Where to look for hidden fees and repeat transactions that could be costing you a bundle.
Scott: Hello Dave. Dave's been with Hanson McClain for more than 20 years, great advisor, he's a CERTIFIED FINANCIAL PLANNER™ professional, and he works out of our Folsom Northern California office. One of the things I enjoy about Dave is he really cares about his clients. I mean he gets emotionally wrapped up in his clients' lives, and really works to help them, making sure they're doing the right thing.
Dave: I appreciate the kind words, Scott. I really enjoy what I do, so.
Scott: So, tell us about a situation you recently were dealing with, and what happened.
Pat: And we've got about six minutes, Dave, because I know at points in time you like to stretch a story out.
Dave: I knew Pat was going to put me on the clock. Anyway, this particular client actually was an acquaintance of mine, and he had approached me regarding his mother's account, and said, "Hey, you know, there's a lot of stuff going on here, and I'm just kind of getting involved, and I need your help. Appears to be a lot of transactions happening, and I'm not quite sure what we're paying in costs, and fees, commissions. She's 84 years old, you know, we're just trying to kind of simplify things. So, can you take a look at this portfolio, and give me some feedback, and tell me what you think?"
Scott: Which is pretty common, right? Pretty common, particularly there's one parent left and the child ends up getting involved with the finances.
Scott: Very common.
Dave: Exactly, yeah. So, I took a look at the portfolio and went through things, and, right off the bat, I could see that... and my friend knew some of this was going on, but he just didn't quite have his hands around it, right? So, right off the bat, I could see that there were five... So, it's about a $2,000,000 portfolio, and I could see that there were about 5 to 10 transactions happening on a monthly basis, and I had him give me statements dating back for a couple years, so I could go back and look at it over an 18-month time frame. Almost every single month there were 5 to 10 transactions taking place, and in 2014 they had made transactions moving about $900,000, 2015 was $900,000, year to date, and this was like through June and July, they had about $500,000 to $600,000.
Scott: Out of a $2,000,000 portfolio?
Pat: So, they're moving 50% of the portfolio a year. Was it in an IRA, was it in a tax qualified account, or was it in...?
Scott: Well, turned 100% a year.
Dave: Yeah, out of the $2,000,000, really the IRA, there was about $300,000 in an IRA, so it was around $1,700,000 to $2,000,000 sitting in the trust account, and that's where all the transactions were taking place. The IRA was pretty much left alone. So...
Pat: So, that makes good sense for tax efficiency, doesn't it, to trade as much as you can on the one that's going to incur the taxes.
Scott: Was it a commission type account, like a typical brokerage account?
Dave: So, inside the portfolio there were a lot of different things being held, there were REITs being held, there were individual ETFs, individual stocks, individual bonds, and mutual funds, so myriad different investments. Now, again, this is for an 84-year old, and we've got 5 to 10 transactions happening on a monthly basis. So, you know, we rolled up the sleeves, we went through all of this...
Scott: She's like a day-trader, 84 year old day-trader.
Dave: Yeah, I mean, and she, pretty much the way this was taking place was, the financial advisor... and, by the way, this was a situation where the dad was managing the portfolio for quite some time, he retired and passed it on to his son, and so the past couple years, this is where a lot of the activity started to begin inside this account. So, we went through, we looked through the portfolio, and we really couldn't see a lot of fees and costs being generated inside the portfolio. Now there were internal costs by some of the funds that were being purchased, and the ETFs and what not, so you had to actually go to the transaction statements, the confirmation statements, and that's where the commissions were being generated.
Scott: So, they weren't on the statement.
Dave: No. So...
Dave: What really alerted the client, or...
Scott: By the way, if you're listening, you're a client at Hanson McClain thinking, "Well, I don't see any transaction costs on statements." That's because we don't have transaction costs, so.
Pat: The firm pays the transaction costs.
Dave: Yeah, there actually is transaction costs, but we pay for it. So, we're sitting here, and we're going through this, and we can't see any fees, but the son was sitting here going, "But the account balance is continuing to go down, down, and down." Well, sure enough, when you pulled up the confirmation statements, and looked at those, that's why there was 5 to 10 transactions going on on a monthly basis, and all of those commissions were being generated through those transactions.
Scott: It's like the 1980s, the way this account's managed.
Dave: It's really interesting, you know...
Scott: I mean…you don't see this every day, do you?
Dave: No, I mean we talk about it, and we know that it's out there, but, I have to tell you, in the 20 years that I've been here, and 25 years in the industry, it's not that often I see these kinds of transactions being taken place inside of an account. We all know the word churning…
Scott: Were they at a large firm?
Dave: Yes, they were:
Pat: And so, what did you do to fix it?
Dave: They're looking to simplify her life. I mean, one of the things that we did is, number one, after we found out costs and all that, we did a stress test on the portfolio to see how it was allocated in conjunction with where her son and-or she needed it to be, and we could see... and, by the way, for our listeners, stress testing just simply means that we're... and I know you guys have talked about it... just simply means that we take a portfolio and we put it in a controlled room, a controlled environment, and we throw economic factors at it to see how that portfolio is reacting, and to see if it's falling within the risk tolerance that what they say they're willing to take on within that portfolio.
So, we did that. We said, "Look, you know, whether or not you use us or not, you need to get to a fee-based relationship so that the transactions, that you know that are happening inside the portfolio, are happening for the best interest of your mom, and not necessarily for somebody being paid in commission. So, when we went through all that, we talked about how we do things, they ended up choosing to use us.
Pat: And, the reality is, had they chosen a fiduciary advisor day one they wouldn't have had these conflicts with their broker, and, obviously, there was a position of trust...
Scott: Well, when they're not a fee-based relationship there's a conflict that exists when the brokers get paid to make a transaction, not necessarily what's doing in the best interest of the clients.
Pat: Thank you very much.
Scott: Thanks, Dave.
Pat: Thanks, appreciate you being part of the firm, and taking great care of your clients.