Global View Investment Blog

Investment Portfolio Management: Pay For Play

Investment portfolio management is important for reasons you don’t even know … yet. Private contracts (that you can’t see) determine which products and services get into your portfolio. Just like a cancer patient has trouble understanding the specifics of their problem (and treatment) from an oncologist, most investors have no idea how financial services companies make money.

Until we learned this from a friend starting a mutual fund, we never knew that hidden, private contracts determine how products and services are distributed. Until the investment is offered by a brokerage firm or insurance company, you can’t buy it. And to be offered, the investment company (providing the mutual fund for example) has to be approved. A key step of the approval process is paying a fee for access. This means brokerage firms and insurance companies can pick investments that pay them better. Even if they aren’t necessarily better for you.

It is the rule rather than the exception that brokerage firms and insurance companies require enormous up-front fees (up to $250,000) before they will even offer the mutual funds!

Even worse – these same mutual fund providers must pay high ongoing fees to be offered on the brokerage firm and insurance company platforms. This fee is often 0.40 percent or more at banks and brokerage firms (including so called no-transaction fee funds at discount brokerage firms). In other words, an investor owning a fund worth $100,000 pays the brokerage firm $400 a year for the privilege of owning the fund.


There is no way you could know this. Fortunately, we know from firsthand experience. We have friends who started funds and were made to pay these egregious fees. For example, when our friends at International Value Advisors (IVA) started a fund, Merrill Lynch wanted $250,000 and a 0.40 percent fee simply to get on their platform. The owners of IVA refused, taking their business to discount brokerage firms like Schwab and T.D. Ameritrade (brokerage firms favored by independent Registered Investment Advisors). Eventually, after enormous pressure from advisors at Merrill Lynch, IVA agreed on a renegotiated deal before finally closing their funds to new investors at Merrill Lynch and other major wire house brokerage firms in 2011. The reason for closing the funds was to avoid the asset bloat problem (spoiler alert – larger funds get lower returns and have higher risk).

Because IVA can control asset growth by avoiding distribution with the big banks and brokerage firms, they can continue to allow new purchases of their funds by Registered Investment Advisors at firms like Schwab Institutional and T.D. Ameritrade Institutional.


Want to talk to a real fee-only fiduciary who has your best interests at heart? Contact us with any questions or to schedule a complimentary financial review.


Another great example of a mutual fund company that is not available at the big banks and brokerage firms is Grandeur Peak. The founder of Grandeur Peak, Robert Gardiner, ran several funds at Wasatch with some of the best track records of any investment companies. Because he didn’t know how quickly he would attract assets, he sought distribution through the big banks. But when he got worried about how fast the funds were growing, he closed them, opening newer funds. The new funds were selectively offered, primarily through channels used by Independent Registered Investment Advisors– again, to avoid the “asset bloat” problem.

Because Grandeur Peak doesn’t have to pay access to these brokerage firms, they can keep fees relatively low and focus on what they do best: Research.

Remember, some of the best investment firms won’t engage in this pay-to-play behavior; you simply cannot buy them there! This is even more important than we are telling you now, and it’s something that keeps us on our toes, constantly seeking the best investments!

The enormous source of pay-to-play revenue (legally, this is called revenue sharing) provides the big banks and brokerage firms with a steady and reliable source of income to fund their tremendous marketing efforts.


Remember the last time you were enticed to move your investments to another firm by an ad on TV? It may have involved a free IPAD or even cash. Now you know why. And it is the reason so many investors have little trust in financial advisors, bankers and life insurance agents.

You are unlikely to see your local Registered Investment Advisor advertise on TV (unless he or she has other ways to make money, like through the sale of extremely profitable insurance products).

And this is only one of the many sources of revenue.

You are highly likely to see advertisements (especially local advertisements) by insurance agents posing as investment advisors, because this is also extremely profitable for the companies selling insurance. You may even notice they are now disclaiming this!

Imagine that you could take a pill and instantly lose 20 pounds or be able to run a 3-hour marathon. A lot of people would take it. But before you decide, think about all of those commercials you have heard about miracle products and diets that will do this?

Now imagine that you can get paid a bunch of money today (for making a quick sale) versus getting paid a little money every three months for ongoing work. Which would you prefer? That literally and exactly explains the conundrum that any “investment advisor” who has an insurance license faces.

Brokers (or insurance and investment salesman) can make this choice, and more times than not, they choose to get paid a bunch of money today simply by convincing their clients to make a one-time purchase.

Unscrupulous life insurance agents sell their clients products that easily pay the equivalent of 10 years of investment management fees. And to do that, all they have to do is make guarantees – guarantees that you will not lose money; sometimes guarantees that you will make a minimum percentage of money. The problem is, these guarantees, under close scrutiny, are not worth very much at all. Most of the guarantees are about as helpful as having flood insurance on a mountain home – you don’t need it.

We believe the most egregious conflict of interest of all (and this takes some doing) is that insurance agents can be paid up to 10 times more by selling insurance than they would for a year of advisory fees.

This is why unscrupulous insurance salesmen are so active advertising on local radio and are scrambling to make life insurance sales.


As I say all the time, the financial services industry is a confusopoly, an industry that specifically uses confusion to profit from its clients. At Global View, we strive to keep our clients informed; not confused. In an industry full of conflicts of interest, we believe investors deserve an unbiased, independent advocate they can trust. Contact us to try us out – give us a test drive.


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Ken Moore

Written by Ken Moore

Ken’s focus is on investment strategy, research and analysis as well as financial planning strategy. Ken plays the lead role of our team identifying investments that fit the philosophy of the Global View approach. He is a strict adherent to Margin of Safety investment principles and has a strong belief in the power of business cycles. On a personal note, Ken was born in 1964 in Lexington Virginia, has been married since 1991. Immediately before locating to Greenville in 1997, Ken lived in New York City.

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