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:
Easily accessible (some have large national branch networks)
Easy to Understand Investment Philosophy (More on this later)
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:
- 5% Front End Load
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
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
- Lord Abbett
- MFS Investment Management
- Oppenheimer Funds
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!