Until the market provides us with some better opportunities, I thought I would provide you with an educational lesson while we wait.
After I broke away from the shackles of working for a brokerage firm, I was amazed by the huge array of choices available to investors investing through discounters. I have mentioned this before, and its worth repeating, brokerage firms keep their brokers and clients ignorant to a host of wonderful investment opportunities. Why? Because they can't make money off of you if you use them.
Here are some examples:
1) Vanguard No-Load Funds: Since the Vanguard Funds are no-load, and they do not pay kick backs to the firms to put them on the brokerage firms shelf, investors do not have the option to buy these funds through a broker.
This is not the brokers fault. Remember, a broker is just a salesman for the brokerage firms products. So, if the brokerage firm does not allow the broker to sell certain products, your choices, and possibly your performance, is limited.
2) Fidelity Select Sector Funds: If you like to maximize your performance by investing in conjunction with the Sector Rotation Model", you cannot buy Fidelity sector funds through a broker.
3) Short or Bear Funds by Rydex and ProFunds: Some brokerage firms will allow you to buy certain Rydex and ProFunds mutual funds, but not all. For example, you may be able to buy a Rydex fund that does 100% of the inverse of the S&P, Dow, or NASDAQ, but not the funds that do 200% of the index. Why? First, they don't think you池e smart enough to understand the risks associated with a 200% inverse fund. Secondly, they don't get paid because the fund is a no-load. Lastly, they are not confident that their brokers are knowledgeable to recommend these funds, and if something goes wrong they might get sued.
Here are some other examples:
1) Individually Managed Accounts:
These are fee based managed accounts that are managed by the firms home office money managers. Originally, brokerage firms allowed their brokers to place their clients with outside professional money managers. Brokerage firms were not satisfied with collecting just brokerage fees from the accounts outside managers handled, they want the money manager痴 fee too.
Something smells fishy here. Am I reading in between the lines too much, or does this look similar to the stunt they tried to pull with 的n-House� mutual funds?
Oh, one other question. If their in-house money managers do not perform well, or keep pace with the indexes and their peer group, will they fire themselves like they would an independent, outside money manager? Hardly.
In the past, before a brokerage firm would allow an outside professional money manager on to their 菟referred list�, the firm would perform an on-site due diligence evaluation at the manager痴 office. How objective do you think the firm is going to be in evaluating themselves?
2) Wrap Fee Mutual Fund Programs:
A wrap fee mutual fund program is designed to allocate a client痴 assets among a series of funds. The clients pay no sales charge(even on load funds), but a quarterly fee is charged totaling 1.5% per year. As circumstances in the economy change, the mutual fund allocations are automatically rebalanced between growth, blue chip, bonds, international funds, and real estate. Sound pretty good, huh?
As I examined the concept a little closer, I noticed a couple of the firm痴 的n-House� funds made it into the mix. And, even though the load was waived on each fund, the client was still charged an expense ratio and 12b1 fee. When you add the 1.5% fee to the expense ratio and 12b1, you池e still paying a hefty fee.
Since the firm痴 mystery panel is handling your account, and making the investment decisions, the relationship and trust you had in your broker is no longer necessary. Well, well. Would it be fair to say that collecting additional fees, and making the client reliant on the firm and not the broker was the objective? I think that痴 a fair assumption.
Brokerage firms are coming up with many ingenious ways to keep clients locked to the firm and in the process minimize or eliminate the broker痴 importance. Why?
a) More fees and revenue.
b) To place themselves directly in the middle of the broker/client relationship. By minimizing the role of the broker, the firm stands a better chance of retaining the client痴 assets should the broker move to another firm.
c) To minimize litigation. By removing the broker and client from the day-to-day management of an account, the firm will cut down dramatically on arbitration claims and awards. The basic mentality is 徹ur brokers are stupid, and so are their clients�. Huh, who are they calling stupid? Of the brokers and clients I know, none were cutting deals with Enron, WorldCom, Qwest, Global Crossing, Tyco and HealthSouth.
