Individual investors have been watching the stock market’s gyrations especially closely in recent weeks, but few of them probably have more than a vague idea how their own portfolios are really doing.
And the statements they will be getting soon from most brokerage firms and mutual fund companies won’t give them any easy answers.
Although brokerage houses have been including more information in recent years, most still don’t show an overall performance number that can be compared with, say, Standard & Poor’s 500-stock index’s first-quarter total return of 2.68 percent. How much a firm charged in commissions and other trading costs can also be an elusive number.
Mutual fund investors fare somewhat better, as fund companies report total-return figures for each fund. But these figures may bear little relationship to an individual’s own return because they assume that all dividends and income were reinvested and that an investor didn’t buy or sell shares in any other way.
As reported recently, Barry Barbash, director of the Securities and Exchange Commission’s division of investment management, has suggested that funds provide personalized performance and expense information.
Without more detailed information, it can be difficult for investors to know how their stocks, bonds and mutual funds stack up, if they are on track to meet their financial goals and whether they are getting the advice and service they are paying for. “Brokers don’t offer performance computations and are, therefore, essentially unaccountable,” says Steven Ames, a fee-only financial planner in Annapolis, Md.
But there are ways to keep score, and doing so could save you thousands of dollars.
Robert Syms, a Secaucus, N.J., real estate executive, discovered high commissions and sorry returns in his six-figure brokerage accounts at a couple of major Wall Street firms. Once a broker charged him $1,000 in commissions just to trade 20,000 shares priced at less than $1 apiece.
Although some commissions are typically reported on the confirmation slips brokerage houses send customers, Syms, like many investors, says he ordinarily pays little attention to them. And total commissions aren’t shown on the account statements he reads. “The words `fleeced’ and `gouged’ come to mind,” he gripes.
Paying close attention to your performance and total costs pays off for other reasons. “When a broker knows you are looking over his shoulder, he is less likely to call you when the firm says it is time to sell those risky, high-commission products,” argues Thomas W. Benson, a Naples, Fla., consultant to individual investors in arbitration cases against brokers.
So how are you really doing? Here’s how to find out:
– Find out the return. Brokerage firms don’t usually tell you how well or poorly your accounts are performing. (Prudential Securities Inc. is an exception. Since last year, it has provided yearly returns on accounts.) But most brokers can call up your return on a computer screen.
Be sure any number you get from a broker is “net of fees and commissions,” meaning it takes into account all of the money you put up, including what you lost to trading costs.
– Look for hidden losses. A stockbroker who wants to hide poor stocks will often just let them lie in your account. Why? Selling them triggers a tax loss that is easily noticed because it lands on Schedule D of your income tax return. For the full story, get a list of your “unrealized” losses as well as any gains.
There is a side benefit to keeping losers on your radar screen: They can help you plan for a lower income tax bill. In years when you have big taxable gains, you can sell those stocks for a tax loss, offsetting some or all of the gains.
– Uncover all expenses. The returns most investors earn lag behind pure stock indexes in part because of high trading costs. With expenses equal to 5 percent of your balance, you would have to earn at least 5 percent just to break even.
Finding the bottom line isn’t easy. Commissions show up on confirmation slips–not monthly statements. But that is only part of your total investing expense. Brokers also “mark up” stocks and bonds, buying them for one price and selling them to you for a higher price. These markups generally aren’t listed anywhere, but can run as high as 5 percent for low-priced stocks traded at small brokerage firms, says David A. Green, a former stockbroker who runs a portfolio-tracking service for investors.
Don’t overlook continuing mutual fund expenses, as well as the usual loads, or commissions. So-called no-load mutual funds often carry high annual fees, which you can measure by looking at a fund’s annual “expense ratio.”
Assuming you own mostly stocks, your cost ratio (total trading costs, including margin interest and fund fees, divided by your average account balance) generally shouldn’t exceed 3 percent. Despite the raging bull market in recent years, stocks have earned only about 10 percent annually on average during the past seven decades. You can’t beat the market in the long run when you are losing a quarter or more of your gains to expenses.
– Hire a “detective.” Some people with portfolios of $250,000 or more have found a professional “portfolio analysis” worth its price. A growing number of accountants and investor-arbitration experts offer unbiased, thorough reviews.
GreenTrak Inc. caters to people looking to keep tabs on a broker’s fees and performance. The New York-based service looks at your costs and returns in several accounts at different firms and compiles the results in a single quarterly report ($250 a year per account, plus set-up fees; 800-815-3434). Stock Broker Analysis, run by Benson, gives brokers a grade of A to F, based on your three-year records ($375; 941-261-9106). New York arbitration consultant Saul Nirenberg examines your account over a period of one year ($500; 212-582-1555).
Be sure any Sherlock you hire gives you the full story. Some big accounting firms sell reports in an effort to reel in new business for their high-priced money manager search services. But some others don’t measure commissions and trading costs separately–and that is precisely why it is so easy for some brokers to clean up.
Just ask Syms: “I shudder to think of all the times in the past when I didn’t notice the excessive charges in my accounts.”
