Ellis,

During the five-year ICLWager test, when I was using Take $tock and following the rules to the letter, I found that the turnover rate was quite high. In other words, using the methods developed within Take $tock serve to line the pockets of the broker.

I don’t recall the exact percentage, but I think T$ results in a portfolio turnover of around 60% per year. How does one square this turnover with the concern over brokers making money with each transaction?

If one takes a passive rather than an active approach to money management, the turnover drops well below 10% per year.

Lowell
http://www.lherr.org/blog/

Ellis,

I left a comment about the high turnover rate when using Take $tock, but it did not stick on the site. Perhaps you need to approve my comment.

Lowell

Hmm. I see the last comment did stick, so I will rewrite my original post.

When I was operating the five-year ICLWager test using Take Stock software, I found the turnover rate was quite high. I don’t recall the exact percentage but it was something around 60% per year. How do you square the high turnover when following the rules of Take $tock with the problem of lining the pockets of brokers.

I do have an alternative to active management and that is passive portfolio management. The returns are higher(on average), risk is reduced (on average), and expenses are reduced.

Lowell
http://www.lherr.org/blog/

Regarding this quote from your article, “don’t you think it would be better if we rewarded the brokerages by giving them a fractional percent of the value of our portfolios annually for their services”?
I think it would be better for the investor if the broker got paid on any gains in that portfolio. If they got paid on the balance every year they are getting paid for the initial principal investment that they already got paid. This way they would be truly paid for gains in your portfolio not for leaving your money in their account year after year.

@ITAWealth
Lowell, I have given up moderating the posts. We have a genteel group here and I think they’d rather have instant gratification when they do post a comment. How do you feel about it. Don’t you do the same with your blog?

@dannym
That’s a good point, Danny. However, should we then expect them to give back some when the portfolio’s market value declines?

There’s got to be some better way to see that they’re compensated for services they actually render, and which will reward them for portfolio success.

Any more ideas?

No, to earn pay they would have to show a gain, a loss would mean there is no profit from which to pay a fee to the broker. Most services you buy have an implied contract that they won’t make conditions worse for a customer. For instance if a mechanic errs and the effect is a blown engine they will most likely make the necessary repairs. As it stands now if a broker errs and causes a blown portfolio they still expect you to pay them once again…all the while telling you how it could’ve been worse.

@Ellis

Ellis,

I have Word Press set up so I need to moderate the first post. Once I OK the first post for a contributor, that person can post again without me doing anything.

What surprised me was that after I posted successfully, two additional posts were eliminated.

Lowell

Ellis,

Let me try again. I don’t mind paying a brokerage house $7.00 a trade. As a passive investor, I can reduce the trades each year. In contrast, when I was running the ICLWager Portfolio, the turnover was something like 60% a year, or what I considered to be quite high. For one Passive Portfolio I watch over, I think we have had 12 trades (would need to check it again) in nearly ten years of operation.

Once a passive portfolio is established, the only reason for buying and selling is if rebalancing is required.

Lowell

People need to take responsibility for their own lives.

They simply turn the responsibility for managing their assets over to a financial manager whom some firm has anointed.

It’s OK to have someone other than yourself manage your portfolio. What if you die and your spouse has no interest? What if portfolio management is a headache you don’t want in addition to your business or job?

You need to know how to manage your assets so you can judge how your choice is doing.

Way too many people just turn their money over to a manager and never look at it again. Look at the really rich folks that lost it all with Bernie Madoff. Rich doesn’t necessarily make you smart in finance. In college logic class that was called the fallacy of transcendental authority.

I think I’ve told you of an experience a client of mine has when he looked into becoming a broker. $10,000 fee, 8 weeks of brain washing, 24 – 7 programing of your life for those 8 weeks. If you quit or they dismiss you, you lose the $10,000 dollars.

It just like basic training. They tear you down to nothing and then build you back up, along with your new brethern, and turn out an army of robotic brokers willing to do their debachery.

I’ve been burned by a few borkers and finally decided I could not possibly do worse than they’d done for me.

After spending many, many hours with John Bogle reading his first book I took responsiblity for investing my assets. I’ve done better than many for the risk I’ve taken and I’m cheap to hire!

So what’s a fair compensation for a broker or a financial consultant?

Financial consultants should be paid on an hourly basis. It takes no more time to manage a $10,000 portfolio than it does to manage a $10,000,000 portfolio.

You can consult only on the basics or you could have the company do the investing and record keeping for accounting fees, typically $80 around here.

These days there are so many programs available to make the recommendations the only real need for a human is for the confidence factor. After this last stock market decline how much confidence can you have in any financial advisor.

How many financial advisor have I seen that are only educated in the operation of a computer program? They think I’ll be impressed with a slick color report generated by a “smart” computer, but devoid of common sense.

Vanguard Mutual Fund Company offers consultations for its members for reasonable fees – $1000 IIRC and it’s less for their Explorer or Flagship clients.

I’ve done these with Vanguard and it’s quite an impressive, colorful print out, yet nothing I can’t get for free with their free link to Financial Engines.

Their web site offers a nice feature where you specify an asset allocation ( pick one of theirs or custom make your own) and it monitors how close your actual portfolio is to your planned portfolio.

It also does a nice analysis of the portfolio by market cap, US/International, bond type and duration, and cash. It’s as impressive as any report I’ve seen.

BetterInvesting’s Portfolio Manager also does a good job. I use and recommend it. Matt & Peter Willms are fantastic to work with. $29 a year for support is cheap.

There are great life – money planners out there too. They help you plan for goals such as a house, car, vacation, college education, and retirement. My favorite is Silver by Moneytree. It costs $250 for an individual and was recommended by a former HOIC director whom used it himself in his consulting business.

My conclusion is you should learn to do it for yourself because you’re most interested in ond protective of your money. Failing that, use a fee for service consultant for whichever parts you don’t feel comfortable with or simply do not want to do.

But these brokers have been so successful with the ongoing management fee I’ve been trying to bring it to my profession. I think I will call it “Pay per chew”. I’ll charge an initial fee for fixing the tooth and then an ongoing annual fee based upon how long the restoration lasts and how much use you get out of it based upon your weight gain. VBG

I’ll be less inclined to restore badly broken down teeth becasue they won’t last as long and the client will have better restorations and less time in the chair because of the better restorations.

To quote John Lovitz “Yea, that’s the ticket!”

Some brokers used to be investment knowledgeable people but now I view most as being mainly smooth talking sales people touting whatever the home office suggests be pushed that day. Thus I am of the view the value add by most all brokers is very low. Therefore I prefer to utilize low fee brokers and ignore any broker advice. I do admit it took me quite a few years to realize the “free” advice of brokers was not even worth the cost. (bg)

I do agree excessive trading is to be avoided. It is not only the brokerage fees but the hidden fees such as bid ask spreads that subtract from ones returns. I have seen studies that indicate over half of the costs are hidden.

Your suggestion is essentially implemented by most hedge funds except they charge 1 to 2% of your assets annually plus 20% of the your profits. I suspect you were suggesting a more reasonable fee. In short they have no downside risk while having high upside potential. Thus they are motivated to take on riskier investments. This has recently been demonstrated by the large number of hedge funds that have gone out of business.

Dan

Ellis, excellent observation. As we enter the “new economy,” or what is being referred to as the “Darwin economy,” we need to look at the old way of doing things and shake them up if the modifications are for the better. Your article raises another curiosity as well. Is there a broker’s code of ethics?

So are looking at revamping the exchange system?

I’m looking for any way within reason to compensate those who facilitate our buying and selling shares of stock in a manner that will let them share in our success rather than benefit from the number of transactions we make.

Since the Internet has made it easy for us to buy and sell on-line and has eliminated most of the work involved by the customers’ man, there must be a way for brokerages to provide some other valuable services for which they could be reasonably compensated and with which they can cover the fixed cost of their trading system.

I think a fee based advisor is the most economical way for obtaining advice. Most of them are espouting basic theory and printing out a pretty computer generated plan.

I suggest reading the books yourself and just buying the computer programs. It’s a lot less expensive if you’ve got the inclination.

Some don’t and should pay a fee based advisor to manage their funds. Problem is they want a percentage of assets under management. It takes no more work to manage $10,000 than $10,000,000, just add 3 zeros ar the end of the order!

I understand they have more risk when they make and error, but that is what errors and omission insurance is available for. If I’m using them to make those transaction, I’d be willing to pay for that insurance.

I execute my trades on the internet devoid of any advice from Vanguard.

They charge me 0.08% or $8,000 per million of assets under management to buy Total Stock Market shares in proportion to the market cap.

I don’t think I could do it much cheaper considering the time away from work.

So what I’m looking at is how do I decrease this trading/management fee?

At an accounting fee of $100/hr that’s 80 hours to buy, sell, reinvest dividend, and record keep.

Unless we revamp the exchanges, I don’t see the fees getting less.

I don’t trust brokers. They’ve always made me broker.

As the Norweigian blonde lady mayor whom had lost 75% of her city’s retirement plan featured in the CNBC presentation of “House of Card” said: “I learned not to trust nice men in Armani suits.”

The planners I’ve met are nice men that know how to run a computer program. It looks great, but none of them told me about last years crash.

Brokers are hand-holders that charge huge fees. Getting them out of the equation is the best way to save money. Just like being your own general contractor.

Agred, Gary. I haven’t used a full-service broker since I discovered our way of investing. So the fees are not the issue with me. I use FolioFN, and a delighted to spend a couple of hundred buck a year for the service.

But the cost to the user for human help is not so much the issue as is the fact that, no matter how you buy or sell stock, there’s a commission on the sale or purchase. No matter how minute it may be, that’s the way the industry is compensated. No matter how miniscule the commission may be per trade, the smaller the margin, the more important it is for them to induce us to churn our accounts. They have to have a lot of trades at $2 a trade in order to pay for all of their infrastructure, to say nothing of paying their top executives enough to choke a horse!

Let’s find another way for them to earn their money besides commissions. They have an infrastructure to maintain, employees to pay, etc.. But the cost to them is no longer a sizeable operating cost. It’s become a fixed cost. Let’s try to get them to do what they need to do to increase the number of accounts (and compete for them) and not charge per transaction. Unlimited trades for an annual fee would do it. And that annual fee could be based on the number of dollars under their stewardship.

Any better ideas?

My dad always said “If you wonder why something is or isn’t being done, look to see whom is or isn’t making a buck on it.”

Money is the great motivator.

Until individual investors demand lower fees and refuse to pay the higher fees, we won’t see them.

With as bad a stock market as we saw in 2008, the exchanges must have made a ton of money with all of the selling and buying in the market.

It reminds me of the movie, Trading Places, where the two brothers explain to Eddie Murphy they make money on BOTH the buying and selling of the futures contracts.

If a new company were to be created and everyone held their shares themselves, could they not just trade the shares among themselves?

Hi, interesting post. I have been thinking about this issue,so thanks for writing. I will certainly be subscribing to your blog.

Hi, nice post. I have been pondering this issue,so thanks for posting. I’ll likely be coming back to your site. Keep up great writing

I believe the internet will do to “full service” brokerages what it did to “full service” travel agencies … make them a memory! There will be some who are afraid to take control of their financial future, but the remainder will continue to flock to online brokerages paying a fraction of the fees. Today’s broker seems to be focused on getting new business (investor accounts) and making trades for the equities sponsored by the brokerage firm without any concern for the investor’s portfolio. They, like all of us, have to make their employer more money than they get paid including benefits. Hmmm … where does that leave their customer?

My point, exactly!