless value of 12b-1 fees. I mean honestly, what privileged status does the financial industry have in charging customers for a business’s operating expenses? Why stop at charging customers for marketing and distribution costs…maybe customers can start paying for new fund development expenses or for employee health benefits? What’s more, if the financial industry is going to nickel and dime clients with all kinds of fees, then why not have customers subsidize the marketing and advertising campaigns in other industries, like in the pharmaceutical, tobacco, beer, and junk food industries?

Not all 12b-1 fees are created equally. Many funds do not even carry 12b-1 fees, or many that do carry a much more modest punch. While I respect Mary Shapiro’s courage in addressing the useless 30-year 12b-1 fee structure institutionalized by industry lobbyists, putting a Band-Aid on this paper-cut is only hiding the wound, not healing it.

Wade W. Slome, CFA, CFP®  

Plan. Invest. Prosper. 

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds and mutual funds, including Vanguard and Fidelity, but at the time of publishing SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

September 3, 2010 at 1:21 am Leave a comment

Investment Credentials: The Letter Shell Game

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In most professional industries – whether you are talking about a doctor, lawyer, dentist, accountant, or other respected field – a comprehensive and rigorous multi-year schooling and examination process is required to gain entrance into the club. Unfortunately for those working with professionals (I use the term loosely) in the investment and insurance fields, all that most advisors need to do is have a pulse and spend a few hours or days studying for an exam. Our structurally flawed and loosely cobbled together financial regulatory system is like a shell game that is constantly moving and hiding different conflicts of interest.

Left in the wake of the financial crisis, the public has been left picking up the pieces from the rating agency conflicts, Madoff scandal, Lehman Brothers bankruptcy, AIG collapse, Goldman Sachs hearings, golden parachute bonuses, billions in fees, commissions, and investor losses. Rather than watch the backs of investors, the system has favored financial institutions and penalized investors with fees, commissions, transactions costs, fine print, and layers of conflicts of interests. Andy Warhol described the amassing of fees like the prices of art – under both circumstances you collect “anything you can get away with.” So unless investors do their own thorough homework, there’s a good chance they will end up with a failing grade.

One of the major deception components is the creation of many worthless, pathetic lettered credentials that in many cases are worth less than the paper or business cards they are written on. Now, I’m sure some of these multi-letter credentials are worth more than others, but as a practicing professional in the industry for more than 15 years, it feels like I come across some new three letter designation every week. I know I am not alone with my sentiments, because respected professionals and colleagues I work with chuckle at many of these lettered credentials, and like me, have no clue what they stand for. When receiving a new business card with some of these strange letters, I often don’t know if I should cover my mouth while I burst out laughing, or if I’m supposed to be genuinely impressed?

Perhaps for hardworking parents, like a Joe and Mary Smith, it may mean something, but unless a multi-year curriculum (for example, the CFA Chartered Financial Analyst or CFP® – Certified Financial Planning programs) is put behind the alphabet of letters on a business card, please do not be offended if I yawn. Investors deserve better and fairer representation from someone managing their life savings, much like they get from a MD performing a surgery, a JD protecting a proprietor’s business, a CPA shielding a tax return from the IRS, or a DDS performing a root canal.

While it may sound like I am demonizing the broker/salesmen/advisors that are swimming around in the investment waters looking for commission opportunities (see Financial Sharks article), I understand some of them have genuine intentions and do not purposely misrepresent their credentials. As a matter of fact, many of the brokerage firms that hire these individuals require them to add funny letters to their business card for marketing purposes.

Here is a list of finance-related credentials other than the aforementioned:

  • AAMS (Accredited Asset Management Specialist)
  • AFC (Accredited Financial Counselor) 
  • AWMA (Accredited Wealth Management Advisor)
  • CAIA (Chartered Alternative Investment Analyst)
  • CASL (Chartered Advisor for Senior Living)
  • CCFC (Certified Cash Flow Consultant)
  • CFS (Certified Fund Specialist)
  • CIMA (Certified Investment Management Analyst)  
  • CIMC (Certified Investment Management Consultant)
  • CMA (Certified Management Accountant)
  • CMFC (Chartered Mutual Fund Counselor)
  • CMT (Chartered Market Technician)
  • ChFC (Chartered Financial Consultant)
  • CCFC (Certified Cash Flow Consultant)
  • CDFA (Certified Divorce Financial Analyst)
  • CEBS (Certified Employee Benefit Specialist)
  • CDP (Certified Divorce Planner)
  • CLTC (Certified in Long Term Care)
  • CLU (Chartered Life Underwriter)
  • CPCU (Chartered Property Casualty Underwriter)
  • CRPC (Chartered Retirement Planning Counselor)
  • CTFA (Certified Trust and Financial Adviser)
  • FRM (Financial Risk Manager)
  • MSFS (Master of Science in Financial Services)
  • PFS (Personal Financial Specialist – awarded by the American Institute of Certified Public Accountants (AICPA))
  • QPFC (Qualified Plan Financial Consultant)
  • REBC (Registered Employee Benefits Consultant)
  • RFC (Registered Financial Consultant)

When it comes to these and other industry credentials I am open to being enlightened on the relative merits…I’m all ears. And even if you trust the CFP® and CFA designations as the gold standards in the investing field, holding those credentials alone are not sufficient to make someone a good adviser. However, until I gain a better understanding of the dozens of other confusing credentials, I will continue to scratch my head and wonder which ones are worth more than the others, and which ones are not worth squat.

Healing the Wounds

It will take a long time for the financial industry to gain back the trust of investors, but it will require a multi-prong effort from regulators, financial industry executives, and investors themselves (who need to do better homework). If we want to more specifically dissect the professional service industry, then why not form one certification for each segment –not dozens.

What’s more, rather than pulling the wool over the public’s eyes with meaningless titles and credentials, let’s establish a fiduciary duty and designation that is demanded of all investment professionals. Moreover, let’s make the filtering process more rigorous in weeding out the dead-weight before handing the precious keys over to a professional. Unless changes are made, the corrupt system will remain structurally flawed, ripe with conflicts of interest, and aggressive salesmen calling themselves professionals –even if meaningless credentials are flaunted around to garner fees and commissions from the unsuspecting public.

Not everyone in the industry is a crook, but make sure you follow the ball very closely, so you do not lose in the investment shell game.

Read the Partial List of Financial Service Credentials on the CFP® Website

Wade W. Slome, CFA, CFP®    <— Don’t worry if you are not impressed by these letters…my wife and friends are not either!

Plan. Invest. Prosper.

*DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct position in Lehman/Barclays, GS, or AIG (but do own derivative position in subsidiary) or any security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

August 9, 2010 at 1:23 am Leave a comment

The Annuity Trap

Like the infamous Roach Motel, annuities allow investors to check-in while making it very difficult to check out. In many instances, getting out of annuities can be cost prohibitive (fees, charges, commissions, expenses, etc.), even if escaping these fee-laden products is in the investors’ best financial interest.

In an article dated April 13th, 2010, Jay Peroni warned others by outlining a typical annuity fee structure as follows:

  • Mortality and Expense Charge 1.50%
  • Sub Account Management Fees 1.00%
  • Unreported trading costs 0.78%
  • Annual Administrative Expenses 0.15%


What aren’t included in these numbers above are the surrender charges, which effectively can lock you into the annuity if you are averse to paying hefty surrender charges. Normally, the surrender charges vary from up to a 10% charge for large withdrawals in year one, decreasing to something like 1% in year 10. Worth noting, steep sales commissions can be layered on top of the previous charges or mysteriously embedded in the fee structure categories above.

The Big Sell


Driving the push for these 3%+ annual fees are lucrative financial institutions hiring aggressive salespeople. Typically annuities are sold under the guise of safe tax shelter investments. What the broker won’t tell you is that only a fraction (“exclusion ratio”) of the annuity payments is shielded from taxes, and the rest of the payments are taxed at the higher, unfavorable ordinary income tax rate (relative to qualified dividends and capital gains from other securities). Much of the time, many of the salespeople, who call themselves “financial advisors,” know little about these complex annuity products (see Financial Sharks article). What these brokers do understand are the big, fat commissions they stand to collect upon fleecing unsuspecting investors.

Scores of these so-called advisors are actually “registered representatives” who do not carry a fiduciary duty (meaning they are NOT required to make investment decisions in the best interest of their clients). Certainly, there are some situations where annuities might be appropriate, but from my experience there are very few cases where the egregious charges and expenses outweigh the benefits. I believe the vast majority of brokers/registered reps/salespeople are more concerned about padding their wallets than building and protecting client portfolios.

The Alternatives

If safety and tax advantages are features you are looking for then I encourage you to look at more efficient options such as the following:

  • 401k Defined Contribution Retirement Plan (or other “Qualified Plan”): Allows you to achieve tax deferral often with free money given to you in the form of a match to your contributions.
  • IRA (Individual Retirement Account): Whether you consider a traditional or Roth IRA, there are tax deferral advantages with lower fees.
  • Low Turnover, High Dividend Portfolios: Using a tax efficient management strategy with better tax treatment of income is another approach that I firmly believe will outperform most annuities.
  • Tax-Exempt Muni Bonds or Corporates: The tax-exempt status of municipal bonds affords investors a tax advantaged status. The after-tax yield on corporate bonds can be compared to the returns promised on annuities (AFTER all fees, charges, and commissions). Holding individual bonds until maturity can help avoid interest rate risk.
  • Ladder Zero Coupon Bonds: If safe fixed payments are what you are looking for, then staggered purchases of zero coupon bonds can be purchased as well.

These are only a few options that could and should be considered when reviewing your personal objectives and circumstances. With regard to the insurance component of an annuity contract, there are more cost effective ways of paying for insurance – most notably, term insurance.

At the end of the day, no matter the financial product, it is important you understand the underlying fees charged on any strategy, along with how the person selling you stuff is compensated. If you don’t do your homework on these extremely complex products (many not regulated by the NASD or SEC), then you may find yourself checking into the annuity hotel, but unable to check out.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

*DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct positions in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

June 7, 2010 at 12:10 am 1 comment

Studies Show Investors Ready to Look at New Advisors

Breaking Up a Relationship Doesn't Have to be Difficult

Breaking Up a Relationship Doesn't Have to be Difficult

Breaking up is tough to do, especially when you’ve had a chummy relationship with your financial advisor. BusinessWeek recently ran an article urging investors to seek a second opinion, much the same way people do when they request opinions from more than one doctor. 

Read BusinessWeek Article:  Thinking of Switching Financial Planners?

“Just as a good doctor should respect your decision to see a second opinion, so should your financial adviser be open to review.”


Unfortunately, when it comes to money, the average investor focuses more on the emotional aspects of the client –advisor relationship rather than the objective facts. Given the volatility in the financial markets, investors continue to sift through the rubble over the last 18 months, only to find commissions, fees, taxes, and misallocated portfolios.

A Wall Street Journal article in April highlighted the survey from Prince & Associates Inc., which showed more than 75% of investors with more than $1 million to invest plan to move some money away from their investors – more than 50% intend to leave their advisors altogether. According to the Spectrem Group (July 2009 BusinessWeek article), only 36% of millionaires believe their advisors performed well through the financial crisis of 2008-2009. Another study done by the Wharton School of Business and State Street Advisors showed that only 31% of investing clients are extreme satisfied, even though their Advisors think 65% of the clients are very satisfied.

Now is the time to check under the hood to review advisor fees and performance

Now is the time to check under the hood to review advisor fees and performance

Over our lives, we have switched CPAs, attorneys, hair-stylists and auto-mechanics, so why the difficulty in considering advisor change? The emotional aspects and uncertainty of the financial markets can cloud the decision making process. That’s why now, better than ever, it is an ideal time to ask tough questions and shop around for the top advice you deserve. In addition to bad advice, commissions and fees could be eating away at your investment returns, forcing a later than anticipated retirement or a lower quality of life. I myself prefer filet mignon over macaroni & cheese.

Given the unabated free-fall of last fall appears to have abated and the economy appears to be finding firmer footing, do yourself a favor and get a second opinion – there’s not a lot of downside.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

July 23, 2009 at 4:04 am Leave a comment

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