John Oliver Goes Off on High Fee Financial Advisors

John Oliver took the entire financial advice industry to the mat yesterday, royally embarrassed John Hancock financial services and brokers, and called out the ridiculously high fees in the 401k industry.

He also mocked Prudential’s domino commercial and a woman who wanted to use $4,000 to get an elf spotting certificate instead of saving for retirement. I highly recommend you check it out. The full video is about 20 minutes long. If you only have two or three minutes, skip to the end and watch his summary on how to build wealth for retirement.

Make Sure Your Advisor is a Fiduciary

John Oliver highlighted FINRA’s warning that anyone can call themselves an advisor. You can use the name “financial analyst, wealth manager, financial advisor, financial consultant” or anything you want. Also, credentials in the industry are confusing and often do not mean anything. Consider this certificate I got from John Oliver’s website. Many advisors at high fee financial advice firms have certifications that mean even less.

John Olivers shows how crazy ads are for financial advice. He laughed at a Chase ad that showed the family’s financial advisor attending their daughter’s wedding. Certainly, if you have that close of a relationship with your advisor, you need to reevaluate your professional relationship because they are probably taking you to the cleaners.

You need to find out if your advisor has a fiduciary responsibility to you. This means they have a legal obligation to give you advice that is in your self interest. Most brokers and commission-based advisors give advice on a “suitability” standard. That means they can recommend financial products that give them huge payouts instead of low cost mutual funds such as the ones from Vanguard. The first question when you interview anyone to give you advice on your finances should be, “do you have a fiduciary responsibility to me?” If they answer no, then run do not walk.

A Cat Throwing Darts is Better Than Active Managers

John Oliver highlights a study that found a cat picking stocks performed better than the majority of expert stock pickers. The cat earned almost 11% and the active managers earned 3.5%. Over the long term, the academic consensus is powerfully the same: active management loses because of high fees, transaction costs, and taxes.

Even so, about 70% of fund assets remain in active funds, most of which have fees greater than 1% of assets per year. Why would so much money be laying around in expensive junk? Retirement plans like 401ks explain a lot of the reason why.

What Happened When John Oliver Stopped Googling Photos of Baby Pigs with Ice Cream and Paid Attention to His 401k

John Oliver praised Janice in accounting for actually caring about the fees their 30 or so employees paid in their 401k. Their plan got set up by John Hancock, a large financial firm that primarily does insurance but also runs a few mutual funds. The total fee for the 401k was 1.69% a year (!!) That is a very high number, but very typical for a small employer unwilling to pay the administrative fees of the plan. Rather than pay directly, these companies let the fund company charge them indirectly through higher fees. Often, the HR managers setting up the retirement plans have limited knowledge of the financial industry and do not know they are picking such a poor option.

When you have an insurance company as your sponsor for your 401k, you can expect a lot of high fees and poor fund choices. Insurance companies are not in the business of mutual fund investing, or at least that is not their focus. If they have a retail investing arm at all, it will be a profit center for them. Such was the case with John Oliver’s financial plan with John Hancock.

The plan required the use of a broker, who worked under the suitability standard instead of the fiduciary standard. That meant he could put a bunch of high fee active funds good for his pocket into the plan and not as many low fee index funds. Oliver found out the broker would be paid a significant portion of the plan fees for the life of the plan, and decided they needed to make a change. Hancock and the broker’s reaction when Oliver questioned the high fees was that they were typical for a startup 401k plan.

If you cannot provide low costs for a service, you should not offer it. Allow another company with good scale ramp up their service and become more efficient, but do not have a 401k division just to have one. John Hancock was totally embarrassed last night on Last Week Tonight, and I’m glad. Charging 1.69% for a simple 401k is ridiculous and they deserve the embarrassment.

Why do retirement plans cost so much? ERISA regulations passed in the ’70s make 401k’s so difficult and costly to administer that fund companies have entire divisions run on 2003 excel spreadsheets dedicated to them (I know I used to work at one). Because of this inefficiency caused by regulation, small 401k plans are very expensive to set up and run. John Oliver experienced this with his small 401k, probably with a low six figure level of assets. The broker wants to make at least a few thousand dollars a year to manage it and Hancock wants the same to make it worth their time, hence the high fee. If we allowed IRAs to function as 401k’s instead, we could eliminate all this waste and make low fee funds accessible to everyone. Unfortunately, the strange bedfellows of pro-labor politicians and active portfolio management companies will conspire to prevent that from happening.

John Oliver Has the Best Summary of Retirement Advice Ever

He took the final segment and used Prudential’s falling domino commercial to show how destructive even small fees can be to your portfolio. He promoted index funds from companies such as Vanguard as well as lambasting financial investments like annuities that come with high commissions and high expenses for the investor.

You should really watch the whole thing. I am working on a book about some of these concepts now, so keep your eye out in the next few months for a comprehensive look at managing your money.

Anything you wish Oliver had talked about more? What was your favorite part? Comment below!