Beware of Fido

Our family dog, Brittney, is very affectionate and has a sweet disposition most of the time.  However, when provoked she can get aggressive.  As with all dogs, you have to be careful around her when she might be protective of her food, yard or one of the family members.  As a comparison, I hope my clients will exercise similar caution when dealing with Fidelity Investments.

Also known as Fido, Fidelity is an excellent discount broker and custodian for self-directed investors. I frequently refer clients to Fidelity to implement and maintain a low-cost portfolio. They offer several index funds that are comparable in price and quality to those of index fund leader, Vanguard. Fidelity also has exceptional customer service and top notch administrative and educational support for its investors. In fact, all of my personal investments are with Fidelity. Even so, I’ve noticed an unwelcome change in Fido over the last couple of years.

Fidelity has begun aggressively marketing proprietary high-cost services to existing customers. Of course, there is nothing wrong with making a profit and they have a right to seek new revenue sources. Most of the products and services offered by major investment firms are expensive, so one more player in the sandbox is not a big deal. The problem arises when Fidelity’s customers are also my clients.

I’ve learned that many of my clients have been pitched a high-cost money management service, even though they already had a much better portfolio of low-cost index funds and ETFs. Some clients have even been persuaded to abandon a carefully designed portfolio for a program that is inherently inferior.

The Fidelity name has strong brand loyalty and instills trust with investors who have had good experiences in the past. Moreover, it is human nature to assume that a well-respected investment company can make you more money than you can make on your own. The combination of these two forces is difficult to resist. Unfortunately, the reality is that the typical portfolio of mutual funds is very unlikely to outperform a portfolio of index funds. Paying an advisor – even one as respected as Fidelity – a 1% asset-based fee on top of the mutual fund expenses – makes this venture a losing proposition.

This advice is the persuasive argument that I’ve made for years to help prospective clients invest more effectively. Not everyone can grasp this concept, but those who have implemented a solid self-directed plan should not have to deal with such sales pitches. I will continue to recommend Fidelity to clients who could benefit from the investment platform that they provide. At the same time, I will make a conscious effort to warn clients not to deviate from the plan or look to Fidelity for advice. Just because Fido looks friendly, doesn’t mean you should let your guard down.