Investor Lawyers Blog

For over a decade, Wall Street firms gathered assets to charge management fees on ever-growing accounts. There was no need to buy and sell, in fact, ignoring clients’ accounts while gathering more assets was rampant. Yet, a funny thing happened on the way to the bank. The value of many of these accounts has plumited and gathering new assets faces strong resistance. With their income cut in half, how are brokers to maintain their standard of living? The answer is as old as the hills – or valleys of the market cycle: Churn clients’ accounts.

“Churning” is when brokers buy and sell to create commissions. It is not only a regulatory offense but an illegal activity. To cover this motive Wall Street has new talking points: “Buy and hold” is history! Investor account need “active management” of their accounts by professionals (them). See Advisers Ditch ‘Buy and Hold’ For New Tactics, Wall Street Journal, April 29, 2009.

Actually, nothing has changed. Active management of accounts by true professionals, using proper diversification, and watching for changes in the outlook for asset classes, industries and companies mitigates risk while providing growth and income. Under-management (ignoring portfolios) exposes investors to undue danger. Over-management (churning portfolios) creates undue costs robbing growth or income. “Trading” stocks depends on knowing when to zig or zag. Since these so-called experts already failed to call the downturn, when did they find a crystal ball? If “market timing” worked they wouldn’t need your money or mine to get rich!

There are simple strategies of investment which are tried and proven. The first is to diversify based upon your investment profile and tolerance, making adjustments as these change. The second is dollar cost averaging, adding to your portfolio through thick and thin, buying more shares with the same money at low prices than when shares are expensive. Beyond that is common sense. For example: Buy shares of solid companies which have not outpaced their earnings potential and hold these until such fundamentals change.

Portfolios need management, but not too much or too little. Quarterly or semi-annual reviews, with only emergency changes in between, are probably sufficient. Anything less is neglect anything more can be over-management, even churning. You should only do this ourself if you are well versed and have time to follow investments. Do not use an advisor who calls you more than once or twice per month. Either that person is trying to gin up commissions or has entirely too much time on his or her hands. But do not keep an advisor who does not contact you every two to three months.

Adding-up the commissions from time to time would be good, but many of these are hidden. Instead, ask that the total amount anyone and everyone has made on your account in the past 12 months be included (in writing) in an annual review each year. This should include that made by the advisor, his or her firm, fund or other third-party managers, plus any other fees fees and costs charged by anyone. This is a fair question. If refused, look for a new advisor.

One or two percent on the equity portion of a portfolio is about right. If the amount is more than 2%, be concerned. If more than 4%, be very concerned. If more than 6%, leave at once! (Fees could be higher on accounts under $100,000, but cut these guidelines in half if over a million.) Bond management costs should be MUCH lower. Note tha,t if you earn only 3% or 4%, a fee of 1% robs you of a third to a fourth of your income!
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