Investing in Index Funds and REITs: Tired of Paying for My Broker's Mercedes

My family has been investing with a broker decades.  My Great Aunt began investing at an early age.  She was a secretary and never made a ton of money, but died with enough money to pay for several years in assisted living without ever touching her principle.  My Great Aunt invested with a broker she trusted.  And it seemed like the broker did a pretty good job with her money.

My parents are still invested with this company even though it has been bought by Wachovia and then Well Fargo.  My parents began my investment career when I was in first grade.  They invested money that was gifted to me after my grandma's passing.  Since then I have been managed by the same company that is now Wells Fargo.  Until last week!

If you have been reading past entries we have had a fiscal epiphany and have found several ways to save money.  #4 on that list was Vanguard.  After analyzing our holdings with Wells Fargo and reviewing the fees, I determined with the help of our broker that I was paying 1.5% in fees to Wells Fargo (Broker's Mercedes Fund) and on average 0.9% to a money manager (MM's Boat Fund).  I started to run the numbers, what does 2.4% mean to an investment of $100,000?

After 1 year, 2.4% puts $2,400 in the broker's & money manager's pocket.  Another way to say it, you are not compounding $2,400 in your own investments.  What does this mean with our conservative 7% annual return with compounding?  Let's assume the $100k does not go up and you just invest the fees, that works out to just over $35,000 over ten years.  It is even worse in reality your principle goes up which puts more money towards boats and Mercedes.  The other part that bothered me about this situation is they were putting in the same effort whether I had $50k, $100k, or $500k invested.  However, they would get paid more as our hard earned money accumulates.

I have subscribed to the idea of low cost index funds as touted by Jim Collins.  The numbers do not lie.  Yahoo! Finance just released an article Betting on benchmarks: Index trounces active said that over 1, 3, 5 and 10 years, less than 1 in 10 active managers outperform benchmarks.  I have not researched the percentage of brokers that beat the benchmarks, but intuitively the I would think the percentage would even less than the fund managers.

Slow, simple and steady.  This is how I invested our withdrawal from Wells Fargo.  I put 75% toward VTSAX, a total market index fund and 25% in a REIT, 0.05% and 0.10% in fees, respectively.  Now, our money is being reinvested in us and not going toward a 2 week vacation in for my broker in Wai Ki Ki.


Photo credit: theqspeaks / Foter / CC BY-NC-SA