Paying for Underperformance

I once had a person come to me who was very disgruntled with their current financial advisor. They had lost more money than they’d wanted to and really didn’t understand what they had. When I had a chance to take a look at their mutual fund portfolio, I noticed that all they had were B-Share mutual funds.

For those of you who don’t know, B-Shares, for the most part, are now non-existent. Although I can’t be certain why, my hunch is that they aren’t around anymore because too many advisors abused them. If they could still sell them, the advisor could make a handsome commission, and the client would never know.

Now, it’s not the commission on the B-Share that makes them so bad; it’s the fact that most of them had a six- to seven-year surrender period. That means if you buy the fund, you’re going to have to hold it for at least six or seven years before you can liquidate it without a penalty.

The client in my office had no idea what a B-Share was, and most importantly, had no idea that she had a surrender charge attached to it. So here she is—stuck in investments that had lost more money for her than she had wanted, and she can’t do anything about it. If she did sell it, she’d have to pay a surrender charge on top of her losses. Talk about a slap in the face.

Lesson learned: Read all the fine print and make sure you understand if your investment product has any type of surrender charge attached to it.

My husband’s family has used a boutique firm of financial advisors for years, and honestly, they are probably the best of the best. Independent, fee-for-service—they are very good at what they do. However, I still have some massive issues with them.

Essentially, they have overcomplicated everyone’s finances to a point where the family is now reliant on them for everything. They could probably never extract themselves from their services even if they wanted to. I think this is their ultimate business model. My in-laws have a highly complex portfolio of 30-40 investments (shares, managed funds, etc.), and yet their fund grows less than my simple VAS/VGS portfolio. They pay these guys something insane like $30K per year in fees.

The same firm took on my sister as a client, despite her having extremely simple and minimal finances, charging her $5K per year for insurance and tax advice and complicating her super and other things to the point that now she can’t manage it by herself. I think they honestly should have told her she didn’t need a financial advisor.

Prior to learning about finances and “going it alone,” they had my husband involved in several managed funds that were charging him 1.5% per year and making around 5-6% before fees. Way worse than a simple ETF. I worked out that his money grew about half the amount it would have if we had just been using ETFs from the beginning. And yet, when we mentioned our change of plan, they still recommended we didn’t go with ETFs and stayed with the managed fund. It didn’t make sense.

Again, my theory is simply that they don’t charge commissions on these things, but by having them manage our money and invest into funds for us, they can charge us fees for service and keep things sufficiently complex so we need to keep using them year after year. I think it’s all a bit of a rort, really.

I went to see one about setting up a private pension because I don't get one through my employer (employed through an offshore company). Got charged about 150 quid for them to go away and "research" some options for me (probably very little research to be done; they already have a standard set of funds that they use through Openwork). For the first year they wanted 35% of my contributions.

The fund that they "found" for me (something Graphene, can't remember the name of it and I'm not at home to check) consisted of several individual funds to apparently lessen the risk of a single fund manager going to shit. In total the funds consisted of about 70% UK equities (why?), had rubbish past performance when compared to a global index tracker and would've cost me well over 2 or 3% per year (can't remember the exact number sorry), plus about 1% per year to the financial advisor for "management" after the initial 35% for the first year.