ETF Investing Guide: Summary: Brokers, Financial Advisors & Investing For the Wealthy

by: David Jackson
  • The traditional broker-client relationship is crippled by a fundamental conflict of interest: the broker is not directly compensated for giving objective advice, and is incentivized to maximize fees (My Broker's an Honest Fox).
  • Asset-based-fees go some way to reducing brokers’ conflicts of interest. But they don’t solve all conflicts of interest, they incentivize the broker to spend too much time prospecting for new accounts, and they take a sizable chunk out of clients’ investment returns (Asset-Based Fees to the Rescue).
  • Asset-based-fees could cut investor returns by 25% based on current market forecasts (But What if You Saved $275k Annually?).
  • Many independent financial advisors also charge-asset based-fees. If you need to consult a financial advisor, it’s generally better to negotiate an hourly fee instead (Financial Advisors).
  • Commoditization of financial products - particularly of index funds and online brokerage services - has steadily driven costs down and improved product quality. Fees for less commoditized financial products, such as managed accounts and actively managed mutual funds, have actually risen. As a result, wealthy investors should welcome low-cost, high functionality mass-market products (Me, Use E*Trade? But I'm not a Poor Day Trader!).
  • Separately managed accounts are the darling of the investment industry because they attract wealthy clients and charge hefty recurring fees. But the overall underperformance of investment managers versus their index benchmarks (Why You Shouldn’t Buy Mutual Funds) and the crippling impact of high fees (But What if You Saved $275k Annually?) means that separately managed accounts are generally a bad deal for investors (Separately Managed Accounts (SMAs)).
  • Most wealthy investors over-estimate their need for investment advice. Management of a portfolio of eight to twelve ETFs (A Core ETF Portfolio) in an online account (Which Brokerages Come Out Best?) is easy and not time consuming, and likely provides better diversification and overall performance than most High Net (financial) Worth financial services using individual stocks and mutual funds (What Not To Do).
  • For a $10 million account, a basket of ETFs managed in an online brokerage account should outperform an asset-based-fee account targeted at wealthy individuals by about $275,000 per year, by my estimate (But What if You Saved $275k Annually?).
  • If you need customized advice and products, split your assets between an active manager and an online brokerage to minimize fees. Use the online brokerage to manage the majority of your assets in ETFs. Ensure that the active manager is directly compensated for objective advice, fully discloses all fees, and provides a fully documented track record (What to Do With What's Left?).
  • All investors are "high net worth", because all human beings are high net worth. Some investors, however, have high net financial worth because they are wealthy. Perhaps we should be concerned that the terminology adopted by the financial industry doesn't recognize the distinction between "high net worth" and "high net financial worth". Just a thought...

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