Should you invest with Edward Jones? I can tell you about my experience of several years. If you are thinking about Edward Jones (EDJ), you are probably a lot like me. You are leaving a corporate job, you have a 401K to rollover, or maybe have a modest inheritance and want to invest for your retirement.
Recommend this product?
I have a degree in finance, have always worked in financial services, but never was involved in retirement investments. So, my knowledge of investing was like most middle class people – I had my company 401K, which was mostly made up of stock mutual funds.
I left my corporate job and wanted to rollover (meaning move it away from my former employer) my 401K. Most people leaving corporate jobs should do this as most 401K plans have their drawbacks. Ex-employees usually cannot make additional contributions and if you have several jobs over a career you don’t want several little accounts left all over the place.
I didn’t look far when looking for an alternative. EDJ has a reputation for being conservative, and oriented to the long haul investor – the most basic idea that has made Warren Buffet a success! I had also read an article in a major magazine that said front-load (up-front commission) investments are best for a person like me. You pay money on the way in, and no back load (sales commissions when you sell the investment), and as your investment grows, in theory, you might only pay commission on the $200,000 that you invest over a lifetime, but no commission on the $400,000 that you withdrawal in your retirement years. There may be exceptions, but in mutual fund purchases, Edward Jones generally just charges front loads. Perfect, right?
Well, no. The typical Edward Jones strategy is to have you invest in several reasonably diversified managed stock and bond mutual funds. For most people, this is a reasonable idea, but this super basic advice comes at a super serious cost to you, and it's a little out of date as well.
Disadvantage of the Basic Product Advice:
(Note: See the January / February 2011 issue of Money Magazine for their article on Jack Bogle and their Money 70 Mutual fund recommendations! Good common sense never changes! If you are thinking about Edward Jones vs Vanguard , this is a good read!)
"Managed stock and bond mutual funds" means that a management team at the fund tries to pick winners and losers among stocks and bonds, and create above average returns compared to the overall stock and bond market. But, read any article in a major personal finance magazine, and you will find that the push today is to buy market indexed funds. This means there is a simple process to buy broadly diversified stocks and bonds that mirror the overall market. Despite the recent financial turmoil, over a lifetime the market usually returns about 7-8% a year on your investments. Managed mutual funds RARELY beat average market returns over the long haul, and as they say, past performance is not a guarantee of future performance. Trying to pick a winner among managed mutual funds is nearly impossible. Even worse, managed mutual funds take about 1.25% to 1.5% of the fund money each year as expenses – to pay the fancy management team, pay the cost of all that trading in the fund, and pay the cost of marketing the fund - sometimes this includes money they spend in marketing deals with Edward Jones. The best index funds only charge around .25%. Just by avoiding this expense, an index fund has a good shot at beating the returns a managed mutual fund makes.
So, what else can be said about managed mutual funds? A little research on the Motley Fool investment website had this to say:
"The average actively managed stock mutual fund returns approximately 2% less per year to its shareholders than the stock market returns in general."
"The costs of being in the average actively managed mutual fund over time are, put simply, very, very severe. Although 2% may not sound like that much of a differential when the market is returning roughly 20% per year as it has from 1995 through 1998, the standard returns for the stock market historically are closer to 10%. Consider whether this is severe enough for you: over 50 years, a $10,000 investment will compound to $1,170,000 at 10% returns per year, but to only $470,000 at 8% per year.
Vanguard founder John Bogle looks at these numbers and says: "Our hypothetical fund investor has earned $1,170,000, donated $700,000 to the mutual fund industry, and kept the remainder of $470,000. The financial system has consumed 60% of the return, the fund investor has achieved but 40% of his earnings potential. Yet it was the investor who provided 100% of the initial capital; the industry provided none. Confronted by the issue in this way, would an intelligent investor consider this split to represent a fair shake? Merely to ask the question is to answer it: 'No.'"
Yes, this information is a little old, but considering that that the overall market hasn't provided much return the past 10 years, to what degree do you think that the expenses of a managed mutual fund are helping YOU?
Very High Commissions:
Further, you can easily avoid the typical 5.75% commission Edward Jones charges to buy funds by going to trusted investment houses like Vanguard and Fidelity. In many cases, you can get into a variety of indexed funds at no front or back end cost!! So, we’ve now saved you commission on buying your investment, and removed about 1% in annual overhead.
This front load commission hurts you in another way. In 2008, I was limited by IRS rules to a contribution to my Roth IRA of $5,000. Assuming a 5.75% commission on this - totaling $287.50 - I only actually deposited $4,712.50 to my Roth after the commission. I asked my Financial Advisor if I could pay the commission outside the contribution so I could maximize the full $5,000 annual contribution. He gave me a fuzzy "no." I'm not sure if it is an IRS rule, or an Edward Jones rule. How much does this hurt you? A LOT! After just 4 years, you have underfunded your Roth by a whopping $1,150.00. Working for you for just one year at 7%, that money could earn you $80.50. You start looking at the underfunding as well as the loss of the compound interest effect on that underfunding, and the front load business model loses you THOUSANDS of dollars over a 20 or 30 year investment window. How do you avoid this underfunding? Buy no-load mutual funds, or at least make your purchase somewhere that charges $10.00 for a trade, instead of almost $300.00, and you can truly put away $5,000 a year in your Roth IRA.
As they say, “BUT WAIT, THERES MORE!” Edward Jones gets more expensive. What they don’t tell you is that a lot of their mutual funds will pay out dividends and when they do, the money goes to a cash account at Edward Jones and they re-invest the dividends for you – yep, another 5.75% commission on an investment you already paid commission on!! How ugly is this? During 2008 alone, my portfolio kicked out dividends and interest equal to 3.73% of my portfolio. That is 3.73% of my portfolio that went back through the commission grinder. Mutual funds and bond funds that kick out dividends are not a problem if you have no load fees and they automatically reinvest at no charge - which is how it works at Vanguard.
Disclosure and Reporting:
This is a good place to put in a footnote about Edward Jones' statements, website, etc. The reporting doesn't show commissions paid! It is an amazing fact that in 2008 that the company was not required by law to show commissions paid! This is partially why I bumbled along with these guys for several years before coming to my senses. No commissions show on my contributions, my dividend reinvestments, anything.
My Rep's Quotas are Coming Due:
Periodically, your Financial Advisor will call and say “Edward Jones feels that your XYZ managed fund has run its course, we see this or that problem with it.” Heck, the first time I got "the call," I took it as my Financial Advisor looking out for me. I never asked for any documentation or analysis, (the few times I ever did ask something on the technical side my rep didn't seem to know much - he had a plan from the corporate mother ship, and that is what he was going to push). But, if you take it that the Edward Jones corporate guys have done their homework, and have told their reps to recommend that clients get out of certain funds - you have to read between the lines, and they are admitting they can’t pick winners among managed mutual funds! (And, yes, I know, the words "churning" and "my boat payment is due" may also apply here - I was stupid, but I'm not as stupid as I was!)
Anyway, bad fund picks are great news for Edward Jones because it is a commission bonanza! They want you to sell that fund and re-invest that part of your portfolio in another mutual fund at – yep, another 5.75% commission. On re-investing say $10,000, Edward Jones has collected from YOU $575.00 on one phone call! What is the sanity in that??? An equivilent trade for many mutual funds similar to what Edward Jones offers could cost you between $0.00 and $10.00 at many other places. Your rep is making phone calls to you because he or she has sales quotas to meet. The investment advice is all about the commission, not YOUR long term financial health.
What About That Personalized Service?
“Personalized Service” is the argument Edward Jones makes for their mind boggling fee structure. Just Google the words “should I become an Edward Jones rep,” and you’ll find all kinds of forums on prospective reps, former reps, Edward Jones’ own website, etc. What they look for is a person from any field or educational background that can present themselves professionally, is clean of drugs and personal problems, and has the confidence to put up with a lot of rejection. They train the rep to pass basic securities sales license requirements, and then, rather famously, tell them to literally go knock on doors while paying them a starvation wage. This is what it is all about at Edward Jones - MAKE THE DAMN SALE OR HIT THE ROAD! (Sort of ironic, HIT THE ROAD OR HIT THE ROAD). So, you have a bunch of folks out there who start their Edward Jones career DESPERATE TO MAKE A SALE. And, the folks that survive this brutal process eventually become awarded a good living as folks that exceed their sales quotas from Edward Jones while sucking funds out of established client’s retirement accounts with virtually no obvious disclosure. (It is the no obvious disclosure part that really turned me off on these guys. They are apparently embarrassed by their crazy fees and can’t just admit they need to make a living as well.) Notice that so far, nothing has been said about looking out for your interests! Edward Jones at the corporate level looks out for your interests by providing a basic program your rep can understand, and controls all cash so that a desperate rep behind on his or her commissions does not decide to give themselves a five finger bonus. That’s it: Personalized Service = Follow the same basic advice all my clients get, and pay a fortune in fees for products from me that you can get elsewhere at a fraction of the cost.
Another argument for Jones I've seen is "they are expanding their product offerings, blah, blah, blah." They can't have it both ways - they cannot be a sophisticated investment house and a basic safe place for simple retirement plans. Let's face it, their established reps are not going to suddenly turn about on their sheep, err, clients, and push a lot of stuff they don't understand. It is too much work and too much risk that they will upset and scare someone off. The new reps may be more willing to push some new product, but let's face it, do you really want one of their new, notoriously high turnover cowboys with little financial planning experience, pushing products they, and you, don't understand? I didn't think so!
They are Better Than Doing Nothing!
That is the bottom line for some defenders of Edward Jones, and they may have me there! The story goes along the lines that their Financial Advisor is sort of a cheerleader, and they probably wouldn't be investing for retirement the way they should without the cheerleader. Well, of course the rep is cheerleading - each successful cheer is a commission!!! Frankly, most regular investors simply set up an automatic monthly investment for their IRA, or whatever, and this set it and forget it method of making sure that you are investing is both very successful and can cost you virtually nothing in a no-load or low comission environment. If you really feel the need to pay 5.75% of every dollar you invest, along with a host of other fees to a cheerleader, well, Rah Rah Sis Boom Bah Edward Jones is the place for you!
Annual Fees are a Good Thing if you are Edward Jones:
Finally, there are annual Edward Jones account management fees. If you end up with an IRA and a Roth IRA to hold your mutual funds, you’ll pay around $100 a year for the two accounts. Vanguard generally does not charge annual fees. (I think there may be a $20.00 fee if your account balance is quite low and you insist on getting paper statements, or something like that. The bar for getting out of paying the fee is set pretty low.)
And Just Why Did We Recommend That Fund? Our Attorneys Have Advised Us That We Should Tell You!
Edward Jones was involved in some class action lawsuits over the past several years. They were sued over deals between Edward Jones and various funds where Edward Jones got favorable terms for pushing certain funds, without telling clients this was a big reason why they recommend certain funds. The funds were pretty mainstream, and generally seen as okay by the people that have opinions on these things, so how much this really impacted the average Edward Jones investor is debatable. But, it is annoying to know that Edward Jones was looking out for its bottom line when it was dispensing advice on which funds to buy. As an Edward Jones account holder, I was given some free or reduced cost trades to make up for any shenanigans. It wasn’t much help to me. I had already closed my account and didn’t want to work with them anymore. Edward Jones still pushes funds where they get a deal, but now they disclose that fact to you. All of this clarifies one thing for me: Your Edward Jones Financial Advisor is not providing a lot of financial advice; he is selling a program that is taught to him or her by Edward Jones as a way of maximizing return for Edward Jones and your Financial Advisor.
You can read more about their bias in financial advice problems at this government web site:
A commentary on just how sleazy this was:
Read more right off the EDJ website:
(Note: the disclosure Edward Jones was required to put on their website regarding their hijinks was only required by the court for a few years. The link is no longer valid. Too bad, sort of a fun corporate "scarlet letter" when you think about it.)
Edward Jones is Convenient, They Are on Every Corner, What Can I Do?
Burger King is also on every corner, but isn't really all that good for you either. And I like Burger King, I just don't eat there everyday.
For the average person with enough skills to find this review on the Internet, alternatives are very easy. Spending a little time looking on-line at the offerings at Vanguard and Fidelity (there are others as well), you can pick something as simple as a targeted date indexed retirement fund that automatically balances your stock and bond mix as you age (bonds are more stable, but stocks normally make better returns – balancing stabilizes the value of your account away from volatile stocks, and into more reliable bonds as you near retirement). Rebalancing is a valid practice, and a good Edward Jones rep will work with you in this, but at a cost of 5.75% of each new purchase. Do this three times over several years and you might pay $1,725 in fees on $10,000 that you reinvest. The fee structure positively kills your investment return as time goes by. The best on-line shops do this automatically for little, and yes, even no cost.
If you avoid the high Edward Jones upfront commissions, the high fund management fees, the annual fees, the dividend reinvesting commissions, the portfolio reinvesting and balancing commissions, the underfunding your account effect, that is a LOT of LOOT over a lifetime.
What if you have a good pile of money? If you need the help, Vanguard or Fidelity may not be a lot of help with estate planning and the like. You may want to consider going to a Certified Financial Planner (CFP) at an independent firm. The good ones promote holding low cost index funds, purchased through cheap trade custodial accounts at discount houses like Charles Schwab. Your CFP is going to charge you .5% to 1.0% a year to manage your funds, but this is still better than paying that 1% to the fund managers at managed mutual funds. Your fee gets you retirement distribution planning, tax planning, estate planning help, etc., that you are not going to get at Edward Jones. And, frankly, Edward Jones does not hire a lot of CFP’s. Also, the beauty of this fee arrangement is that it is honest - your financial advisor needs to make a living, and a constant flow of funds that motivates your advisor to look out for you, not just make another sale for another commission, almost has to be a better arrangement. And, it's at least a little comforting to know that if your portfolio grows in value, your CFP's income grows as well - he or she is motivated to some extent by your good fortune, not just his or her ability to get you to cough up more commission dollars. And, your CFP is motivated to treat you well and retain you as a customer because of the regular fees you are paying. At Edward Jones, if you aren't buying anything, you are comparatively useless to them! Just don't let a CFP coast too much; the downside here is that he or she can do practically nothing for years while drawing on part of your retirement every year!
Depending on your knowledge, what I have written here is a lot to absorb. Research what I’ve had to say here – read Money magazine, interview a few CFP’s, research the Vanguard and Fidelity websites. Heck, interview an Edward Jones rep and have them explain every fee using this review as a checklist. Ask the rep about their statements, disclosure of fees and website. Be aggressive, it's your retirement we are talking about here. Do this, and you'll find what I’m saying makes a lot of sense. “Making Sense of Investing,” as Edward Jones is fond of saying.
So, if you are asking yourself should I invest with Edward Jones, the answer should be self-explanatory. I was way too passive about my several years with Edward Jones, and after learning progressively more about how much money they suck out of your retirement with a very basic program, I decided I needed to get a clue and get out. Don't do your homework after investing with them, do it first! Don't wind up like I did, feeling a bit humiliated that you let someone charge you high fees with very little disclosure. Any relationship that leaves you feeling like you need a hot shower and a cup of coffee is generally a bad thing! (Well, the occasional relationship indiscretion in life may not be all bad, but you don't want to do this with an Edward Jones rep!!)
If you are bent on trying Edward Jones, try it with just a small part of your money, and test and compare it with something else. If you think you are getting any solid advice from your rep, you can always duplicate that with some of your money at a discount house. There is no need to go whole hog and move your entire account in one swoop to Edward Jones.
Good luck with your investing adventures. These days we all need a little luck!
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