AUM based Wells Fargo advisor making lots of small stock trades in IRA, why?

yofi

Dryer sheet aficionado
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I noticed last week my elderly mother's AUM-based WF advisor made 80+ small (from 1 - 100) individual stock trades (some buy some sell) in an IRA/Roth IRA. She said there is no extra charge since he makes money from the yearly AUM fee. This is the first batch of trades all year so this is out of the ordinary.

I don't see any extra charges associated with these trades. Is he being proactive by doing this based on the latest stock research or diversification strategies, or is something shady going on possibly? He took her out to lunch at this time and said her account grew 7% this year, and presumably to get her permission to make these trades.

Small example, he sold 6 shares of Apple, 1 share of Blackrock, and bought 5 shares of Texas Instruments, and 15 shares of Cisco.
 
Some guesses:

1. Your Mom is wrong and there are trading fees in addition to the AUM fees. (Unlikely since you said you didn't see charges either.)

2. There aren't trading fees but the advisor is trading and some brokerage back end associated with WF is making money on the transaction somehow.

3. The advisor is trading in order to (a) make your Mom feel like she's getting something for her AUM and (b) make your Mom feel like it's complicated and tricky and detailed and she should never DIY for those reasons.
 
7% is terrible performance for this year. If she had invested all her money in Fidelity Balanced FBALX (60% stock/40% bonds), she would be up 13.45% year to date.
 
Depending on the amount of equities involved, 7% may not be that bad or if equities more than 35% it
would be below expectations. I would see if Mom would be ok with you asking the advisor why he is
making so many trades for no apparent reason.
 
Some guesses:

1. Your Mom is wrong and there are trading fees in addition to the AUM fees. (Unlikely since you said you didn't see charges either.)

2. There aren't trading fees but the advisor is trading and some brokerage back end associated with WF is making money on the transaction somehow.

3. The advisor is trading in order to (a) make your Mom feel like she's getting something for her AUM and (b) make your Mom feel like it's complicated and tricky and detailed and she should never DIY for those reasons.
I believe your reason number 3 is the most likely. To make your mom feel like stocks are complicated and tricky and they know something no one else does. But I would check for trading charges too.
 
Indeed very strange behavior. I wonder if there are hidden fees in the pricing of the trades. Pick a few and look at the market prices on the date and time of the trade.

She should tell him to cut it out. Trades of small lots like the OP wrote of are ridiculous.
 
We have some of our savings in an AUM accout at Wells Fargo. How it works is they use models designed by a central research group. Your Mom and her advisor have determined that she should follow their "conservative growth model" or "aggressive saver model" or whichever one matches her goals and life phase. These models are like their own little mutual funds that each have a hundred or so stocks. The individual advisor can also tweak or tilt the model a bit if it doesn't exactly fit the client's goals by putting a bit more money into one sector over another.

The most likely reason for the recent trades is that the WF research group has adjusted the model based on whatever they think is happening or is about to happen in the market. Instead of holding 7% in the tech sector, now they want to hold 5%; and instead of 9% in commodities, now they want 10% (I'm making up the numbers, but I'm sure you get the idea). This leads to lots of small trades whenever the portfolio is rebalanced to match the changes in the model. If you were to look at the trading history in an actual mutual fund, you'd see something similar but on a larger scale.

Your Mom probably doesn't have to give permission for these trades if she's paying an AUM fee. The advisor likely just took her out to lunch as a client retention strategy.
 
Look into the minute detail of the trades (really buried in her account online), there are fees based on pricing. This crap was going on at my SIL's account at Edward Jones. We shut it down.
 
Just holding 85% Total Bond and 15% Total Stock would have gotten 7% yield so far this year. I'm guessing they are holding more stock than that and so they are losing vs what a simple do it yourself indexing approach would yield.

I get the desire to have a 3rd party manage things in old age, but there are cheaper options like Vanguard's PAS that will match the market and not rely on picking winners.
 
Set up a meeting with Mom and the advisor and ask for an explanation of the activity and costs.
 
For my money, #3 is the most likely. LPL, which is a broker that supports lots of smaller FAs actually has a feature that reminds an FA if an account hasn't had any trades lately. Theory being that customer is paying for management and no trades implies no management. For the same reason, the accounts are loaded up with a completely ridiculous number of positions, again to make things look complicated.

Re where money is being made I'll make a guess: Wells' changes to its stock lists probably does not involve placing thousands of penny-size trades. What they will be doing is aggregating the individual account trades into a few big ones, then distributing the stock intra-Wells when it settles. That's where there is room for some extra charges, probably mostly in fake spreads that cost the accounts more than the big trade cost Wells.

But there are lots of other possibilities. When I took over my mom's accounts I found a confirmation slip for a purchase of a Dreyfus muni fund, marked "Unsolicited Trade." At that point mom's income was so low that we weren't filing tax returns, yet supposedly she wanted tax-free income?!!? No. What happened was that Dreyfus was running a sales contest and the broker was sprinkling this fund into as many of his accounts as he could. He knew it was a breach of fiduciary duty, so added the "Unsolicited Trade" note to cover his a$$.

I would ditch this advisor and, as @Exchme advises, move the money to Vanguard. Cheaper, better portfolio design, simpler, ... What's not to like?
 
I would ditch this advisor and, as @Exchme advises, move the money to Vanguard. Cheaper, better portfolio design, simpler, ... What's not to like?

She loves this advisor ever since they moved their money into Salomon Brothers (recently to WF Advisors) from Vanguard back in the 80s. (Unbelievable, right?). She said she will never leave this advisor but she did agree to move her RMD money out (this year) so I'm going to help her get a Fidelity account opened and invest it FSKAX and t bills or something.
 
I took over a small AUM account I had with Morgan and moved it to FIDO. They had me in 30 different stocks in a 250K IRA account.
Since I need to take RMD's, I am pruning the list starting with the low performers. The FIDO display of holdings features a graphic for each stock showing its price compared to its high. That makes it easier to evaluate each holding.
 
We have some of our savings in an AUM accout at Wells Fargo. How it works is they use models designed by a central research group. Your Mom and her advisor have determined that she should follow their "conservative growth model" or "aggressive saver model" or whichever one matches her goals and life phase. These models are like their own little mutual funds that each have a hundred or so stocks. The individual advisor can also tweak or tilt the model a bit if it doesn't exactly fit the client's goals by putting a bit more money into one sector over another.

The most likely reason for the recent trades is that the WF research group has adjusted the model based on whatever they think is happening or is about to happen in the market. Instead of holding 7% in the tech sector, now they want to hold 5%; and instead of 9% in commodities, now they want 10% (I'm making up the numbers, but I'm sure you get the idea). This leads to lots of small trades whenever the portfolio is rebalanced to match the changes in the model. If you were to look at the trading history in an actual mutual fund, you'd see something similar but on a larger scale.

Your Mom probably doesn't have to give permission for these trades if she's paying an AUM fee. The advisor likely just took her out to lunch as a client retention strategy.
This makes a lot of sense and doesn't seem so nefarious after all.
 
She loves this advisor ever since they moved their money into Salomon Brothers (recently to WF Advisors) from Vanguard back in the 80s. (Unbelievable, right?). She said she will never leave this advisor but she did agree to move her RMD money out (this year) so I'm going to help her get a Fidelity account opened and invest it FSKAX and t bills or something.
The goal of any smart FA is to have clients think of them as friends. Sounds like this one has succeeded.

Good job on moving the RMD to Fido. Wait a year or so and then look at the % gain on her AUM account and on the Fido account. It would be very surprising if the Fido account did not win. Multiply the difference by the AUM account balance to show her how much her friend is costing her.
 
This makes a lot of sense and doesn't seem so nefarious after all.
Maybe not nefarious, but I question if it make sense (for the client). One could accomplish this with just a few ETFs across the large, small, mid caps, add some international maybe - simple straightforward (and the advantage over even a 2 ETF portfolio is also questionable) .

But generally, these advisors must make it look complicated, or the client will wonder what they are paying for. So maybe it is nefarious?
 
7% is terrible performance for this year. If she had invested all her money in Fidelity Balanced FBALX (60% stock/40% bonds), she would be up 13.45% year to date.
Even a super-conservative 30% SPY ( ~ 19% YTD) and 70 BND ( ~ 5% YTD) would give 9.2% YTD (per Yahoo).

(.7×5+.3×19) = 9.2
 
We have some of our savings in an AUM accout at Wells Fargo. How it works is they use models designed by a central research group. Your Mom and her advisor have determined that she should follow their "conservative growth model" or "aggressive saver model" or whichever one matches her goals and life phase. These models are like their own little mutual funds that each have a hundred or so stocks. The individual advisor can also tweak or tilt the model a bit if it doesn't exactly fit the client's goals by putting a bit more money into one sector over another.

The most likely reason for the recent trades is that the WF research group has adjusted the model based on whatever they think is happening or is about to happen in the market. Instead of holding 7% in the tech sector, now they want to hold 5%; and instead of 9% in commodities, now they want 10% (I'm making up the numbers, but I'm sure you get the idea). This leads to lots of small trades whenever the portfolio is rebalanced to match the changes in the model. If you were to look at the trading history in an actual mutual fund, you'd see something similar but on a larger scale.

Your Mom probably doesn't have to give permission for these trades if she's paying an AUM fee. The advisor likely just took her out to lunch as a client retention strategy.
Maybe not nefarious, but this looks a lot like "closet indexing." IOW the FA buys a diversified portfolio that looks like the result of investment effort but in fact is just designed to duplicate an index. The FA then just under-runs the index performance by the amount of his fee, which is better than he could probably get if he as stock picking. Closet Indexing: What it Means, How it Works, Drawbacks

The way to detect this is to calculate the total return of the equity portion of the account. This is kind of a pain; the easiest route is to separate the fixed income and the equity holdings into separate accounts and let the brokerage house computer calculate the return. Then compare to total return (not price return!) of some comparable indexes.
 
I had a FA for years while I was w*rking. He had my account in front end loaded mutual funds. 5% load.

When I FIRED and stopped contributing, first thing he did was switch me to AUM at 1.5% annual fee in a sleeve of about 80 or 90 individual stocks. So I paid him 5% up front to invest my money and once I stopped contributing he got another 1.5% each year. He told me the sleeve would beat the SP 500 by 2 or 3 % every year. Well I watched it underperform the SP 500 by 2 or 3 % a year for a few years and switched it to Vanguard and put it all in their Total Stock fund and have had much better results.



Folks, its really that easy.
 
... The way to detect this is to calculate the total return of the equity portion of the account. This is kind of a pain; the easiest route is to separate the fixed income and the equity holdings into separate accounts and let the brokerage house computer calculate the return. Then compare to total return (not price return!) of some comparable indexes.
That's a long, arduous, twisted road to travel to come to an already obvious conclusion. The FA is unlikely to outperform, especially after fees. And if he/she did, it is unlikely to be sustained.

Just cut to the chase.
 
That's a long, arduous, twisted road to travel to come to an already obvious conclusion. The FA is unlikely to outperform, especially after fees. And if he/she did, it is unlikely to be sustained.

Just cut to the chase.
The point was to get the OP an estimate in dollars of how much this FA "friend" was costing his mother. The "already obvious conclusion" is presently not at all obvious to his mother.
 
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