Here Are The Reasons You Are Not Getting Your Money's Worth At Your Brokerage Firm

In reviewing prospective clients' brokerage accounts over the years, we regularly come across portfolio holdings that are inappropriate, disadvantageous, overly complex, and way too expensive.  If you're making any of the following six portfolio mistakes, consider these alternatives.

Portfolios that are set up without regard to the big picture.

Asset allocations are too often not derived from thorough financial planning and/or ignore assets that the client holds outside the brokerage firm. Instead, portfolios are created using strategies that seem to provide sizzle, but in reality are highly questionable.

There's no evidence that any of the following strategies work in the long run:

  • Market timing, or trying to time your buy and sell decisions with when the market rises or falls

  • Momentum trading, or chasing the hot sector, geography, or market style

  • Active trading, buying or selling securities to profit from short term market movements

  • Sector rotation, buying and selling sectors of the economy that are hot or cold in any time period

Investment products that are expensive and do not add value compared to their low-cost alternatives.

Often we have seen brokerage firms employ structured products (synthetic products that are tied to a market index) that promise "flashy and stable" returns. In reality, structured products are expensive, illiquid (there is limited trading from issuance to maturity), and their payoffs can be easily replicated with low cost ETFs and options. 

There is no free lunch in investing. 

While marketed as risk-management strategies with stable payoffs, structured products are in reality overly complex and expensive solutions to a problem very few investors really have. 

Another favorite product of brokerage firms is the Unit Investment Trust, an archaic form of investment which has been fully (and less expensively) replaced by the myriad of ETFs in the marketplace. Brokerage firms like UITs because of exorbitant upfront or back-end sales changes, typically ranging between 1.5% to 3% of the investment.

Commission-based wealth management models.

Any strategy where the incentive of the advisor is tied to turnover (higher trading means higher commissions) is a sure-fire recipe for asset erosion. Such strategies combine the perils (and costs) of short-term investing with tax inefficiency.

High cost mutual fund shares.

Brokerage firms often employ retail shares with front end or back end loads (essentially a commission paid to the broker out of the client's money). When using a mutual fund, you want your advisor to recommend the best fund regardless of price. If this were the case, you'd likely see lower cost funds (or institutional share classes) prevail.

Tax inefficiency.

Brokerage firms often do not manage for tax minimization nor care much about incurring taxes. At times it seems that the opposite is true - the broker points to the realized gains as evidence of performance, but unrealized gains are even better because no tax is incurred. 

In most cases, advisors employed by brokerage houses are not aware of the client's tax situation as they have not reviewed their tax returns. This puts the client at a disadvantage because it neglects to take into account important information such as tax loss carryforwards and the specific tax bracket that the client falls into.

Brokerage firm investment products are not designed with tax efficiency in mind: for example, unlike exchange traded funds and mutual funds which can be freely traded at any time, most structured products and unit investment trusts have maturities, which force capital gains to realize.

Commission based brokerage models are based on trading. Strategies such as sector or stock rotation are tax inefficient since they involve rapid (and expensive) trading.

Cross selling of products that make little sense for clients.

Brokerage firms often leverage their financial advisor teams as a way to distribute the products that they produce in-house.

We frequently see portfolios holding active funds that do not consistently perform a passive benchmark. The reasons these funds were sold to clients include higher fees for the brokerage firms, pressures to push internal products, or compensation arrangements between brokerage firms and mutual fund companies.

It's also common to see annuities and insurance policies not suitable to the client's needs but highly lucrative for the financial advisor or the broker.


The worst part about these portfolio mistakes is that clients get very little value in return for the price they pay. They pay a hefty fee to brokerage firms to get limited value in return. Often such value amounts to only mediocre investment results, and that is before they have to pay taxes.

We believe the client should get their full money's worth for every dollar of fees: a trusted advisor who is experienced in coordinating and managing all aspects of client's financial planning - retirement and estate planning, investments, taxes and insurance planning - for the same or lower price the client pays a brokerage firm advisor.

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