If you’ve ever seen movies about the brokerage world—think Wall Street or The Boiler Room—you know there’s a formula: A naïve, young broker enters the industry and quickly finds out just how cynical and ugly it is.
That’s pretty much my story. I started in the advisor business 26 years ago, as a 19-year-old intern at a regional brokerage firm. The senior brokers would always answer my questions honestly and directly. I recall that one day I asked one of the top producers how he decided which investments to put in a client’s portfolio.
I’ll never forget his answer. While he always protected his clients with a base of quality municipal bonds, the choice for the balance of the portfolio had different criteria. “If there are two products and they’re both decent—and who really knows which will perform better?” he told me, “I’ll always select the one that pays me more.”
In other words, he would stick his customers with higher fees in order to enrich himself. He was able to rationalize away the conflict by supposing that it was impossible to know which choice would perform best in the future. Common sense, however, would dictate that since fees are a significant component of investment returns, my teacher was hurting his clients’ investment results even as he helped himself. Vanguard, the largest mutual fund company in the world and creator of index investing, highlights data supporting the impact of fees on their website (see the following sidebar). ...