Talk About Money: Don’t get bogged down by investment fees
by Mark Rosenberg
Apr 05, 2012 | 567 views | 0 0 comments | 5 5 recommendations | email to a friend | print
I was sitting in a banquet room at a downtown Los Angeles hotel in the 1980s, next to my late colleague Dick Bowman. We were both stockbrokers in an L.A. office of a major Wall Street firm.

I was 30 and had been with the firm a few years. Bowman was 60 and had been with the firm forever. His face showed it. He had dark circles under his eyes and looked weary from years of being pushed to boost his sales numbers and sell products the firm favored.

A crowd of brokers was there for the kickoff of a new fund. We listened to a parade of vice presidents in expensive suits tell us how great it was.

It was the latest in a series of new funds the firm was underwriting, each different, but each with one thing in common: high fees.

Bowman and I looked at all the highly paid executives promoting the fund and wondered what they did. They weren’t teaching us anything. They weren’t managing money. They were part of “the underwriting team,” who would get paid out of our clients’ money if they could persuade us to recommend the new fund.

Shaking his head, Bowman leaned to me and quietly said out of the side of his mouth, “Too many pigs at the trough.”

What Bowman was resisting in the 1980s was the beginning of a sea change in the brokerage business, a new approach that benefitted firms, not clients.

Instead of devoting many hours to research and helping clients select and monitor  individual stocks and bonds, brokers were pushed to “leverage our time” by outsourcing the investment management to mutual funds and other third parties.

The new approach fueled rapid growth for Wall Street in the go-go ’80s and ’90s. And clients didn’t mind paying 2 or 3 percent, or more, in fees when the stock market was going up by double digits each year.

Then the go-go years ended. The stock market had a “lost decade,” with the Standard & Poor’s 500 losing 0.9 percent a year on average for the 10 years that followed Y2K. But high fees are still around.

I’ve seen many cases where clients invested in mutual funds in the late ’90s or early ’00s, and 10 to 12 years later haven’t made any profit. Meanwhile, they’ve paid hefty fees. It’s not unusual. Yahoo Finance projects the average midcap-blend equity fund will charge $2,153 in fees on a $10,000 investment over the next 10 years.

High fees remind me of that meeting in the 1980s.

Bowman and I didn’t sell any shares of the new fund, despite the pressure we were under and the rewards we would get if we did.

A few years after that presentation, I left that firm, moved north to where I grew up, and went to work for an independent firm that never pushes me to sell anything.

I’m not opposed to mutual funds. They are the right choice for many investors in many situations. But, where appropriate, I prefer the lower-cost approach of helping clients manage a portfolio of individual stocks and bonds.

Bowman died a long time ago, but his words echo in my mind every time I see an investor’s statement showing the adviser has outsourced portfolio management to a third party. A team of two — client and adviser — may do better, and is usually less costly.

- Mark Rosenberg is an investment consultant for Financial West Group in Scotts Valley, a member of FINRA and SIPC. He can be reached at 439-9910 or Opinions are his, and not those of FWG.

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