Problem: Ineffective and Expensive Brokerage Firm “Solution”
- Opaque fee structure
- Broker is a high priced delegater
- Undetected style drift
- Lack of proper portfolio re-balancing–creating undue risk
- Investment decisions based on “yesterday’s winners”
Solution: Created a Cost and Tax Efficient Portfolio
- Move assets to a preferred qualified custodian
- Terminate separate account management platform
- Reduce unwarranted equity exposure
- Harvest tax losses, liquidate tax-inefficient holdings
- Minimize fees, maximize after-tax value
A Much Needed Portfolio Check Up
At the suggestion of a client, Dr. Care scheduled a complimentary consultation with one of our investment advisors. At the time of his visit he was 60 years old and a partner in a multi-specialty medical group. The doctor was concerned about a lack of communication with his broker and an unclear investment strategy. His brokerage statement was very confusing with references to numerous money managers, hundreds of investments, lengthy footnotes and is printed on over fifty double sided pages.
The Separate Account Management “Solution”
Years earlier, a stock broker moved his sizable retirement and personal investments into a separate account management platform allowing him to “quarterback” the relationship. In essence, the broker would receive a rather large management fee for the privilege of outsourcing investments to external money managers. These external manager solutions, (including an illiquid limited partnership), came with significant management fees as well, though not obvious to the doctor, as they were embedded in the outsourced products.
The Reality of Separate Account Management Platforms
Dr. Care was paying a substantial amount of money to participate in the separate account management program. Whenever questioned, the broker would repeatedly preach his portfolio diversification mantra as justification for his actions. Here we agree in concept. However, instead of benefiting from proper diversification the portfolio was actually experiencing undetected style drift. The outsourced managers, independent of their mandate, were collectively chasing “yesterday’s” winners and effectively increasing portfolio risk, not lowering it. In addition to failing to properly “manage the managers” the advisor had failed to periodically rebalance the Doctor’s mix of stocks and bonds. Unfortunately for the doctor, portfolio risk was expanding on all fronts as his ability to accept risk was steadily declining. Had the broker carefully and fully explained the “all-in” fee structure of the relationship? Was the broker improperly incented to “push” certain product? Was there any attempt to maximize after-tax performance? Did the broker maintain a current profile on the client? Was the broker acting as a client fiduciary? We do not know for certain. Unlike a registered investment advisor, the broker was only bound by a suitability clause that did not legally require the advisor to act in the best interests of their client.
Engaging Withum Wealth Management, a Registered Investment Advisor
After terminating the broker relationship, the doctor engaged Withum Wealth Management’s services. Our first step was to move investment accounts to a preferred qualified custodian. Terminating the broker relationship produced an immediate cost savings. We also addressed the unsuitable asset mix that had manifested over time by reducing equity exposure and reallocating sale proceeds. Tax losses were “harvested” and inappropriate and tax-inefficient holdings were liquidated. Dr. Care’s new investment strategy reduced equity risk, without incurring a large tax liability, and positioned new bond purchases to compound on a pre-tax basis. These initial steps created a foundation of trust that has lead to a long and rewarding relationship.
Dr. Care has comfortably retired from his medical group, but not from medicine. He is now the Medical Director for a not-for-profit healthcare facility dedicated to helping the underprivileged in his community. We are proud supporter of this organization. Working together, we helped Dr. Care achieve goals beyond those related to investments. We secured his future and in return he now works to secure the future of those less fortunate than us.
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