When looking at your portfolio, there are a few key red flags to look out for. Any of these red flags could mean that you may be with an advisor or firm that has major conflicts of interest and incentives to sell you potentially pricey products that may underperform (due to high fees).
Peter Mallouk, Tony’s co-author of Unshakeable, has seen thousands of portfolios in his career, and has outlined the 3 red flags below that are easiest to spot once you know what to look for.
Paying Commissions, Kickbacks and Unnecessary Fees
In an ideal world, you would receive unbiased recommendations as to where to put your money. Unfortunately, that’s not how the financial system works for most brokers/advisors. Typical advisors receive varying levels of commissions or kickbacks for placing your money in certain mutual funds, annuities, real estate investment trusts (REITs) or exotic instruments (i.e., structured notes). These kickbacks and sales loads and can take a chunk out of your investment and/or drag down returns each year.
Proprietary Funds
Brokers routinely sell “proprietary” funds created by their own firm. They typically carry the name brand of the firm within the name of the fund. It’s a not-so-subtle strategy for keeping fees in the family – a common money-making scheme that depends on clients being naive enough to not ask whether another firm might offer better or cheaper funds.
Some independent advisors have also figured out ways to use this ruse by hiding the ball in more sinister fashion. Here’s how it typically works: the advisory firm has two arms, one of which is a registered investment advisor that offers independent advice. So far, so good. But the firm’s second arm is a sister company that owns and operates a bunch of proprietary mutual funds under an entirely different brand name. Most people know that Kirkland is a Costco brand, but few clients suspect that the funds in these situations are proprietary.
Model Portfolios for an Added Charge
Here’s another scheme that’s become increasingly common: you pay an advisor a fee to manage your money – let’s say, 1% of your assets. The advisor then recommends a “model portfolio” (he may even give it a fancy name like the “XYZ Portfolio Series”), which has its own additional fee – let’s say, 0.25% of your assets. This fee is over and above the cost of the underlying investments in your portfolio. But nothing additional is being done for you: the “model portfolio” consists of various investments the advisor has assembled, which is what you paid them to do in the first place. It’s like buying $100 worth of groceries and then getting slapped with a $25 fee for the right to carry them out of the store in a paper bag! If an advisor charges a money management fee for selecting investments, that should be it. End of story.
