The E*Trade Baby Knows Something Most Investors Don't

Have you seen the latest E*Trade commercials? They’re the ones that often feature an adorable talking baby that opines on various investing topics (and of course E*Trade’s solution to all that is wrong with the world). These commercials have garnered a lot of praise over the years, in part because they take a topic most people would rather not talk about, investing, and gather your attention by showing you something much more appealing - a wise-cracking baby.

These commercials have been discussed at length on various internet forums and LinkedIn groups recentl. The folks discussing the commercials are not experts on the merits of commercials, their effectiveness or even on the cuteness of babies, but rather, they are in large part financial advisors.

Why would financial advisors care what another firm in the industry says in their commercials? I can only think of a few reasons, perhaps they have a legitimate gripe regarding the content, or as is the case here, they are upset a large investment firm, with a substantial media presence and advertising budget is calling them out on something they would rather you not know about.

In truth, what has these advisors hot and bothered is that these commercials, in no uncertain terms, call-out advisors for their high fees, when considered in aggregate as an industry.

In one commercial E*Trade quotes a fee of 2% as an example. Two percent may not seem a huge sum when considered in a vacuum, but as an advisory fee, particularly in a low interest rate environment (like we are experiencing now), and considering the compounding effect, is unconscionable!

Now, to be fair, there aren’t many advisors that charge 2%, if you know of one, or worse yet are working with one, run, don’t walk. RUN! You are being taken advantage of. If you don’t know how much you are paying you need to find out. Make an effort to learn all costs you are paying, including transaction costs and expense ratios of any holdings like mutual funds and ETF’s.

While there aren’t many advisors that charge 2% outright there are many more who have all-in costs that reach or exceed that threshold. All-in costs include brokerage fees, expense ratios on the underlying managed products and any other costs in addition to the advisor’s management fee. Incidentally, the average advisors management fee is about 1%.

Back to the ad in question; I’ve seen advisors call this commercial misleading, deceptive and worse. Personally I see it as accurate and factual with regard to advisor fees and their impact on long term performance. Regardless, of where most advisors stand, and as you can imagine the vast majority are firmly against the ads since they want to protect their fat profit margins, fees are a real issue for your portfolio.

It’s strange that so many advisors with varying investment styles and outlooks on the market can generally agree that the commercial is bad, because it is not in their best interests. It may, however, be in the best interests of some of their clients.To paraphrase George Carlin, who was referring to Congress, but none-the-less the sentiment still applies; when you have such widespread agreement, it’s likely a larger than usual deception is being carried out.

Yes, E*Trade has their own agenda. They are ultimately driven by their own profit margin, however, there is some value in what these commercials are telling us. Investors DO stand to lose tens of thousands of dollars to hidden fees in 401(k) plans and IRA’s – how E*Trade aims to correct that isn’t entirely clear from their commercials, but it’s assumed they offer some kind of lower cost alternative.

The best steps to take are to first understand all the costs associated with your advisory account. Next, assuming your advisor doesn’t have magical abilities to deliver above market returns (hint: none of them do consistently), determine what you think the account might earn in an average year and extrapolate the account balance over time to ten, twenty or thirty years. Last, do the same once more but adding back the costs of advice and management. For example if you assumed a 4% return earlier and 2% fees, you would calculate a 6% return in this case over the same ten, twenty or thirty year period. The difference between the first and second ending portfolio values is the estimated impact of that meager 2% fee. Chances are you’ll be surprised at how much you’re missing out on.


About the author: Michael Prus is the President and Founder of Scale Investment Group, LLC, a registered investment advisory firm with offices in White Lake and Grand Blanc, Michigan. Scale Investment Group is a leader in providing low-cost institutional investment services, like 401(k) and 403(b) plans, to small and mid-sized organizations and also manages money for private clients. The firm is a champion for small investors promoting low-costs and transparency of the investment advisory industry. For more information visit scaleinv.com or contact Michael directly at mprus@scaleinv.com.