Dear Mr. Market:

Have you ever seen survey results that made you question the validity of the data? You don’t have to look far to find surveys that rank everything from blenders to vacuums these days. J.D. Power and Associates is regarded as an industry leader when it comes to surveys and various product rankings; they are best known for customer satisfaction research and ratings on new and used automobiles.   Annually they venture into the Financial Services industry, ranking the best ‘Full Service Investment Firms’… the results left us scratching our heads!

For the last two years (2014 & 2015) J.D. Power and Associates has named Edward Jones #1 in their Full Service Investor Satisfaction study. With any survey it is important to dig into how the data was collected and ultimately ranked to see if it carries any weight or credibility. The survey is fairly broad in scope looking at numerous factors such as: how investors feel about their advisor, investment performance, account information, account offerings, commissions/fees, website and problem resolution. While all of these are important one is often overlooked but in our opinion ultimately has the most dramatic impact on a portfolio… fees and expenses. If a portfolio is managed with products and services that have excessive charges does it really matter if the firm has a great website or local office?

Over the course of the last year we have presented many comprehensive and complimentary portfolio reviews for accounts held at Edward Jones. In the following paragraphs we will offer an overview of the company and break down several of the products and services that are common with Edward Jones accounts throughout the country. Articles like this can always ruffle some feathers but perhaps your opinion will align with ours after reading it.

The Basics:

Edward Jones has been in existence since 1922 and has expanded to over 12,000 offices in the U.S. and Canada. They have approximately seven million clients and $915 billion in assets under management worldwide with a focus on individual investors and small-business owners. The office model is unique, which has helped differentiate them from their competitors. Each office is staffed by only two employees, a Financial Advisor and an Office Administrator. This model has allowed them to open an impressive number of offices; many in small towns that could not support the typical office model that competitors have with numerous brokers and support staff. As the financial services industry has moved towards models that are not as focused on traditional client relationships (i.e. Robo-Advisors) Edward Jones attempts to embrace personal relationships. The results have been impressive, as they have won the same award from J.D. Powers in: 2002, 2005, 2006, 2007, 2009, 2010, 2012 and 2013! However, don’t allow yourself to believe all the hype! If you dig a bit deeper you can’t help but question if they are they truly focused on client relationships or do they use their model to ultimately drive corporate profits and pay their advisors?

**Every link in this article is from the Edward Jones website to avoid any biased opinions from the media or other websites.

On their website Edward Jones has a link to allow clients and prospects to understand how the company and employees are compensated. You better get comfortable and have some time (maybe a magnifying glass as well!) as it is 43 pages long! The extensive list of fees is a bit overwhelming but there are a few that definitely caught our eye …

Unit Investment Trusts (U.I.T.) – We’ve discussed these before; they are essentially a basket of individual positions with a set maturity and no active management during the life of the investment. They offer diversification but perhaps more importantly they offer high payouts to the advisor and new sales opportunities when they mature. The fee schedule with Edward Jones is if you put $50,000 into a fixed income U.I.T. you would pay 3% or $1,500. Take a quick look at where the 10-year treasury is…here is a hint it is just above 1.5%. Unless the fixed income U.I.T. is capable of delivering stellar returns this is a losing position for any investor. The equity based U.I.T.’s have a charge anywhere from a 2.95% to 3.95%. The beauty of these products (for the advisor and Edward Jones) is that when they mature the advisor gets to sell them again, so they are essentially annuitizing their business by creating a new sales opportunity every few years and generating fees…over and over again!

Mutual Funds – This is a topic that we have gone to the well with many times! Many mutual funds are notorious for charging excessive fees while also making it challenging for the average investor to monitor or even know what they are actually paying. Loaded funds used to be commonplace but with new regulations and more transparency in our industry they not as common as they once were. We often see ‘A-shares’ when reviewing accounts from Edward Jones; these are a front loaded with a fee and ongoing management expenses every year it is owned. According to their revenue sharing summary the number one family of funds sold by Edward Jones is American Funds. The majority of American Funds A-share charge investors 5.75% when they are purchased. Take a moment to put that in perspective… When a fund like this is bought, the position is already down nearly -6%! To compare, if an investor really wanted a mutual fund they could buy a Vanguard large-cap fund and pay no up front fee and have annual fees that would range from .05% to .50% depending on the fund…that is a savings of over 5%! In 2015 Edward Jones was paid $55 million dollars in revenue sharing from just American Funds! If you look at the entire breakdown they received $175.1 million from all mutual fund sales. Every single penny of this was paid by investors through the fees they paid for these products; the majority (if not all) could have been avoided and stayed in their pockets!

Money Market Funds – This is where your cash sits if it is not invested, according to their website it is currently paying a 7-day current yield of .01%. The money market has two different classes, Investment Shares and Retirement Shares, they charge .81% and .90% respectively. Nothing like hitting people where it hurts by charging more in retirement accounts than in taxable accounts for the same product!

Bonds – Fixed income is an essential part of any well-rounded portfolio allocation. For investors that want to own individuals bonds and avoid the fees we’ve already discussed with mutual funds or UITs there are charges that they certainly need to be aware of. They can charge up to 2% of the dollar amount spent on purchases and .75% on sales. Remember what the 10-year treasure is currently paying… 1.5%!

Stock – Most firms these days charge a flat rate around $8 to $10 per trade but Edward Jones charges 2% of the value of the trade. If you were to buy $10,000 of a stock you would pay $200 at Edward Jones, quite a bit more than the standard $8 – $10! If you want to set the stock up for dividend reinvestment there is also a ridiculous 2% charge on the reinvestment amount each time it is purchased! If you buy individual stocks at Edward Jones you need that stock to return a positive 4% to just break even (purchase and sale charges of 2%)!  One last point.. don’t even think about trading online with Edward Jones – they don’t offer it!

Annuities – We don’t think we even have to go down this road as we have covered it numerous times! Remember that there is typically a commission in the 8% range when annuities are sold (and yes…they are sold, not bought)! In 2015 Edward Jones received $23 million from annuity sales revenue sharing.

Account fees – If you open an IRA with Edward Jones you will be paying an account fee of $40 per year and every year that it is open. Thought you were contributing $5,500 to your IRA for 2016? Nope… it is actually $5,460 at Edward Jones but it will drop even more after you are encouraged to buy some A-share mutual funds! If you decide you are ready to leave Edward Jones be prepared for them to hit you with a $95 transfer out fee, how is that for leaving on a good note?!

Conclusion:

There is no arguing the profitability and success that Edward Jones has enjoyed over the years! But when you dig just a bit deeper you can’t help but ask at whose expense is this at? We would suggest that it is at the expense of their clients…and most of them don’t even realize it! While they have created a comfortable small hometown office atmosphere with their branch model they have also created a complicated web of fees ultimately driving their impressive profits. We would encourage anyone currently at Edward Jones or considering investing with them to do their research, ask the tough questions and get a portfolio review from a flat fee based advisor. Even better find an advisor that operates as a
fiduciary so you know that your interests come first, not the advisors or the company’s
bottom line. J.D. Powers and Associates does a phenomenal job when it comes to ranking vehicles but we can’t help but question if they should venture into the financial services industry…perhaps the ‘car salesman’ tactics often used at Edward Jones make it a natural fit for their annual survey? If you have any questions or comments we encourage you to contact us or if you currently have accounts at Edward Jones allow us to complete a complimentary analysis of your portfolio.