Of course, everyone charges fees;  That’s how the business works.  The problem with large brokerages is the size of the fees (AND THEIR EFFECT ON YOUR ACCOUNT).  The business (How I wish it were more “Profession”, rather than “Business”) is built upon fees, of course.  In the past 20 years or so, transactional accounts have been fazed out in favour of ‘wrap fee’ accounts.  [Transactional accounts are the ‘traditional’ brokerage system.  Your ‘broker’ convinces you to buy or sell some or another position in a stock, mutual fund, bond, Paraguayan Yak Futures contract, whatever, and you are charged a commission.  The more, and larger, the transactions, the more money for the broker and firm.  It is an obscenely-expensive way to handle your accounts if you engage in any volume of activity.  “Wrap Fees” are based solely on a certain percentage of total account value—the brokerage firm charges the client a percentage (generally 1-2%) for all advise, trades, custody of holdings, etc.  You and your broker can make as many, or as few, changes to the account as you wish (with certain limitations which are beyond this discussion) for that percentage. (N.B.-More ‘exotic’ or technical investments such as Hedge Funds, Private Equity and the like are similarly structured, but more involved and more expensive.  They are NOT, however, more effective.)

This percentage-fee system makes a decent amount of ‘guttural sense’ to investors, and makes a lot of Lexus payments for your broker.  Part of the industry’s change toward wrap accounts and away from transactional accounts has been investor demand, part of it is decent common sense and all of the large firms are pushing this on their brokers (who are pushing it to their clients).  Why?

Well, having been on both sides, as an investor being charged the ‘wrap fee’ and as a broker pushed by his firm to charge same, I do admit that it has that certain ‘guttural sense’ to it.  In theory (and practice), the recompense to the firm and broker are tied to the performance of your account.  We, the firm, make (read: “take”) 1-2%, for ever and always, in compensation for our advise to you.  If your account grows, as we both truly hope it will, you “have” more and we “make” more.  Sounds good so far, right?

Yes and no.  While it does eliminate brokers calling clients with ‘the next big idea’ (and the accompanying next big commission), it also vastly over-charges you, the client.

You may wish to think of the problem either in terms of theory or in terms of your experience.
In theory, it is as if the mathematical game of investing comes with an embedded ‘house edge’ of 1-2%.  It takes one heck of a lot of super-market performance to make up that edge.

Now think of your experience.  I challenge you to compare your investment account value today to where it was in 2002.  Don’t ‘cherry-pick’ an account which has done well, do it honestly.   Discount for contributions to that account and don’t even bother factoring in inflation;  That will only make you miserable. I will wager that you haven’t “made” much.  Any gains are paper gains only, of course, but I bet you don’t have a surfeit of those.  But if you’ve been paying a wrap fee, guess who has been making money?  Not paper, real fees, paid by you and gone forever.

I’ve seen these accounts.  Hell, I OWN these accounts.  One of my former brokers drives a brand new Range Rover.  Glad he does, he’s one of the good guys;  Did very right by me. Put me in a wrap account at a reasonable rate (a ‘reasonable rate’for a wrap account, that is), and let the computers spit out recommendations which by-and-large worked—More on that HERE.  I have a thousand stories of guys doing it “the right way”, but they are all limited in their ability to help you because they MUST charge you that exorbitant fee.  When I was with a large brokerage firm, I HAD to charge myself a fee in excess of what I could provide MYSELF.  Embedded costs, overhead, whatever you wish to call it.  Someone is paying for all those analysts and properties in Manhattan and Training Centers teaching an ever-changing army of brokers how to “sell” wrap fee accounts.  Three guesses as to who is paying that freight and no credit if you have to use the first two.

Go to the parking lot of any large brokerage firm and look around.  I certainly do not begrudge anyone success, and I am happier than most to accept being over-charged for what I perceive to be a valuable good or service. (Ask my wife how many pair of golf shoes I have).  But, when I have been charged through the nose for a decade and a half, and received literally, nothing…Swindon, we have a problem.