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Many Pay High Investment Company Fees For Services They Don't Use, Survey Shows (consumerreports.org)
Penelope Wang, writing for Consumer Reports: If you are investing in stocks, bonds, or mutual funds, you have a wide range of options to help manage your portfolio -- everything from traditional brokerages to mutual fund companies to online financial firms. But as consumers search for an investment company, many pay little attention to the fees they're being charged, according to a just-released Consumer Reports survey of more than 46,000 CR members. Four out of 10 surveyed said they weren't sure what they paid in fees. And of those who knew the costs, only 60 percent rated their investment company in our survey as Excellent or Very Good on the amount charged.
"Hidden and confusing fees are proliferating across the marketplace, making it hard for consumers to know what they're getting for their money, and to comparison shop across providers," says Anna Laitin, director of financial policy at Consumers Union, the advocacy division of Consumer Reports. "It is concerning that so many investors don't know how much they are paying in fees and that many of those who do understand the fees don't appear to think they are getting their money's worth," she says.
"Hidden and confusing fees are proliferating across the marketplace, making it hard for consumers to know what they're getting for their money, and to comparison shop across providers," says Anna Laitin, director of financial policy at Consumers Union, the advocacy division of Consumer Reports. "It is concerning that so many investors don't know how much they are paying in fees and that many of those who do understand the fees don't appear to think they are getting their money's worth," she says.
I may have got this completely wrong, but didn't a certain very large and well known Wall Street bank get found out from doing exactly this?
If I recall, the ruse went something like this:-
1. A client of the bank used the trading platform provided by the bank to put in a purchase for a large enough quantity of stock that it would likely have the effect of adjusting the price of that stock. 2. The bank made a determination that this would be a "market moving" trade, and so, using an "ultra fast" computer link, ordered that precise amount of the stock for the bank's own portfolio. 3. In response to the bank's purchase, the price of the stock went up. 4. Then the bank processed the purchase order from their client, except that what actually happened at this point was that the bank sold the client the shares from the bank's own portfolio, because of course the bank had just "beaten the client to the punch". 5. The bank booked the difference in prices as an operating profit.
Having said that, it's worth bearing in mind that this sort of practice is only really effective in high frequency trading scenarios. If the client is adopting a buy-and-hold strategy [something along the lines of a Warren Buffet approach] then, excepting the odd period of extreme volatility [witness last week's sell-off], perhaps coming just in time to bolster Q3 earnings?, those sorts of short-term variations won't have so much impact on the long-term growth of a stock or the market in general.
FYI this is called Front Running and is illegal. Market specialists were accused of doing this back in the 70s IIRC. High-speed trading scenarios aren't required if the brokerage only makes loose guarantees of how long it'll be before your trade executes.
Corruption is convincing someone that the selfless ideal is the same as their selfish ideal.
The described behavior is called "churning" and it is a form of fraud. It may sometimes be financially responsible to ditch one fund and buy a similar fund in the same year, though. This is a mechanism to "capture gains or losses" by effectively cashing out of a long-held fund. The intent here is that you already have gains/losses that offset this amount. In this way, tax exposure is limited.
As to the advice of fund with low fees... I point to the Warren Buffett million dollar bet (http://fortune.com/2017/12/30/warren-buffett-million-dollar-bet/). He won and was basically able to outperform most managed funds because the fees did not eat into his profits. The managed funds rarely outperformed his index and when it did, the fees usually removed that gain.
That's not really true. A lot of small-time investors are invested in funds that charge significant fees based on the amount invested. Almost all mutual funds have some sort of percentage fee, though it is quite small for the better index funds. On top of that, many retail investors are paying a "financial adviser" (really a salesperson) a percentage of assets under management (often 1-1.5%). Total fees can easily be greater than 2% a year. That doesn't sound like much, but if you are a retired person, that amount represents HALF your annual income (not including social security).
The sad thing is that all these fees are rarely necessary. Simply investing in low-fee index funds from the likes of Vanguard or Fidelity gets your fees down to a nominal level (like .05%). Indeed, trading makes no sense for the retail investor, but fees on trades are rarely the biggest fees retail investors pay.
You do make a point about hedge funds, which are designed to fleece the rich. They are often worse than retail mutual funds, traditionally charging a "2 and 20" (i.e. 2% of assets invested PLUS 20% of the return). Then, pile on private equity investments that add restrictions to liquidity on top of all that. But, of course, they have a slick "wealth manager" that plays golf with them and makes them think they are getting "exclusive" opportunities because they are oh so special for being rich.
It depends a lot on the broker and market - different countries have different rules. US rules are pretty lax and let the broker get away with skimming money because they're only required to provide a client with the current best round lot price even if the order can be satisfied with an odd lot in the market at a better price. Also, some brokers actually do give you access to the stock market and allow you to use various execution strategies on their platform.
It's a bit different with derivative markets where the broker may be creating their own instruments (options, futures, CFDs, etc.) - in this case the broker creates the product and sets the price. You can't trade against other participants, only the broker. You're pretty much guaranteed to be paying unfair premiums in broker market derivatives.
The main function a retail broker provides is managing risk for small clients. The exchange isn't going to deal with investors directly because of settlement risk, i.e. the risk that someone can't deliver cash to cover their buys and/or stock to cover their sells by settlement time. Brokers and other exchange participants (e.g. market makers) are required to show that they have adequate working capital and risk control procedures to manage the risk to the exchange's satisfaction. If there's any failure to settle, it's the broker who's on the line. The broker then applies their own risk management methodology when vetting investors and setting limits on their trading.
Yes, brokers are a point of friction, and they do add to transaction costs. Ideally, competition should drive prices down. As risk management systems are improved/automated, the price brokers need to charge can be reduced. If entrenched brokers are charging too much, upstart brokers can undercut them. Of course you also need a regulatory environment that facilitates a fair market for broker services.
Oh and Goldman Sachs are cunts - we all know that.