Back when I worked in institutional equity sales at Merrill Lynch, we charged our accounts commissions to execute their trades. Bundled into the commissions paid was access to our firm’s research and research was only offered to customers who had a trading relationship with us. By bundling trade execution together with research, firms like Merrill were able to somewhat hold the line on declining commission rates.
But in March of 2004 things changed as mutual fund companies were under intense pressure to lower their costs. Robert Pozen, then Chairman of MFS Investment Management, led the charge; he had had enough of our non-transparent bundled pricing structure. Mr. Pozen demanded that firms like Merrill Lynch break out how much of their commissions were paying for the actual trade execution and how much were paying for research. He wanted a la carte pricing. He then went on to state that he valued our research at zero and only intended to pay for trade execution.
Mr. Pozen’s demand seemed radical at the time as bundling trade execution and research was a tribal custom at large Wall Street firms. Initially, it was unclear if other large institutional clients would jump on the a la carte pricing bandwagon. But with sell side research departments still reeling from the Eliot Spitzer fallout and grappling with new regulations, we were on shaky ground. The jig was up.
In 2004, large mutual fund companies like MFS paid full service brokerage firms like Merrill commission rates of roughly five cents per share. When I left Merrill in the fall of 2007, our a la carte execution only commission rates were about 1/3 of a penny a share. Mr. Pozen succeeded in breaking the back of the institutional commission game.
Take a page out of Mr. Pozen’s playbook
We’ve written extensively about the negative impact investment management fees have on investment returns. We keep returning to this theme for a simple reason—investors have no control over things like market direction, but they have total control over their investment related costs. In the current low return environment it’s not unrealistic to actually double your investment returns by prudently managing these investment related costs.
Investors today need to consider the wisdom of Mr. Pozen’s a la carte pricing. How much are you paying for actual investment advice and how much are you paying for things like portfolio management or ongoing supervisory services? In most cases investors are better off paying for advice and then implementing that advice in a low cost strategy, away from the advisor.
Most of us are drawn to the path of least resistance. The idea of turning your assets over to an investment professional who is promoting things like a “low risk, high return” investment strategy is very tempting. I’d like to think I could eat cheeseburgers and drink milkshakes and still look good at the beach this summer. But it doesn’t work that way in the real world, and neither do most of these gimmicky investment strategies.
It’s time to take personal responsibility for your investments. Seek the best advice you can (be prepared to pay for it) then take advantage of low cost alternatives to implement the advice. We’re not talking about rocket science here. Open a plain old brokerage account, use low cost index funds, be disciplined, and don’t be afraid to invest in a high quality stock once in a while. Invest the time and do your research, but avoid outsourcing—you can’t afford it.
Don’t ever expect your investment advisor to come to you and tell you that you’re paying them too much (even the ones that promote themselves as fiduciaries won’t do this). The name of their game is to charge you the highest fee that they can get away with. Investors need to become educated with respect to advocating for themselves in the investment process, and they need to become savvy about how investment costs directly impact investment performance.
Mr. Pozen’s a la carte pricing demand was brilliant and his gutsy call ended up saving investors billions of dollars. Shouldn’t you demand the same thing?
NOW WATCH: Money & Markets videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.