The biggest rip-off on Wall Street

It doesn’t matter if we’re talking about teachers … plumbers … real estate agents … personal trainers … or any other profession.

There are some people who are doing terrific jobs and deserve every penny they make. (Sometimes more!) Then there are others who fall woefully short.

Of course, Wall Street may be the one place where underperformers are the most consistently (and richly) rewarded.

Just consider the following points …

First, the average financial adviser charges 1% a year to manage your money.

That means the typical investor who uses a professional adviser could be handing over $1,000 a year on a $100,000 portfolio. And that happens before one single penny is earned from the lump sum.

Put another way …

It means that same investor must BEAT a benchmark’s return by one percentage point a year JUST TO BREAK EVEN.

Again, do some advisers provide great information for their fees? Absolutely. Some are worth far MORE than 1% a year. But a lot of others aren’t.

Second, the typical actively managed mutual fund carries an annual expense ratio of 1.1%.

So whether or not you use an adviser, you could be losing more of your money just to pay a mutual fund’s marketing materials, managers and other operating costs.

On top of an annual expense ratio, many mutual funds also slap on plenty of other fees — for getting in or out. They may even level additional fees for every year you stay IN.

Obviously, a lot of investors are getting wise to this and switching to low-cost index funds and ETFs.

However, there are still billions in unnecessary, unjustified fund management fees going into Wall Street’s coffers every single year.

Third, most actively managed funds are consistent UNDERPERFORMERS.

It would be one thing to pay for performance. In fact, you will often hear Wall Street describe its compensation structure this way.

But the reality is that most actively managed funds — whether you’re talking about mutual funds or hedge funds — fail to beat their benchmarks.

Related story: Are Your Mutual Funds Making the Grade? Check the Scoreboard!

The number varies year to year. But it usually sits right around 80%.

It’s the same thing with hedge funds, too.

And remember, you still have to factor in their typical management fees — 2% of assets and 20% of any profits earned!

No wonder the California Public Employees’ Retirement System (CalPERS) decided to pull out all the money it had invested in hedge funds ($4 billion).

That was after they paid $135 million in fees during 2013 and received only 7.1% in returns from their hedge fund investments.

As a point of comparison, the S&P 500 Index rose 29.6% that year!

So if you’re looking for the biggest way that Wall Street is ripping off investors right now — whether large or small — forget penny-stock scams, Ponzi schemes or other esoteric maneuvers.

You may never see a movie made about it. But the grim reality is that they are simply eating away your portfolio through annual fees and expenses while giving you underwhelming trading strategies in return.

Best wishes,
Nilus Mattive