Are You Really Watching Out for Your Member’s Best Interest?
Credit unions almost unanimously unite under the banner and mission of helping their members. It is a noble cause and credit unions may be one of the last beacons of altruism in the cutthroat world of banking and financial services.
There is one dark blemish to consider, however. A majority of credit unions that provide investment advice do so through a third-party broker/adviser. In some cases, the broker/adviser may have office space within the credit union. In other cases, it is just a referral program. In both instances, there is a common thread. The adviser is most often a full service broker who provides biased investment advice for basis points and product commissions that are not transparent to the member.
It is no secret that investments can have fees, commissions and expenses associated with them. The real question is how much are they? Unfortunately most Americans don’t really know the answer to these questions – mostly because they never write a check. The average individual trusts their adviser to help them make the most of their investments and guide them toward retirement.
In the case of credit unions, members should be able to trust their adviser is doing the right thing, right? After all, credit unions watch out for their members’ best interests. Unfortunately, when it comes to investments, this isn’t always the case.
We all know what commissions are, but how much is too much when it comes to the basis point advisory fee? Most advisers charge between 100 and 200 basis points each year for advice. There can be breakpoints for wealthy individuals who have accounts with balances over a certain threshold. Sometimes that threshold is $250k, sometimes it is $500k and sometimes, it is more than $1 million. Whatever the threshold, the question remains, is the cost worth it? After all, 150 basis points on a modest $100k portfolio is $1,500 a year.
To illustrate the cost of these fees on a portfolio, let’s use an example. Let’s assume an average annual growth rate of 6% and calculate that over a 15-year period. Using these numbers a $100,000 portfolio would grow to be approximately $239,655. However, if we subtract 150 basis points for advisory services annually, that same portfolio only grows to be $191,043. That is a difference of $48,612 in fees over 15 years!
On top of advisory fees, many mutual funds have loads that are paid up front or upon liquidation. These can be an additional 5% or more. Essentially, these loads are commissions. Five percent seems like a bargain when considering the costs associated with some annuities being sold these days. An Ohio based credit union with approximately 30,000 members recently discovered that its "rent-a-broker" (with whom they had a relationship for nine years) had charged one of its members more than $17,000 to put $250,000 in an annuity. That’s almost 7%.
For someone who is nearing retirement or even worse, in retirement, and is looking for a conservative portfolio, fees and expenses like this are nearly impossible to recover from. Especially considering many annuities have limits on gains in exchange for downside loss protection.
Numbers don’t lie. Perhaps this is why math is known as the universal language. Unnecessary fees and expenses are a drag on your members’ financial well-being. For credit unions that tout themselves as a resource for financial literacy and fair practices, it is time to recognize evolution in wealth management and embrace the benefits of scalable technology that provides transparency and low-costs over expensive and conflicted advice from a human salesperson. It is time to live up to the credit union promise and watch out for the members’ best interest.
Kevin Pohmer is president/CEO of Financial Guard. He can be reached at 614-973-6999 or firstname.lastname@example.org.