May 17, 2013

Grandma Uses Edward Jones. . . Should You?

Sitting at the table last night playing Rummikub, my buddy's Grandma asked what I'm interested in or what I am pursuing as a career.  I explained that I'm really into personal finance and helping people reach their personal goals, so she asked if I had ever been interested in joining a company like Edward Jones, who handles all of her investments.
I thought about the question a bit, and was wise enough to restrain from discussing her choice to use Edward Jones for her investment needs.  I did, however, respond to the questions by explaining that my investing philosophy didn't align well with Edward Jones.  She was very curious about this comment, as recently she had asked her adviser at EJ what exactly she was paying her.  The adviser has been able to routinely skirt this question, but it got me thinking.

I have a feeling that there are many Americans out there that do not fully understand the trade offs that are being made by working with a financial adviser.  Let's take a look at some pros and cons:

Pros

Easily accessible (some have large national branch networks)
Personalized Service
Easy to Understand Investment Philosophy (More on this later)

Cons

Big Conflict of Interest
High Cost of Investing (You keep less)

The accessible network is very convenient, and if you are the type of person that just feels more comfortable speaking face to face, or by phone with a local representative its a good fit.  Everyone starts with a very limited understanding of how to invest, and EJ advisers are available probably right around the block, and are very kind and personable.

Also, the investment philosophy of investing in blue chip stocks, bonds, and actively managed mutual funds that aim to beat the stock market average is a very simple strategy to understand.  However, these funds tend to come with many high costs.

The adviser is likely to suggest mutual funds with a load (say, 5% of the total investment) that leaves you investing only 95% of your initial investment, with the rest split in some way between the mutual fund company and your adviser.  The funds they suggest also happen to have a high "expense ratio" or the amount the mutual fund company charges on an annual basis to invest in the fund.  For reference, Vanguard (a high quality/low cost investment company) charges between .1% to .25% on many of their funds.  So, on a $100,000 investment they will charge you $100-$250 per year, with no "load" to initially invest.

That same investment, say at an EJ favorite like American Funds, would be:

$100,000 invested
- 5% Front End Load
=$95,000

95,000 x  an estimated 0.75% annual expense ratio ($712.50) (one of the lowest expense ratios offered by American Funds).
=$94,286 left to invest.

This type of math is so critical to investors, yet I'd guess over 70% know nothing about it.  To their credit, they are incredibly hard working Americans working every day to put away a meaningful percentage of their paycheck for retirement.  Hopefully, however, this will be well received by some readers "on the fence" about what to do with their hard earned assets.  The difference between $99,900 and $94286 is meaningful and the gap is tough to make up!  I'd add that most (over 75%) of the "actively managed mutual funds" do not beat Vanguard Low Cost Index Funds like the Total Stock Market Index, Total Bond Market Index, and Total International Index.  These 3 funds make up Vanguard's target retirement date funds, a series of funds that adjust as investors get closer and closer to retirement, and also make up 100% of my Mom's, and my own portfolio.

To add to this, advisers actually have incentive to suggest that you rapidly buy and sell, as they earn a substantial commission when you do so.  Here is an estimate of these commissions per stock trade from call to Edward Jones' customer service line:

  • 2.5% for trades less than $6,000
  • 2% + $30 for trades between $6,000 and $10,000
  • 1.5% + $80 for trades between $10,000 and $25,000
  • 1% + $205 for trades between $25,000 and $100,000
This adds up to $100s of dollars more per trade than an investor would pay using a discounted brokerage like Scottrade or Etrade. (Both probably under $10 per trade).  This adds up to big bucks not growing for you in your IRA or 401k!

Edward Jones and many other adviser companies also have relationships with mutual fund companies like the following that pay the advisers big bonuses for selling their products.  It is likely that Edward Jones will select funds from the following companies nearly exclusively for this reason:

  • American Funds
  • Franklin Templeton
  • Hartford Investments
  • Invesco
  • Lord Abbett
  • MFS Investment Management
  • Oppenheimer Funds
 Now, let's be clear.  I'm not suggesting that Edward Jones is a bad company to do business with.  In fact, I'd like to praise their work and the work of independent financial advisers for helping millions of families reach goals that they may not have been able to had the advisers not been there to coach and motivate!  I am suggesting, however, that the goal of keeping costs low while investing is incredibly important, and the average investor should take some time to read books like The Bogleheads Guide to Investing, or The Coffeehouse Investor to get a bit more information on how to "do it yourself" and save big $ on costs. (shameless plug, if you buy one of these via clicking my link I'll get exactly 5 cents)! Investing on your own IS doable, and is actually very simple.  Taking the time to invest $100 bucks at Barnes and Noble or Amazon to purchase a few books will save you hundreds of thousands of dollars during your investing career.  I think that's one of the most worthwhile investments available!

I didn't know how to say all this to buddy's Grandma so I figured I'd put it here and refer her to this article.  I hope you also found it helpful, and wish you well with your investing future!

If you liked this article, check out our archives to see if something else may interest you.

Take care, and be well!

TB

6 comments:

  1. Didn't know this info about advisers til I read this, thanks. My uncle uses Edward Jones and I'd like him to know more about how they get paid... Sending him this article thanks!

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  2. Great! Hope it helps him. Putting someone with a conflict of interestin charge of your money can be a recipe for disaster! My wife and I are thinking of buying a house and are unsure about the benefit of using a buyers agent... We know the area pretty well, so may do it on our own as a buyers affect may have a similar conflict of interest.

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    Replies
    1. Have your uncle read this: http://www.joshuakennon.com/executives-edward-jones-feel-humiliated-mutual-fund-practices/. With the massive conflicts of interest going on at Edward Jones, you'd be a fool to invest there.

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  3. Hi Charles,

    I agree with everything you say here. American Funds; however, is not a good example for funds with high management fees. Actually, American has extraordinarily low fees. I just checked, and they are in the .6 -.75% range -- not as cheap as Vanguard but significantly lower than most load or no-load funds -- and nowhere near the 1.5% you estimate in your article. Over decades , the American Fund with a 5% load and a .6% management fee will be mathematically "cheaper" than a no load fund that has an annual fee well over 1%.

    I'm not recommending anything. I don't own any American Funds and I don't sell them. I'm just sayin'.

    Tom




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