Are Loss Leaders Weighing Down Your Portfolio?


July 13, 2015



JRW_WW.jpgEver hear of a loss leader? It’s when a store advertises an item for an extremely low price, figuring once you’re in their doors you’ll also buy some higher-margin items. It’s the kind of game you might expect at a grocery or department store. But the truth is you can get hit by similar games from financial service firms.


Before coming to us, one of my clients, call him Jason, had gone to a very large, well known financial conglomerate to apply for a mortgage loan. The rate they offered him was excellent, only 3.5%. But to get that rate, he would have to open a $1 million account with the conglomerate’s investment arm. He did so.


Fast forward four years. Jason had a sense that his overall financial situation was not quite optimal. He asked me to take a look. What quickly caught my eye was a 2.2% management fee on his investment account with the large conglomerate. A more competitive fee of 1% would not have been hard to find for that type of account earning that type of return. But what about the low mortgage rate, he asked? With some basic calculations, I showed Jason that, taking the investment fee into account, he was paying an effective mortgage rate of about 5%. Not such a great deal after all.


Economists call it asymmetric information. It’s when one party to an exchange knows more about what is happening than the other party. I suspect the financial conglomerate knew that what they gave up to Jason on the mortgage offer they would make back on the investment fund that their representative steered him into. Jason, however, only fully realized the problem when I pointed it out to him. Fortunately, the conglomerate offered a selection of investment funds, some of which were more competitively priced. So I was able to work with them to move Jason’s investment account into a different fund and lower his fee without him having to give up the low mortgage rate.


It was a good ending, but in an increasingly complex world, asymmetric information is a growing problem. Think about it. A big organization can afford to pay people to spend their workdays designing ways of tilting complex transactions in their favor. The only way to stay ahead of them would be to spend your own valuable time doing the same thing, reading every word of the sales agreements, disclosures and fine print deals you come across. If you’re like my client Jason, you don’t have the time to deal with that much clutter. Does that mean you have to accept being at an informational disadvantage with the firms you do business with? No. The best way to protect yourself is with a knowledgeable and trustworthy single point of contact—someone with your best interests at heart, whom you can count on in all financial matters.


At PARTNERSINWEALTH that’s what we provide. To see how having your own PERSONALCFO can remove clutter from your life, optimize your finances and help you rest easy, please contact Jim Waters, CFP®, at 713.964.4028 or