The Executives at Edward Jones Should Feel Humiliated About Their Mutual Fund Practices

Trust departments, trust companies, and money management firms provide a valuable service to the civilization.  For centuries, men and women who had built up a nest egg could go down to their local branch, meet with the bank, and sign a contract for the bank to protect the money when they were incapacitated or had fallen off the mortal coil.  Farmers could sleep at night knowing that the bank would keep their farm running until their minor children came of age.  Real estate moguls could have peace with the idea that their spendthrift grandchildren would always have money as they could never touch the principal of their inheritance.  Sure, the bank or wealth management company took some fees, but the benefits were well worth the arrangement.

Those who worked in trust departments were typically the epitome of conservatism.  Silver haired, suit-wearing, and well-heeled, they sat in their offices, looking over the books, reviewing client portfolios, paying household bills for widows who didn’t know how to manage finances.  Their job was to make sure each client owned a collection of assets that suited his or her needs.  The laws in the United States held them to a fiduciary duty, including the so-called “Prudent Man Rule”, which requires trustees “to observe how men of prudence, discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested.”  This was not the realm of high-flying dot-com stocks or options speculation.  No, the bank trust officer would put you in stocks and bonds issued by AT&T or Wal-Mart, PepsiCo or Nestle.  “Get rich slowly but safely” might as well have been etched into the oft-marble buildings that housed these institutions.

In recent decades, it seems as if things have changed.  As I put the finishing touches on an article about bank trust departments I was writing for the Investing for Beginners site at About.com, I decided to pull fee schedules and disclosures from some of the best-known trust companies in business here in the United States.  Some behaved very well, still living by that old time religion and keeping the faith.  Others, I consider worthy of derision.  Let me give you an example of the latter.

The Fee Structure on a Hypothetical $2,000,000 Trust Fund

Imagine you quietly build a $2,000,000 portfolio of blue chip stocks and bonds throughout your lifetime.  Year after year, decade after decade, you buy shares of Coca-Cola, Royal Dutch Shell, Procter & Gamble, General Electric, Johnson & Johnson, and a host of other firms with records of growing earnings and increasing dividends.  Given that you have no expenses save for a handful of brokerage commissions, academic research indicates you could afford to safely withdraw 4% of your net assets, or $80,000, every year without running out of money even in a Great Depression scenario.

You want your children and grandchildren to inherit these assets, but never be able to do something foolish like lose them to a gambling addiction or day trading.  They will enjoy a huge tax advantage when you die because not only will these assets be passed on to your kids and grandkids tax-free, they will enjoy a stepped-up cost basis on the shares, forever wiping out any capital gains taxes you would have owed were the investments sold.

To begin planning this transition, you decide to meet with a trust company.  You settle on the affiliate of Edward Jones, the well known and well respected main street purveyor of financial advice.  The Edward Jones model allows you to find someone, an individual, you want to work with in your community so you enjoy a one-on-one relationship; a person to understand your needs, hold your hand, and concern themselves with your unique situation.

You look over the terms and, at first glance, they appear pretty reasonable; not a bargain, by any means, but certainly not terrible.  To establish the trust and handle all of the details when you pass away, they are going to charge you a $12,500 one-time accounting opening trust settlement and distribution fee.  If you need them to act as the executor, as well, that’s another $3,000 on top of it.  So right out the gate, $15,500 is gone.  For setting up a lifetime of security for your heirs, this isn’t too bad.  We’re talking about 77.5 basis points; barely more than three-quarters of one percent.  Whatever.  We can live with this.  Still, you are adamant you want the trust to begin with exactly $2,000,000 so you decide to pay the $15,500 out of pocket from the remainder of your estate.

You pass away and your heirs go meet with their Edward Jones representative.  Now, the annual fees begin.  That’s okay, too.  Administering and investing the assets of a trust requires work, legal risk, compliance requirements, and time.  To serve as trustee or co-trustee, Edward Jones charges $1,200.  Then, to determine the expenses you will pay for the money management fee, it provides a tiered expense ratio that rewards you with larger account balances, which is good.  Pulling up their fee schedule (PDF), the first year fees on the $2,000,000 trust would be $21,950, broken down as follows:

Edward Jones Trust Fund Fee Schedule

Again, not a huge deal.  Once the trust is up and running, the base management and administration fees are only going to be 1.1%.  That is below the mutual fund expense ratio of the average equity fund, and will continue to decline as the trust assets grow.  There will be a few other fees in there – $600 for a preparation of a tax return – but on a $2,000,000 trust, it’s a rounding error.

All in, we might expect the total administrative and investment costs to run around 1.2%.  Given that this includes trustee oversight, tax preparation, and money management of a diversified collection of assets (perhaps you instruct Edward Jones to sell some of your stocks so that the trust includes a mix of domestic and international blue chips, gilt-edged bonds, and Treasury bills), that’s more than fair.  The commissions are typically free as they use their brokerage affiliate, so you don’t need to worry about those costs.  The arrangement will allow the trust company to intelligently plan tax strategy far more efficiently than investing in an index fund could (even the great mutual fund guru John Bogle, founder of Vanguard, points out in Common Sense on Mutual Funds, “Holding individual stocks for the long term may not only be wise, but far more tax-efficient.”  When you selectively liquidate certain holdings with the highest cost basis, or shelter certain gains by simultaneously triggering losses on shares that have fallen to net them against each other, you can reduce quite a bit of the bite taken by Uncle Sam, which are among the reasons it’s often better to construct your own index fund from direct securities once you have some real money to your name.  One could easily build an S&P 500 fund with as little as $500,000 and a negotiated free commission period).

This is a satisfactory trust arrangement.  The withdrawal rate for the beneficiaries will need to be 3%, not the 4% you were taking, in order to safely accommodate the now 1.2% expenses it is running, but you’ve protected the assets from creditors, guaranteed your family will have money upon which they can live, and left an inheritance to even your children’s children so any one who is capable and able will be able to go to college, start a life, and have a little bit extra.  Your family doesn’t need to think about stocks or bonds – they may not be interested or they may not have the time nor talent – but they’ll still get to enjoy the wonders of compounding.  It’s a mutually beneficial arrangement that is fair to everyone involved.

What’s the problem?

If you keep reading the fee disclosure, you get to a passage that should make your jaw drop.

Edward Jones Mutual Fund Disclosure

You, and your family, are paying Edward Jones a tiered asset management fee – 1.5% on the first $500,000, 1.15% on the next $500,000, and 0.75% on the next $1,000,000 – specifically to construct a portfolio of investments for you.  This means individually selecting stocks and bonds that fit your needs based on the current attractiveness of the price, while avoiding those that aren’t appropriate for your personality, temperament, risk profile, or liquidity requirements.

Yet, Edward Jones is saying that they might turn around and invest the money into mutual funds.

Mutual funds are pooled investment vehicles through which investors use their combined economies of scale to hire an asset manager.  They can be wonderful tools for building wealth, but only if you hold them directly, paying a small one-time commission of a few dollars.  In this case, Edward Jones is saying they might take your money, get paid for investing the capital, then instead of doing the job you hired them to do, turn around and hire another asset manager, who will also take a fee, albeit indirectly so you don’t see it as it is deducted from the value of the mutual fund shares.  It will never explicitly be listed on your account statement but rather reduce the market value of your mutual fund shares.

It would be like hiring an interior decorator.  You put $50,000 in an escrow account to spruce up your house.  You agree to pay him $3,000 for his services, leaving $47,000 for the project.  He accepts the contract but instead of doing the job himself, brings in another designer.  This other designer doesn’t charge you, directly, but instead, adds 10% to the costs of all the rugs, paintings, and furniture she buys for your home.  This second designer buys $42,300 worth of stuff, charges you the $47,000, and pockets the $4,700 difference as her fee.  But she had a side arrangement that she would inflate the costs of her services then give $850 under the table back to the first designer you hired.  And he’d never tell you about this except in teeny, tiny print when forced to disclose it after the government threatened him and levied a hefty fine.

To any intelligent person, the total decorating costs were $7,700 not $3,000 and the first designer was an unnecessary middleman.  It would have been better for you to go directly to the second designer, pay the $4,700, and be done with it.  It’s also clear the original designer is behaving in a less than honest manner.

At this point, I’m in such disbelief, I think, “Okay.  I’ll give them the benefit of the doubt.  Maybe, maybe, they will turn around and take advantage of some very low cost index funds or bonds funds, which still doesn’t make sense for any account of size, but we’re talking a couple of added basis points.  I mean, the Vanguard 500 Index Fund admiral class shares have a cost basis of 0.05%, or 5 basis points.  I can see, in theory, how someone might want to devote a small sliver of an asset allocation to some sort of broad based strategy and the convenience of the prepackaged security would achieve that.”  And, again, this is only because we’re dealing with a $2,000,000 trust.  For smaller accounts, the pooled structures are probably a necessity as there simply aren’t the economies of scale necessary to get a lot of diversification in a way that is worth the time pf and risk to the firm.  If you have a $50,000 account at a financial adviser, you’re probably not getting individual positions.

So I dig deeper.  Edward Jones has a list of so-called “preferred” mutual fund families.  According to the Edward Jones disclosure, a majority of the assets devoted to mutual funds at the firm are steered into those on the list.

Edward Jones Preferred Fund Family Disclosure

JPMorgan Asset Management was recently bragging about being one of the few companies to get on the roster, so I decide to find out which funds are included.  Here’s the official announcement flyer from the New York megabank’s money management division:

JP Morgan Funds at Edward Jones

Click the image to go to the official PDF file on the J.P. Morgan Funds website.

“Alright,” I think.  “Let’s pull a random fund off the list.  How about the JPMorgan Mid Cap Value Fund?  That sounds good.  There are two classes of shares, so one of them surely offers a rock-bottom expense ratio since this is an additional cost imposed on top of the Edward Jones management fee and Edward Jones couldn’t possibly be so corrupt or incompetent to pick a regular, plain-vanilla retail fund for inclusion.  After all, that borders on professional incompetence to the point if I were a regulator, I’d shut down their trust department.”

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Rage.  Nothing but rage.  The C Class shares have an expense ratio of 1.74%.  The A class shares have an expense ratio of 1.24%.  The Class A shares have a turnover of 67%, meaning the average stock is held for less than 18 months!  Eighteen months!  Do you have any idea what that does your tax efficiency?  You lose all the benefit of deferred taxes, which can be enormous in the wealth building process.  The Class B shares come in at 23%, which is still extremely high.  And this is for a trust.  Unless you are distributing all of that income to the trust beneficiaries, trusts have significantly compressed tax brackets so short-term gains, if any, are particularly harmful.

Oh, yeah, and Class A shares are so expensive because of the whopping 5.75% sales load.  That means for every $10,000 you invest, $575 is taken as a commission charge to the people selling you the fund.

That means that a family with $2,000,000 who went to Edward Jones for investment management services would theoretically be paying an asset-based fee with trust administration fees of around 1.20% plus an indirect fee of between 1.24% and 1.74%, while getting terrible tax efficiency.  The only good news is that a client of this size would probably be able to avoid most of the sales loads (it appears, depending on the situation, that once you cross $100,000, the load drops to 3%-4% and once you cross the $1,000,000 mark for a fund, it is exempt), but that is cold comfort to most families.

The combined cut, ignoring the sales load that smaller investors would face, could be as high as 3% to 4% of net worth per year, meaning that the only safe withdrawal rate to survive even a Great Depression for the portfolio owner is 0%.  As in nothing.  Nearly all of the after-tax, after-inflation rewards are being confiscated by this abomination of an arrangement.  And again, for smaller investors, there’s a sales load!  This means the best defense a client would have is an Edward Jones representative of integrity, who would choose the lower cost options (not all of the funds have expense ratios this high), while encouraging long-term ownership so any sales loads that charged averaged out to become very small as a percentage of the overall returns (e.g., a 10+ year holding period).  As a matter of fact, for a regular brokerage client, there are some interesting mathematical scenarios under which a long-term investor who was capable and willing to hold for more than a decade might end up saving money on fees by opting for the expensive share classes that charge a sales load.  It sounds counter-intuitive but it’s true.  That is another essay for another day.

This is insanity!  I have a hard time believing it exists, let alone that anyone would sign up for these services.  I have to be missing something.  I have to be making a mistake somewhere, right?  Right?  Unless consumers were completely stupid, there’s no way the free market could allow it to persist.  Right?  Why would anyone agree to such terms?

I start researching more.

It turns out that nearly a decade ago, Edward Jones was hit with a $75,000,000 fine as a result of taking “revenue sharing” payments (read: what ordinary people would call bribes or kickbacks) in exchange for steering their customers into the funds of mutual fund families that paid the broker to make the list and never telling the clients about it.  The settlement required them to disclose this disgusting practice, which they now do.  Here, see it for yourself:

Edward Jones Revenue Sharing Disclosure

Of course – and this is in no way meant to be a negative as people have much more important things they’d rather be doing in life, which is perfectly okay – the type of people who go to a broker like Edward Jones are the type of people who tend not to be highly sophisticated when it comes to matters of accounting, finance, and economics (Edward Jones isn’t going to be on the top of your list if you are wealthy and know what you are doing as you’d probably be looking for a top-shelf asset management group with whom you would develop a direct relationship) so they probably don’t realize exactly how they are being … is fleeced too strong a word?  In any event, I, personally, consider it a violation of the fiduciary duty as well as the prudent man rule because no prudent man would invest this way nor would any trust adviser invest his own money this way if he had any sense of the numbers.  The only reason the arrangement is allowed to exist is because of the ignorance of the client.  This is not like a hedge fund charging 2% of assets and 20% of profits in a negotiated contract between the investor and the firm; a practice that is clear as day, above board, and everybody knows what they are getting so it’s fair, particularly since it involves sophisticated and/or accredited investors.  Unless I’m missing something, this gives me the feeling that it might be hidden, indirect, and obfuscated on purpose.

Let me be blunt: There is almost no situation, that any investor with a meaningful-sized portfolio, under almost any circumstances, for almost any conceivable reason would ever, under almost any condition, be intelligent to pay a money management fee to an advisor then turn around and have the advisor put all of the money into an open-ended retail mutual fund charging another retail-like advisory fee to the fund itself.  Furthermore, there is almost no conceivable situation in which an investor should be willing to pay a sales load when the identical fund has other classes of shares not subject to said load, provided the base expense ratios are comparable (they may not be as, again, there are some situations where the load shares are cheaper long-term and you’re better off paying the 5.75% or whatever it is upfront but these are should be evaluated on a case-by-case basis).  A handful of exceptions do exist but they are typically involving things like smaller accounts for family members of wealthy clients (e.g., if you have a client with $2,000,000 and they have a college-aged child who has $10,000 in a brokerage account, you might agree to manage the brokerage account for little to no fee and invest it in mutual funds, exchanged traded funds, etc.) or a valuation-specific scenario for those who ascribe to a Benjamin Graham philosophy (e.g., Charlie Munger has talked about there are conditions under which you know an entire sector of the economy is trading for less than its reasonable intrinsic value so you’d buy something like a low-cost ETF focused on, say, domestic and international pharmaceuticals as part of an overall portfolio, which allows you certain economies of scale after all relevant considerations are factored into the decision, in which case the additional fee is worth it.  Even I would do that at the right time, under the right circumstances, for the right client if I were managing money as I’d be looking at the bigger picture).

Again, and this is just personal opinion, I think the fact that someone can behave this way is a tragedy.  Sadly, even Vanguard’s trust department does it and they are the best of the bunch (don’t even get me started on that – the Vanguard trust department needs some serious work, which disappoints me considering how much I adore the firm’s work and mission.  I’d find it very hard to trust them after a fiasco a few years back where they sent a notice that they were changing the beneficiary listed on the IRA accounts of 170,000 clients against the client’s will so they could more easily manage their internal paperwork.  It’s entirely possible there are thousands of people out there who now don’t realize they disinherited one or more their children, a spouse, or other intended heirs; an unpleasant surprise when the investor passes away and the family has little recourse).  Still, I’m willing to give them a pass.  They might not be perfect, but they are the closest thing to perfect I’ve ever seen for those who have modest portfolios.

It seems to me that if you are paying a money management fee, you should get a money management service.  I now realize this is apparently not how most of the financial industry feels.  The more I look into this, I am clearly in the minority.  It’s just that there are better ways to do it.  For example, if you wanted your family trust invested in the JPMorgan Mid Cap Value Fund, all you would need to do is hire a corporate trustee or name someone you trust beyond measure and have the trust open a trust account at Charles Schwab, which would work as the custody agent.  The trustee then could then instruct the trust to purchase the retail fund or near-retail-priced fund through the account.  Other than a small commission, you’d only, then, be paying the expense ratio of the fund itself to the managers of JPMorgan and the administrative and other fees to the trustee, avoiding paying a second, layered money management fee.

Some money managers and mutual funds do have fair revenue sharing arrangements.  For example, there are a lot of funds that pay Charles Schwab & Company for promotion.  Instead of charging an addition fee, Schwab and the money manager agree to split the fee charged by the fund itself.  In exchange, Schwab doesn’t charge a commission on the purchases and promotes the fund on its website.  There are really no substantial new, hidden, layered fees; they are dividing up the costs the investor is already paying among themselves.  I have no problem with such a true revenue sharing arrangement because the brokerage customers at Schwab aren’t paying Schwab a money management fee of 1% or 2%.  There is just one cost: The mutual fund expense ratio.  That’s it.  That’s all there is too it.

A Look at the Disclosure Document to See How Bad the Damage Is to Edward Jones Clients

So I go to the webpage in the first disclosure document, only to find it’s a broken link.  I later find my way to the tiny – we’re talking size 4 or size 6 font I’d guess – link, which then takes me to another page, which then lets me finally find the disclosure PDF containing more details.  What does it say?  Here’s an excerpt:

Edward Jones Disclosure Revenue Sharing Big Quote

Click to go to the original PDF. At this point, JPMorgan hadn’t yet been put on the list but several of the other companies are no better – you can do your own research and look at the added layers of expenses.

There’s the answer.  How could Edward Jones purposely steer clients into assets that are shockingly more expensive than they should be, confiscating as much as 30% to 50% of the expected pre-tax and pre-inflation compounding, and virtually all of the after-tax and net-of-inflation compounding?  Money.  They are, in my personal opinion, betraying their clients’ best interest and getting paid handsomely based on the assets they can gather for other firms.  Turns out, it’s not even a secret.  The Wall Street Journal has even written about it (PDF).

This is far from uncommon in the asset management industry.  Revenue sharing can be ethical, like the Charles Schwab arrangement, but this is something else.  Were I a client of Edward Jones, and were I to find a single mutual fund on the preferred list on my account statement, I’d give serious thought to terminating my relationship immediately.  If I were particularly fond of my broker, I might compromise and issue a mandate that only individual stocks and bonds can be held in the account as I would hold mutual funds directly, on my own.  Good Edward Jones brokers do exist despite the institutional incentives I believe this creates.  The trick would be finding one.

There Are Plenty of Honest, Good, Ethical Edward Jones Agents I Would Trust

Let me reiterate that again and be clear: There are plenty of honest, good, ethical Edward Jones agents that I would be perfectly fine having handle an account for the 1.2% all-in management fee on a trust.  They would choose excellent long-term stocks and bonds, manage the account with low turnover, intelligently pay attention to tax consequences, and listen to the needs of the beneficiaries.  They would make sure the trust was executed in the manner I intended, adhering to my wishes.

My criticism should not reflect poorly on them at all.  In fact, the situation is just as unfair to them as it is to the clients because their reputation and business are unfairly sullied through no fault of their own.  Some of these people are very talented.  They are good, long-term, disciplined investors.  They earn every penny of their fees.

Rather, this is about the Edward Jones senior leadership, the upper management, permitting a situation that is directly, irrefutably bad for their clients and that, I believe, exists to fleece them of wealth by preying on their ignorance.  There is no justification for it and I think it is a failure of our society to put a stop to it.  It wouldn’t even be hard to do.  Edward Jones would simply have to setup an in-house mutual fund provided at-cost and available exclusively to clients through the individual Edward Jones representatives.  Boom.  Problem solved with the waive of a pen.

I don’t understand how people can betray others who trust them.  I wouldn’t be able to look myself in the mirror if I acted like this.  The Edward Jones senior management is behaving in a way that, to me, indicates they care more about gathering assets than they do about helping clients.  They wear the proverbial clothes of a wealth manager but that’s not really what butters the bread.  It’s unfair to those who entrust their life savings to them.  It’s unfair to the honest, ethical brokers they do have working for them, who refuse to engage in these practices.  I personally find whole thing is disgusting.

Part of it happens because of a fine legal distinction between broker-dealers and investment advisors, which this author explains as it relates to Edward Jones.  I found that essay after I had finished writing this piece and it does a very good job updating the situation through recent times and explaining some of the potential problems with the Edward Jones model as currently structured.  It’s worth the read.

Image Credit: Creative Commons Licensed Under the Attribution-ShareAlike 2.0 Generic (CC By-SA2.0). Created by Rona Proudfoot, Edward Jones Investments, aka Star Inc. 2008 Lorain County Beautiful award nominee. Source.

  • Nick Pape

    Josh, directly under “The Fee Structure on a Hypothetical $2,000,000 Trust Fund”, you write:

    Imagine you quietly build a $2,000,000 portfolio of blue chip stocks and bonds throughout your lifetime. Year after year, decade after decade, you buy shares of Coca-Cola, Royal Dutch Shell, Procter & Gamble, General Electric, Johnson & Johnson, and a host of other firms with records of growing earnings and increasing dividends. Given that you have no expenses save for a handful of brokerage commissions, academic research indicates you could afford to safely withdraw 4% of your net assets, or $200,000, every year without running out of money even in a Great Depression scenario.

    Wouldn’t that be $80k instead of $200k? Or did you mean $5m portfolio?

    • Lord Squidworth

      $200,000 is 10%.

      $120,000 is 6%.

      $80,000 = 4%?

    • Thanks for catching that. You’re sot on … I originally wrote it using a $5,000,000 hypothetical trust but then saved myself 15 minutes by changing it to $2,000,000 so I could use exact screenshots of the fee structure in the Edward Jones literature. I missed that sentence when adjusting the numbers. I just fixed it. It should go live in a few minutes.

  • Lord Squidworth

    Prudential does it too.

    I’m sure others as well.

    • That’s what I’m discovering. I’m sitting here going through the disclosures and, because I don’t really deal with small retail investors and don’t know many people who do, I never realized just how bad it was; that someone would buy an intermediary investment such as a mutual fund through another intermediary on top of that. I would think a few seconds of basic math would demonstrate the folly.

      Why not just take on a client, charge a flat 1% to 1.5% of assets, and do your job? Put together good long-term portfolios, hold their hand, watch after tax efficiency, etc. It wouldn’t be that hard. It would all be above board, crystal clear, no misunderstandings, no hidden fees. What is so difficult about it? You could make a lot of money if you knew what you were doing. If I had ever had the urge to start a money management firm, that would be my formula. “Here’s what we do, here’s what we charge, if you like it, fine, if not, we wish you the best.”

      The rest is so unnecessary.

      • peterpatch79

        Something is very wrong with the financial world when someone with a high school education could just invest the money into a a “couch potato” low cost index portfolio and do significantly better then a well paid money manager. I got a little caught up in this practise myself through my works RRSP (like a 401k) matching program. They had “funds of funds” where they were charging me a MER for the fund to invest in other funds which charged the fund a high MER that wasn’t part of my fund MER.

        In reference to the scandal of mutual funds Charlie Munger says “It was as if a man came up and said, “Why don’t we kill your mother, and we’ll split the insurance money?” And many people said, “Why, yes, I’d like some of that insurance money.” (pg 116 Poor Charlie’s Almanac 3rd ed)

        Incentives are amazingly powerful, I deal with them as a main part of my work and I am amazed at how powerful they can be, often dictating peoples behaviour (good or bad) for most of their waking hours. I think if the regulators made smart changes to the allowed incentives then most of this would go away.

      • David

        Joshua, isn’t one of the core problems the fact that most of these advisor’s clients do not have million to invest, and therefore they would have to manage hundreds of portfolios to even make an average living at their take of .6 % or so. I think there is some value in directing people to certain mutual funds, but I suppose that’s not entirely what your at odds with here.

        • In the above essay, my focus is on the trust company. The trust company affiliate has a minimum fee of $6,000 per year at Edward Jones according to the disclosure on their website. That means nobody with less than $500,000 is likely to open a trust with them despite the technical lack of accounting minimum, otherwise it would be too expensive.

          If someone walks in with half a million dollars, and pays 1.5% to have it managed, I think hiring another portfolio manager – which is what buying a mutual fund is – for an additional fee, even if it’s low, is asinine, especially when the client can hire the other portfolio manager directly by opening an account either with the mutual fund firm or buying the mutual fund shares through a discount broker. At some firms, they could go the direct route and open an SMA (separately managed account), like the ones offered by Northern Trust.

          As for a regular brokerage relationship, particularly smaller non-trust clients who work exclusively with the broker-dealer affiliate, my thoughts aren’t much different. As another commentator points out in this thread, I think the ideal model is Charles Schwab & Company. If the advisor or broker is constructing a portfolio of stocks and bonds that he manages, he or she should be able to charge an on-going management fee. If he is outsourcing the management of the funds to another portfolio manager by purchasing mutual funds, he should charge a flat consultation fee. Like an attorney offering a consultation, that is essentially what he is doing in the latter case. Such an arrangement would remove all incentive bias to place assets with a particular fund family.

  • Matt

    This is why I abhor the money management industry in general. The rampant conflicts of interest and confusing fee structures basically makes it very worthwhile to learn about investments yourself if you ever plan on having a reasonably significant amount of assets. One of the reasons why I wanted to learn about investments is that I realized early on that many many people don’t have the knowledge to know when they are getting fleeced, and I didn’t want to be one of them.

    I understand that trust departments can provide a valuable service, but it seems like a significant majority of the industry is just interested in taking advantage of people’s ignorance by playing off of greed (chasing returns) rather than providing guidance for people’s long-term plan. From management perspective, this is about gathering assets and driving numbers rather than helping people plant trees. The way this trickles down to the broker level and incentivizes them to sell regardless of client interests is saddening.

    The following paragraph is just unbelievable:

    Revenue sharing, as received by Edward Jones, involves a payment from a mutual fund company’s adviser or distributor, a 529 plan program manager or an insurance company or the entity that markets an insurance contract. It is not an additional charge to you. These payments are in addition to standard sales loads, annual sales fees, expense reimbursements, sub-transfer agent fees for maintaining client account information and providing other administrative services for mutual funds (shareholder accounting and networking fees), fees for maintaining technology and providing other administrative services for insurance products (inforce contract service fees), and reimbursements for education, marketing support and training-related expenses.

    Even if the revenue sharing doesn’t result in charges to you, this doesn’t change the fact that you still are paying another layer of (craftily disguised) fees.

  • Allen Jarboe

    Hello Joshua,

    I have been a reader for awhile and have finally decided to go out on a limb and start posting. I love your articles though.

    I have seen this very thing where certain family members have financial advisors, which charge their fees, and then their funds all wind up in mutual funds with expense ratios. (At least to my knowledge I haven’t seen any with sales loads). I have even repeatedly explained why stacking fees is so bad, when you could just go out and buy the funds yourself, or even better find some better funds with lower expense ratios (vanguard maybe?) For some reason, I just can’t convince them to do it, I don’t know if it is fear of managing their own money or some other issue that prevents them to do it but it completely baffles me. However I can understand how Edward Jones gets away with it, even if they had a big banner on their front page screaming, we charge you a fee and then invest your money in some other fund who also charges a fee, I feel like there would still be people that make poor decisions with their money.

    I do have a follow on question, I see your very strong worded opinion on stating, no one should ever pay for financial advise where the manager is in turn putting the money into mutual funds/ETFs. I think there is some service being provided sitting down with a client, and being able to decipher for them the many different plusses and minuses between funds. Then finding a reasonable blend/allocation ratio and picking funds with competitive expense ratios. For example, the advisor recommends VOO with an expense ratio of .05% and say the advisor adds .1% on top. Yes the client could buy VOO on their own, but I think the advisor knowing and guiding the client and continuing to monitor the situation, would be worth something. Obviously in a situation like that, the fee an advisor charged would be different for more actively managed portions. Also a key piece here would be the advisor being forthright on how the expenses are working.

    • Lord Squidworth

      I think what you’re getting at is basically something like Charles Schwab is doing.

      To just pick mutual funds should be a flat fee, like getting a financial plan (set dollar amount). A management fee is for managing a portfolio, and picking a few mutual funds isn’t really doing that.

      • Allen Jarboe

        Ya, that would sound reasonable too. So much better than what a lot of the offerings are.

    • Nice to (virtually) meet you 🙂

      I agree with Lord Squidworth. I think a service like that should involve a flat consultation fee, like an attorney or accountant. An on-going management fee should be charged only in the case of on-going, direct management.

      • Allen Jarboe

        Thanks for the reply! I am still learning how things work in finance, but definitely am intrigued and enjoy it. I have a math background so when I heard family members were paying high rates for financial advisors/managed funds and then saw the advisor had put them in mutual funds it definitely raised red flags to me that their long term results could be dramatically effected. I do see a value to helping picking a mutual fund, but the flat consultation fee seems to make much more sense after you and Lord Squidworth pointed that out.

        Again I feel fortunate to have stumbled across your site, it has never failed to offer very insightful and well thought out pieces. (and has stood out in clear contrast in quality to almost every other financial oriented blog that I have looked at), I look forward to more of your work!

  • Rob

    Hi Joshua,

    I enjoy reading your articles, and this one about Edward Jones is particularly interesting.

    Please keep doing what you are doing!

  • Grant Gentry

    Hi Joshua,
    first time post, long time reader. What do you mean by “One could easily build an S&P 500 fund with as little as $500,000 and a negotiated free commission period)”. Are you recommending buying 500 stocks and weighting them as an index fund? Or only participating in the top holdings? How would this effect a portfolio over 30 years as opposed to holding an index fund? Thank you for all your insight.

  • Aditya

    Certain low-cost (to the employer) 401k(s) have this same problem with the fund families offered. In addition, HSAs are also notorious for having this issue pretty much everywhere you go, on top of the very onerous fee structure.

  • If you are digging into this topic full force (like you usually do), I would love to see your opinion of http://www.wealthfront.com/ as the new internet alternative.

  • Lord Squidworth

    Not sure I’ve ever read your opinion on annuities but I would assume their fees scare you off.

    Given the above post, you figure a management fee of 1.25% yearly with the mutual fund fees we’ll consider at 1% averaged.

    That’s a yearly fee of 2.25%.

    Taking into consideration Prudential’s Highest Daily Income (I think that’s what it’s called. Basically when the cash value increases, the lifetime income steps up every high it makes. It declines, the lifetime income doesn’t step down. Its guaranteed 5% growth first 10 years), I believe carries a yearly fee of 2.45%.

    I’d imagine the fees are much closer than most people realize? The two greatest differences I see is the annuity guarantees lifetime income once withdrawals start but doesn’t provide increase for inflation.

    Just something quick off the top of my head, briefly saw something for the annuity. I personally have no desire for an annuity nor ever will, but I’m probably part of the 1% in ability to handle personal finances.

  • Elle

    Hello, I am inexperienced in investing and considering using a financial advisor. Please, I’m a newbie at this, so no judgements! I was looking at Edward Jones, but am unsure and confused. I’ve received info from them on their American Funds, which they say are suited to my investment needs. They also strongly suggest I sign on with them on a one-time commission, rather than a fee-only basis. Is this a good move, or would I be better going in another direction. Any advice is greatly appreciated. Thanks!

    • a. palmer jr.

      They recommend American Funds to everybody, in my opinion because they make a big commission from selling it to you and it has a significant load up front which will cost you a bunch to get in it.

  • Will

    In your example of $2MM invested in A-Shares within any of those “preferred” mutual fund companies, you failed to disclose breakpoints associated with A-Shares. A million-dollar portfolio with any one of those fund companies you listed would be invested without a sales charge at NAV.

    • … you mean except for the 25th paragraph of the post that literally, explicitly, says exactly that?

      The only good news is that a client of this size would probably be able to avoid most of the sales loads (it appears, depending on the situation, that once you cross $100,000, the load drops to 3%-4% and once you cross the $1,000,000 mark for a fund, it is exempt), but that is cold comfort to most families.

  • suesmaller

    Unfortunately, my family money is tied up with Edward Jones. I came into an inheritance two years ago and unfortunately lost about 15% in an up year. I am taking some income from my estate, but I was told by two advisors I was not eating into the principle by any significant amount.

    Suddenly, I started to lose money. As a novice investor who has always held a position (and done really well by that), I didn’t really look into the problem until recently. No one at Edward Jones will account for the money. All I want is an accounting of how much of what I lost is in fees, how much in income I’ve taken, and how much in poor investments.

    I feel sick about my losses. To me, to lose that much money in an up market is really sickening.

    I filed a report with the BBB, and I have a complaint with FINRA ready to be kicked off.

    The world outside of Jones is not much better. I’m appalled at how easily the average investor can be taken advantage of. There are no rules, no guidelines.

    I spoke with a wealth manager who is very highly regarded by Schwab. I might have moved my money over to him, except I got talked down to, lied to, misled. He tried to claim that the market was going to drop by 22%, and that I would never recoup my money with Edward Jones. He was very obnoxious about it. He also told me he could beat the market. I called him on #1 and 3, and he backed off, stating that no one can beat the market or predict where the market is heading. I couldn’t believe he would simply lie to me this way.

    In contrast, Edward Jones seems honest by comparison, but my huge losses with them are still unaccounted for.

    I’ve read that Edward Jones has changed over the past year to try to get speculative investors and try to move the small fry (me, with a buy and hold attitude) out of their company. I’m nearing retirement, and I can’t afford to lose huge sums of money.

    I’m probably never going to see that $200,000 again, and now I’m having to look around for a company that will do an honest job of investing my money, as if that’s possible.

    I would love to know where that $200,000 went. Did it get placed in risky investments? Did it disappear in fees?

    There must be a lot of investors like me.

  • Wallyb

    I have to agree with the above, Edward Jones only cares about the top executives salaries, their customers service practices are ZERO. If you want to try and speak with an executive, customers relations laughs at you. IF you plan to invest money with Edward Jones, your making the biggest mistake of you life. DONT DO IT, RUN TO ANOTHER INVESTMENT COMPANY. Learn from the rest of us. BEST OF LUCK

  • a. palmer jr.

    Been with Edward Jones for several years now, thought I invested in safe things but find my IRA account dropping every year and it seems the only advice I get from them is something that stuffs their pockets, risk free for them. I thought about leaving but I’m sure the selling fees would make my account practically worthless.

  • Andrew

    Thanks Joshua, a very eye opening article, glad I found it. I’m currently with EJ, as is my dad, and for a while now I’ve been trying to fully understand their fees and real implications of this revenue sharing arrangement. All of my holdings are in American Funds, which appears to be their most profitable rev sharing relationship. Before I confront my advisor and move my money elsewhere, wondering if you could clarify….Their disclaimer says that there are no additional charges to the client as a result of this practice. Does this mean that these costs are reflected in the funds’ expense ratios, or would they be hidden additional costs not reflected in the ratio? Am I any better off having not immediately purchased A shares but instead hold C shares. Any reply would be appreciated.

  • Jimmy R.

    Here’s the thing with Jones…each advisor will do what’s best for his own situation. If he is young and early in his career, he is going to sell the highest commission product he can. He needs to hit his “hurdles” so he keeps his job and feeds his family.

    Jones has this sort of, “Awe Shucks” image in the media. But the truth is, they are as ruthless as any other Wall Street firm. They churn and burn through advisors (most newbies don’t make it to one year). They sell products with high commissions. They get kickbacks from their “Preferred” mutual fund vendors. They have proprietary mutual funds now (within their advisory platform – so they now get advisory fees PLUS the reimbursement of expenses in their OWN funds). They award incentive trips to their brokers. It never ends. And the media has no idea how bad it is because Jones perpetuates this local-yokel, Mayberry image.

  • My colleagues wanted IRS W-2 earlier today and saw a company that hosts
    an online forms library . If you need IRS W-2 too , here’s https://goo.gl/2UlPL7.

  • suesmaller

    It gets worse…I have been with EJ for two decades. I had a good advisor that served my family well. I inherited a lot of money. That’s when the “fun” began. I’m not completely faulting EJ…maybe they are on the up and up. But here’s what happened:

    The advisor’s husband took over from her when she became ill. Unbeknownst to me, he churned my investments by exchanging them into other mutual funds, charging me $35,000 on the entire transaction. Then…he put me into oil and gas. It did provide a large income for me, because the dividends were high. Ok, so I lost $35,000. But the stock market was good, so I came out ahead. Well, I’ve been through three other advisors since then. What I have found is, if you say “no” to purchasing anything from them, they won’t go away. One guy threatened me with an overnight letter that he was going to sell my assets. So, I stopped that process by moving to the next advisor. He put a lot of pressure on me to buy from him as well, now won’t let me tap into my money, and flew into a rage at me because I wire transferred some money to Schwab. I was curious about how the money would do in an environment where no one could churn the investment. So, my current financial advisor called me and said I had gone behind his back with the wire transfer and because I asked EJ customer service if I could turn on the income myself without going through my FA. (It’s my money.)

    Then, my current advisor stated that he didn’t think I was mentally competent to manage my money, and could he recommend a trustee that he would choose? He stated that he had a lot of elderly clients that had used his recommendations to use trustees. He also recommended I get a relative to do it. Note that I’m not that old. Phew?!!! So, tomorrow, first thing, I will have to get a lawyer and make sure I can get my assets out from under him. I mean, where is he going with all of this??? Is he now going to confiscate my money??? Notice I have not been living a riotous lifestyle. I am not living high on the hog, and I have been doing intermittent contract work. I have some assets that aren’t with EJ, but somehow EJ wanted to know about those assets.

    So here is a tail of woe that I’ll bet not many people can top. My financial advisor has called me mentally incompetent to handle my money because I am refusing to buy anything from him.

    I’m sorry, but, as an EJ client, I cannot give them a thumbs up. The problem for me, is, I don’t know where to turn. I can do some investing of my own, but not anything that would do my nest egg justice.

    • Froilan Rellora

      You should look into working with an RIA (Registered Investment Advisor). Investment Advisor Representatives are held to a fiduciary duty so their decisions must be in your best interest, not theirs. Also, their compensation is fee based so you churning for commissions will no longer be an issue for your account. Let me know if you want links to some resources. I’d be more than happy to send them your way.

      • OKSoWhatShallWeDo

        Yes, do post links to resources please!!

        • Froilan Rellora

          Sorry for the late response. See below for some links.

          -National Associate of Professional Financial Advisors – https://www.napfa.org – This is an organization for fee based financial planners.
          -Investment Adviser Public Disclosure – https://www.adviserinfo.sec.gov – This website allows you to look up your advisor to see if they have any public disclosures or conflicts of interest.
          -NerdWallet – https://www.nerdwallet.com – This is an open forum where people can ask investment questions to advisors with anonymity.

    • Jimson

      His threats and such almost sound criminal. You need to move your money out of EJ as soon as you can and get an independent financial planner to help.

  • Anthony Milton

    Your opinion was very enlightening as usual and even better appreciated with your Investing for Beginners Guide to Trust Funds. Having read that guide and the majority of your other Investing Basics Guides, I’m curious as to what the top 4 corporate trustees are in your opinion for an individual who had to place $ 4 million in a trust fund. I’m sorry to interrupt you when you’re trying to get your Asset Management business off of the ground,but I couldn’t get this question off of my mind. Thanks for everything. I’m a huge fan of both of your websites and have learned more about finance and the necessary attitude to succeed in it from you than anywhere else. Best of Luck.

  • OKSoWhatShallWeDo

    Thank you so much, Joshua. I’m trying to make sense of how Edward Jones swindled us for so much money, and this article is far more helpful than anything else I’ve found. In our case, Edward Jones was trusted to — at the very least — preserve value. Because of Edward Jones, we not only missed out on the greatest increase in the stock market in history. not only didn’t even preserve what we had, we lost a few hundred thousand. If any readers out there know what specific things customers of Edward Jones can do about being robbed like this, please post. The intentional, emotionally manipulative (e.g. angry responses to reasonable questions) sleight-of-hand, bamboozling, trickery, deception, etc. is undeniable. In a functioning justice system, it isn’t by any stretch of the imagination legal or defensible.

  • NoLongerintheBiz

    As a former Jones advisor I would like to add to the discussion. Many of the items in this article are accurate, and are among the reasons that I left. I, too, do not agree with charging a management fee and then taking that money and layering on an additional layer of expenses by investing in open ended mutual funds that also charge fees. Basically we were managing the managers. Jones calls these fee based accounts Advisory Solutions and Guided Solutions.

    There is misconception that the Jones advisor is managing the funds in the account. That is not the case. An Edward Jones advisor has no discretion whatsoever to select the individual investments inside a fee based account. The client must fill out a risk tolerance questionnaire (not a fan – they are used primarily as a legal tool to protect the company) and that will determine the asset allocation. From there I could choose from several models to use with the client. For my clients, I used a model that primarily used index funds. Many of the available models use actively managed funds. I am not a fan of actively managed funds but I will say that they were almost always the institutional share class with significantly lower fees. Under no circumstances were sales charges imposed to purchase the funds in these model accounts, regardless of account size. Additionally, any 12b-1 fees charged by the funds were rebated back to the client’s accounts. While no fan of Edward Jones practices, I feel it is important to point this out.

    Once client assets are invested in the account, a Jones advisor is not involved in any way with the management of the account. It is essentially automated at this point with occasional rebalancing to keep the account close to your original allocation. It may surprise some, but the average Jones advisor has very little knowledge of the financial markets and asset management in general. Most only know what the home office tells them. Also known as the green “kool-aid”.

    To summarize, an Edward Jones advisor is basically paid to get you to sign on the dotted line so they can collect a fee to send the money to the real asset managers. There are some good advisors that can help you with longer term planning needs, but the advice will be painfully generic.

    My advice, if you aren’t comfortable managing investments yourself, is to go with a real asset management firm (like Joshua’s) or go with a firm like Betterment. Then find a good hourly or flat-fee based financial planner (CFP®) for your long term planning needs. There are good sources presented below.

    As far as some of the negative experiences posted here, I can’t really add much. In an organization as large as Edward Jones, there are bound to be some bad apples but the firm does a fairly good job of monitoring everything. Be sure to reach out to the home office if you have concerns. Sorry I can’t help more.

    Hope this helps! Joshua, I have read and enjoyed your blog for years. This is my first comment, however. I hope the new business is going well!

  • Jimson

    EJ advisors, we cannot get rid of them. They come into our neighborhoods knocking doors, they infiltrate churches and other groups, making claims to be “financial experts” and wanting you to give them your money. I am sick of these people. I have been duped by them and I want them to go away and leave me and my family alone. They use aggressive high pressure tactics and are worse than multi-level marketing businesses.

  • Jackalee

    My Ex- Edward Jones broker contacted my new broker and told him we would be coming back to him. I had made it clear to his secretary that we would not be., she said, she told him that. But that didn’t stop him from contacting my new broker. This is unprofessional & unethical. I advise anyone that asked, run as far as you can from Edward Jone