Wednesday, May 11, 2011

Another argument for Social Security

From Felix Salmon:

A lot of people have signed up for Wikinvest and handed over access to their brokerage accounts. I spoke briefly to SigFig founder Parker Conrad, who explained that it’s incredibly easy to flick through those accounts and come up with examples like the one he pulled up, of a man with $2.3 million in his Merrill Lynch account.

This guy probably knows that he’s paying his Merrill broker an annual management fee of 1.75%, which alone is more than $40,000 a year. But he doesn’t know that other Merrill clients in his position are paying far less — that Merrill brokers basically charge as much as they can, and the average Merrill client on Wikinvest pays less than half that, just 85 basis points.

And there are other things this guy doesn’t know, as well, because they’re buried in his statements — things like the fact that Merrill charged him $5,763 to make 24 trades last year, over and above that $40,000 management fee. That’s about $240 per trade.

Other fees are even higher. The Merrill broker bought something called the Fidelity Advisor International Capital Appreciation Fund, which charges 1.45% per year on top of a 5.75% fee payable when you buy the thing in the first place. The fund is substantially identical to the Fidelity International Capital Appreciation Fund, which has a 1% management fee and no front-loading at all. Why would any advisor with his client’s best interests at heart put that client into FCPAX rather than FIVFX? He wouldn’t — FCPAX is simply a vehicle invented by Fidelity for advisors which allows them to skim off hefty commissions.

Given these tricks, one can easily imagine how older adults (as they get less sharp over time) falling victim to all sorts of tricks of this sort. In that sense, the Federal Government can act as a disinterested party and act as a responsible agent in terms of managing pension savings. Given the risk of an older adult being rendered impoverished by these kinds of practices, I am unsure of why a program like social security is not universally popular. There may be some funding issues that require tweaks, but the basic idea is genius.

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