Warren Buffett likens asking a stock broker for investment advice to, “ask[ing] the barber if you need a haircut.” The inference I draw from the analogy is that if you ask too much you’re gonna end up bald/broke in a hurry (or at least faster than you naturally might). The point is that the interests of the broker or barber are not aligned well with the interests of their customers.
One area I’ve recently noticed this conflict in action is in the increasing popularity of WRAP fees. A WRAP fee typically costs a client 1-2% of their account value each year. This fee takes the place of commissions on trades. By definition, then, WRAP fees are best for active accounts and commissions are best for relatively inactive ones and maybe in a no-conflict zone this is actually how they’d work.
The problem that I’ve noticed recently is a trend towards implementing WRAP fees for accounts with almost no activity. My guess is that these accounts are simply not generating any income for the broker and instituting a WRAP fee, while not in the best interests of the client, solves this problem for the broker.
What’s even more troubling is that the instances I’ve witnessed are accounts that have recently purchased load mutual funds, which carry rather large commissions. After this one-time commission is generated for this long-term investment the broker then implements the WRAP fee. Look “double-dipping” up in the dictionary and this is exactly what you’ll find.
The title of this piece refers to the book by Wall Street insider Fred Schwed, first published in 1940. As I’m sure you’ve already gathered, not much has changed in the past 65 years.
LIV