2005 Lane Reports

Determining the True Value in Your Brokerage Account

Thursday, September 1, 2005
by Kenneth N. Green, C.P.A., B.S., M.B.A.

There's an old quip that goes like this: "There's no product or service in this world that someone else can't make a little bit cheaper and at a lot lower quality and those who consider price as the only factor when they buy are this person's legitimate prey." This quote may be one hundred years old yet it is as valid today as it was years ago. We would argue that it aptly applies to choosing an investment brokerage account as it does to just about any other product or service.

There are many factors other than just the price of stock trades to consider when evaluating and funding a new brokerage account. Those who fail to consider such factors risk encountering a less than satisfactory relationship and will likely pay more in the long run, too.

"Low-price" brokerages were beaten up pretty badly after the tech bubble burst in 2001. Trade activity dried up considerably, even among those accounts that had substantial assets remaining after the market bottomed in September, 2002. To stay in business, many firms merged with rivals.

Investors who are gradually coming back into the market are finding that brokerages now are emphasizing customer service, and that the focus is no longer on rock bottom fees and commissions. Firms are trying to court serious, long-term investors and not just high-volume traders who are in short supply today. Nonetheless, investors who maintain small balances or trade infrequently may find themselves subject to "low-balance" fees or "inactivity" fees.

So, investors have discovered that cheaper is not always better. (Make no mistake: the costs associated with a Marc J. Lane & Company investment account are surprisingly modest. See Marc J. Lane & Company FAQ.) Moreover, the cost of your account reflects not only the price per trade but also the volume of your trade activity, the resultant bid-ask spreads, and the inevitable taxes.

Some brokerages market their research as a real advantage. Perhaps so, but you need not pay up for it. There is plenty of research available on the Web or at your local library. At Marc J. Lane & Company, we offer all this plus our own proprietary research and independent third-party research from Value Line, Standard & Poor's, and Morningstar Mutual Funds.

If it's mutual funds that you're interested in buying, it pays to do some homework or have someone else to do it for you. Why? Because, according to Morningstar, there are 126 stock funds with $1 billion or more that have lagged behind their category average over the ten year period ending July 31, 2005. Collectively, these 126 funds manage $438 billion - - 9% of all the money invested in stock funds!

These are not obscure funds, either. Many of them are managed by some of the largest and best-known fund companies. Within this population, there are 48 funds that have lagged their categories average over three and five years. This data begs the question: why investors would keep these funds in their accounts? There truly is a "cost" to holding underachievers for too long.

In taxable accounts, some may feel that large unrealized capital gains won't allow them to sell their fund positions. But this should not be a problem for most fund owners. Since mutual funds distribute their taxable gains to share owners every year, a fund's cost basis is likely to be higher than most people think it is. And, with the lower capital gains tax rates now in effect, there is simply no excuse to hold on to poor performers.

One reason we recommend a narrow range of fund families, is that only a few have consistently outperformed their benchmarks for short, intermediate, and long-term periods. It's also important to our clients that these fund families hold shareowner interests paramount and they have not participated in the late-trading schemes that have tarnished the reputations of some other well-known fund families.

But, truth be told, the mutual fund scandal may not be over yet. Too many brokers continue to sell one mutual fund over another not because it's best for the investor, but because it's best for the broker. According to published reports, $2 billion a year is paid by fund sponsors to friendly brokers to push their funds. This is above and beyond the commissions (or "concessions") brokerages are paid when they sell funds.

Smith Barney's web site frankly ranks fund families that generated the most pay-to-play revenue for the firm last year. A.G. Edwards acknowledges it receives such payments, but won't say how much or from whom. UBS Financial Services' website admits that revenue-sharing is "a factor" in determining whether a fund is sold to customers. Fidelity Investments pays "hundreds" of firms amounts that depend, in part, on whether its Fidelity Advisor Equity Growth Fund was placed "on a preferred or recommended fund list."

Marc J. Lane & Company simply doesn't pay to play; our customers always come first.

The range of product selection is another feature many investors overlook when choosing a broker. Every broker will offer stocks and mutual funds. But, what if you want to purchase certificates of deposit (CDs) that are FDIC-insured, or government or corporate bonds? These are not available at every brokerage. Often, investors who want these securities will need assistance in selecting them because they can be complex. Also, since they do not trade on an exchange, there is not as much pricing transparency as with individual stocks. This leaves investors subject to unfair, yet perfectly legal price mark-ups by the broker.

If you are a serious investor and not a day-trader (and yes, there are still some of them around), don't fret the price-per-trade. Professionalism, customer service, and the range of products and services available to you really determine the true value of your brokerage relationship.

We'll be happy to discuss Marc J. Lane & Company's capabilities with you. Just call Marc personally at (312) 372-1040 ((800) 372-1040, nationwide), or email him at mlane@marcjlane.com.


Kenneth N. Green, C.P.A, B.S. (in Finance, University of Illinois), and M.B.A (in Finance, University of Michigan), is Senior Vice President and Director of Investments of Marc J. Lane & Company and Marc J. Lane Investment Management, Inc., the investment affiliates of The Law Offices of Marc J. Lane, A Professional Corporation.


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Our thoughts and prayers are with all those who are suffering from the devastation of Hurricane Katrina.


Kenneth N. Green, C.P.A, B.S. (in Finance, University of Illinois), and M.B.A (in Finance, University of Michigan), is Senior Vice President and Director of Investments of Marc J. Lane & Company and Marc J. Lane Investment Management, Inc., the investment affiliates of The Law Offices of Marc J. Lane, A Professional Corporation.

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The Lane Report is a publication of The Law Offices of Marc J. Lane, a Professional Corporation. We attempt to highlight and discuss areas of general interest that may result in planning opportunities. Nothing contained in The Lane Report should be construed as legal advice or a legal opinion. Consultation with a professional is recommended before implementing any of the ideas discussed herein. Copyright © 2007 by The Law Offices of Marc J. Lane, A Professional Corporation. Reproduction, in whole or in part, is forbidden without prior written permission.

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