C Shares in Retirement Accounts

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vbrainy's picture
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Recently, several people have said that they are having problems with their compliance department allowing C shares in retirement accounts.  Could you be more specific?  Please no debate about C shares vs. A shares, we all passed the Series 7.  Each has their own benefits.  I am most interested in why your Compliance Department (a.k.a. The Sales Prevention Department) is giving you hassles.

Broker24's picture
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Joined: 2006-10-12

Because C shares are typically for shorter term investing.  Since retirement accounts are typically for long-term investing....you see the disconnect?  If you pick the right mutual funds, and you are investing for a goal many years off, most of your "work" is done for the time being (other than periodic re-bal.).  Now, this is not always the case, but I think that is more or less how the theory goes.  If I were completely neutral, I would agree that A-shares make sense in these cases.  However, it would be nice to collect 1% gross every year on every mutual fund...
I assume you knew this already based on your comments, so not sure if I answered your question completely. 

Moneytree's picture
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Well that's about right. The problem with the logic is a problem that one understands if they use C shares--So many funds tank after a few years that a switch to another firm is necessary thus paying loads on A all over again.

vbrainy's picture
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Look, you can make a very good agrument to use C shares or B shares for that matter.  Open your American Funds book and look at expenses and performance over time.  Some people just don't want to lose that 5.75 off the top, they want all of their money in the market.
Some people don't want to have to stay with a fund company for 5 years, they want more liquidity, even in an IRA than an A share provides.
I asked if you were specifically having this problem with your compliance department, those are the people I would like to hear from.

mktsystms's picture
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Moneytree wrote:Well that's about right. The problem with the logic is a problem that one understands if they use C shares--So many funds tank after a few years that a switch to another firm is necessary thus paying loads on A all over again.Fund families do not charge a load when transferring from one fund to another, as long as it's within the same family of funds.  That's one of the things that Spitzer recently nailed a bunch of firms for.  These guys were switching funds for their clients and charging the client the loads all over again. 

Broker24's picture
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V-

At Jones, you can use them up to about 100K without too many problems.
Once you start hitting decent breakpoints, they pretty much force you to
use A shares. Above that amount, you really have to get an
acknowledgement letter signed by the client.

gad12's picture
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From what I can gather here at Jones the firm has been Pro A share so long for whatever reasons that they just don't like you doing C shares.  They "allow" it under certain circumstances, but their philosophy with retirement accounts is that the time horizon is so long that A shares rule!!!!  You always hear the old, "At jones the average mutual fund is held for 10-14 years"  which sounds made up to me.  Like noted above, you can use them under certain dollar amts.  On a related note I tried to do a new C share fund in a Simple account for an American fund, and they (American) have completely disallowed C shares in Simple and SEP IRAs unless the fund is already owned in the account.  

anonymous's picture
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Joined: 2005-09-29

"A" shares are cheaper than "C" shares in the long run.  When it is put on the investor account form that the investment is long term, it should raise a red flag whenever a "C" share is sold.  That being said, this does not mean that "C" should not be allowed to use.  Somehow, you must get your compliance department to understand that the account is long term, but the specific investment is short term. 
It makes much more sense to completely disallow "C" shares in accounts held at fund families because as long as the account is open, they can move money without sales charges.  In a brokerage account money can be moved between fund familes, thus creating sales charges, so that "C" shares may be cheaper than "A" shares.

troll's picture
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Joined: 2004-11-29

vbrainy wrote:Recently, several people have said that they are having problems with their compliance department allowing C shares in retirement accounts.  Could you be more specific?  Please no debate about C shares vs. A shares, we all passed the Series 7.  Each has their own benefits.  I am most interested in why your Compliance Department (a.k.a. The Sales Prevention Department) is giving you hassles.It's amazing the cr&p that the compliance folks and regulators are messing around with, while there are still plenty of real crooks out there......some clients just don't want to pay a sales charge.If it's going to come down to this, I wish the fund companies would just ban C-shares all together so clients didn't even have a choice.

anonymous's picture
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Joined: 2005-09-29

Actually, I'd like fund companies to ban "A" shares.  I can't stand the fact that they are the cheapest long term, but they put brokers in the position that the broker can't afford to service the client.
The broker can go broke servicing the client or they can churn the account.  It sucks either way.  (Or they can ignore "A" share clients.)

scrim67's picture
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Joined: 2005-04-28

At my firm we use A and F shares in our fee based program.
Compliance doesn't give us hassles.....yet!
scrim

frogger's picture
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Joined: 2006-03-07

Look, the bottom line is, even if C shares were cheaper, the compliance gripe is that when C shares are sold (and we all know this), cost is rarely discussed, disclosed, etc.. with the client because they never see it come out! Compliance departments realize that a rep with a history or pattern of C shares over time frequently proves to be misleading his clients to believe he works for free. Period.

gad12's picture
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Joined: 2006-12-06

Free?  That could be a little extreme.  Separate from the fact that I ALWAYS disclose the fees to the clients, I have a hard time believing that any clients actually believe that we work for non profit companies.

anonymous's picture
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Joined: 2005-09-29

Frogger, your analysis is B.S.  If on the investor account form, you put that the time horizon is short term, the account will get flagged if it is an "A" share.  If on the investor account form, you put that the time horizon is long term, the account will get flagged if it is a "C" share.
It is as simple as that.

AllREIT's picture
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Joined: 2006-12-16

gad12 wrote:Free?  That could be a little
extreme.  Separate from the fact that I ALWAYS disclose the
fees to the clients, I have a hard time believing that any clients
actually believe that we work for non profit companies.

Don't be so sure. Alot of people think this is a like a bank, and that we work for "free".

Registered Rep's picture
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Joined: 2006-07-18

Someone else said it but the bottom line is that there are numerous people that out right refuse to pay a front load fee.  I have tried everything including a software program that shows people how much more expensive the C share is after 4+ years...but they refuse to buy the A.  I always give clients the choice & oddly enough more than 75% of my fund tickets end up in C's.
There are some broker dealers out there that are now limiting the amount of money a rep can put into C's given the break points. After 500k AGE will not accept a C ticket for that household within the same fund family. At a million, you are screwed regardless of how many fund family's you use. Didn't Merrill outlaw the C in most cases?

vbrainy's picture
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Broker24 wrote:V- At Jones, you can use them up to about 100K without too many problems. Once you start hitting decent breakpoints, they pretty much force you to use A shares. Above that amount, you really have to get an acknowledgement letter signed by the client.
 
now that is good input.  But I did not think you could sell anything beside A shares at EDJ.  Am I wrong?

vbrainy's picture
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anonymous wrote:
"A" shares are cheaper than "C" shares in the long run.  When it is put on the investor account form that the investment is long term, it should raise a red flag whenever a "C" share is sold.  That being said, this does not mean that "C" should not be allowed to use.  Somehow, you must get your compliance department to understand that the account is long term, but the specific investment is short term. 
It makes much more sense to completely disallow "C" shares in accounts held at fund families because as long as the account is open, they can move money without sales charges.  In a brokerage account money can be moved between fund familes, thus creating sales charges, so that "C" shares may be cheaper than "A" shares.

You are an idiot.  Do you know how many clients have been poorly served by brokers who sold A shares, took the upfront comission, and NEVER called the client again? 
Retirement is 30 years.  When you use C shares, as the client account grows, you also get paid more.
It makes you have continued interest in the client and to serve their best interest.  Re balance.  Re allocate.
Who wants to serve a bunch of A share clients---NOONE

Broker24's picture
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V-
You can sell C shares at Jones, you just have to follow the policies they have in place.  They will not give you too much hassle if you are doing them in small accounts.  They may send a compliance response request (we call it an F.S. PEND), but you just explain that the client has small dollars, no breakpoint, and prefers not to pay the upfront load.  If you are telling the truth, you have nothing to worry about.  They just make sure we are asking the right questions and doing it for the right reasons.

vbrainy's picture
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OK Broker 24.  Have a prosperous day.

rightway's picture
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rightway wrote:Joe-

 

I think C shares are OK if you are in fact managing the account with
them, but I fear the SEC will be looking at these as nothing more than
a compensation decsision buy the advisor, and one in which costs the
client more money in the long run.  The 1% trail forverver will
die, you watch.

The best reps I know, both Indy and wire, charge hard dollar fee's and
don't appologize for it.  This is because they are worth it to the
client- not a bad way to go.

I found this from a post I did back in 2004.  If your business is
built
on C shares and you think you can continue to collect 1% without a pile
of hassles you may want
to re-visit the issue sooner than later.  Very shortly this will
be a very hot issue for our industry; compliance will increase, fee's
will show up on client statements, pay to the reps will be cut, the
deterents will pop up. 

scrim67's picture
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Rightway,
Any opinions on mutual fund wrap accounts as it pertains to increased compliance?
Do you feel building a fee based book in wrap accounts could be at risk?
I would venture to say that any type of business can, and will eventually come under scrutiny.
I guess diversifying our own book is a good idea
scrim

bankrep1's picture
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Rightway I agree with all the things you have said, but I still use them quite a bit, it is cheaper than a wrap and basically allows me to offer the same thing at a better price. I use an investment policy statement that outlines why we use C shares and also outlines the costs, my clients won't be suprised if they start showing up on there statements because they are aware of it.
If there comes a point in time when we can't use C shares for some reason I will seek out another alternative (maybe dropping my NASD licenses and operating as a fee-only RIA), but as of right now I think they are the best thing for most clients. I think the most they will do is have C shares convert similar to what American Funds does.

rightway's picture
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Bankrep, your speakin' logic, and the SEC don't play that.  The
stark reality is that most clients DO NOT know they are paying
thousands of dollars in fee's.  When you factor in trading costs
with C shares the fee's often exceed 4%...yes 4%.  Take a client
that you had the conversation with 3 years ago about the fee's, and
even you mentioning it at your quarterly reviews, and suddenly put a
$1,200 quarterly line item deduction on there statement and see what
happens. 

Its not cheaper than a wrap in all cases.  A wrap allows you to
mix in ETF's with some funds, buy individual bonds with no mark-up
instead of bond funds, and even a nice core of high quality
stocks.  Fee's are usually around 1.5% all in for a balanced
portfolio with total flexibility.  

This, however, is no longer the answer (to answer SCRIMS question)
because you have utilization issues (read the lates UBS article on this
sight).   What happens at Merrill Lynch right
now?   If there is not an adequete amount of trading to
warrent the wrap fee's a letter goes out and the fee's ar e eventually
turned off.  C Shares are next.

Tsk Tsk.  What does all of this mean?  The writing is on the
wall folks!  YOU HAVE TO EARN THE FEE'S YOU ARE CHARGING!! We have
reps in our office that are clearing over a million in C Share
production from doing NOTHING but servicing account withdrawals and
reading the paper.  Lets be honest...its not right...especially in
the eyes of the SEC.

I have addressed this in my own practice in a very very aggressive way
over the last 3 years because I believe there is sweeping change coming
about.  As a newer rep building a practice I would keep my eyes
very open to this issue.

vagabond's picture
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Fees exceed 4%?  So institutional investors pay about 2% in trading fees?  Gosh, I"ll do it for 1% and pick up the ticket charges.  If there are any MF managers out there feel free to PM me.

Moneytree's picture
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rightway wrote: Bankrep, your speakin' logic, and the SEC don't play that.  The
stark reality is that most clients DO NOT know they are paying
thousands of dollars in fee's.  When you factor in trading costs
with C shares the fee's often exceed 4%...yes 4%.  Take a client
that you had the conversation with 3 years ago about the fee's, and
even you mentioning it at your quarterly reviews, and suddenly put a
$1,200 quarterly line item deduction on there statement and see what
happens. 

Its not cheaper than a wrap in all cases.  A wrap allows you to
mix in ETF's with some funds, buy individual bonds with no mark-up
instead of bond funds, and even a nice core of high quality
stocks.  Fee's are usually around 1.5% all in for a balanced
portfolio with total flexibility.  

This, however, is no longer the answer (to answer SCRIMS question)
because you have utilization issues (read the lates UBS article on this
sight).   What happens at Merrill Lynch right
now?   If there is not an adequete amount of trading to
warrent the wrap fee's a letter goes out and the fee's ar e eventually
turned off.  C Shares are next.

Tsk Tsk.  What does all of this mean?  The writing is on the
wall folks!  YOU HAVE TO EARN THE FEE'S YOU ARE CHARGING!! We have
reps in our office that are clearing over a million in C Share
production from doing NOTHING but servicing account withdrawals and
reading the paper.  Lets be honest...its not right...especially in
the eyes of the SEC.

I have addressed this in my own practice in a very very aggressive way
over the last 3 years because I believe there is sweeping change coming
about.  As a newer rep building a practice I would keep my eyes
very open to this issue.

You forgot to state how you addressed this in your pracitce in a very very aggressive way.

What could happen to C shares?

--The NASD could make the rep do work on C share account such as AA to receive the 1%

--They could be converted to A shares. Since A and C have different NAV that basically means dropping the 12b-1 to 25bp. If that happens it does two things 1)eliminates options for investors and 2) gives rise to churning them to A. (Think of the rep who's client went into C 18 months ago and the pay differential)

--Could force them into wrap accounts. Creates capital gains and a problem for investors who hold closed C share positions.

--Put the fee on the statement. They client has the choice to stay or move to a lower mgt fee A share or wrap account.

Bottom line is it won't be simple to just eliminate C shares as ultimately the investor will get hurt.

C shares are not on the radar screen that I know of. Wraps, annuities are. Maybe after that but, in the end everything will eventually be on the radar screen at some point.

mranonymous2u's picture
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"The stark reality is that most clients DO NOT know they are paying thousands of dollars in fee's.  When you factor in trading costs with C shares the fee's often exceed 4%...yes 4%. '"
Cite a source please.
I'm not sure, rather, I'm sure I'm not following what you are saying.
If xyzcf is a C share with a 1% trail and xyzaf is the same fund in an A share format, is there a higher trading cost factor in the C share?
Maybe there is a larger cash reserve due to the "hot money" aspect of C shares, but the trading would generally be in the same ball park for the A's and the C's right?
Or are you saying that a person with a portfolio that includes C shares and other trading securities that his overall portfolio might have a 4% "fees" total?
IMHO, the next target will be "Managed Money" where the broker is taking 2 to 3% fees for "watching over the managers".  I think you'll see those fee max's trimmed to 1% before you see the SEC go after C shares.
Just to be clear, the only time I use C shares is when the CEF that I own goes to it's historical high in Premium and then I'll switch into C shares until the CEF drops back to a discount, and then I'll switch back into the CEF. 
Mr. A 

Broker24's picture
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In my experience, C Shares are only about 75Bp higher than an A, so it's not a significantly higher expense.  They may crack down on what situations they are allowed to be used in (i.e. breakpoint situations), but I can't see them putting controls in place that would require too much ongoing monitoring by the NASD or SEC.  I can't possibly imagine them erquireing the account to be "actively managed".  That just seems too complicated to control.  But then again, I am no compliance expert.

mranonymous2u's picture
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" A wrap allows you to mix in ETF's with some funds, buy individual bonds with no mark-up instead of bond funds, and even a nice core of high quality stocks.  Fee's are usually around 1.5% all in for a balanced portfolio with total flexibility."
Bonds at 1.5%. That means that if you buy a 10 year bond and hold it to maturity, you got 15 points for the bond.
But you client didn't pay a commission of 1 to 2 points so that's better! Right?
Break it down to 50 beeps, you're still banging the client for 7 and a half pounds.
What now? We stop comparing Bonds in the wrap to bonds in a non wrapped and compare the strategy to a Bond Fund?  
And do you REALLY think that the firm isn't taking anything when you buy bonds in a wrap account?
Mr. A

Captain's picture
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bankrep1 wrote: Rightway I agree with all the things you have said,
but I still use them quite a bit, it is cheaper than a wrap and basically
allows me to offer the same thing at a better price.

If there comes a point in time when we can't use C shares for some
reason I will seek out another alternative (maybe dropping my NASD
licenses and operating as a fee-only RIA), but as of right now I think they
are the best thing for most clients. I think the most they will do is have C
shares convert similar to what American Funds does.

First, I disagree with the C-share comment as being 'the cheaper
alternative'. I don't think you understand that fee-based accounts offer
institutional share classes which 1.) eliminate the 25 bp trail, and do not
have the additional .75% which then embeds the share class with the 1%
that you receive through a C share. Those items eliminated, you have a
wrap platform, at the very least, on par with the funds used within a C-
share platform.

Second, NO way can someone say that a C-share investment platform is
more flexible for the advisor or for the client. You cannot pick and
choose a C-share American Funds fund, JP Morgan C-share fund, and
then expect to be able to manage the portfolio effectively, using
rebalance, tactical asset allocation, etc. You cannot move from one fund
family to another, which is a complete restriction of the movement and
management of the funds within your platform.

Also, wrap programs have the advantage of the potential for a tax
deduction. If they remit the fee to their Roth, or regular IRA, it could be
taken as a deduction. You cannot do this with a C-share. Period.

Lastly, I realize that this is a 'C-share within a retirement account'
discussion, however, it's morphed into something else. People who say
'I'll just transition to an RIA when they eliminate C-shares....', are
completely ignoring the potential tax risks to the client when you swap
from the C-share (which, by the way... in an RIA format you cannot keep
the trail) to an A-share alternative. There will be a tax consequence
which cannot be justified just so you get paid.

C-shares do not win this argument. Face the fact that most advisors may
tell their clients that they pay a fee within their mutual funds, but would
rather NOT have the reminder on the statement each quarter (i.e. the
advisory fee). Clients can be told once, but the lack of a reminder makes
them feel that it's not expensive.

My take is this... the fee-based investment solutions are more flexible.
You can exchange among a group of 5,000 different funds. You don't
have to limit your management to the funds within the C-share fund
family you chose, and you can offer your client the flexibility of remitting
their fee separately with the potential of tax deducting the fee.

I don't see the benefit of using a c-share for anything.

Good discussion, however.

C

AllREIT's picture
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mranonymous2u wrote:Bonds at 1.5%. That means that if you buy a 10
year bond and hold it to maturity, you got 15 points for the
bond.

This is something the industry will wake up to in a few years.

It basicly gets to the point where for alot of clients it will make
sense to have a brokerage account for holding bonds and other income
investments that do not require managment vs a wrap account for
everything else that does need oversight.

Of course you could have a split fee policy, that charges 0.25 for bonds and 1.5 for everything else.

Incredible Hulk's picture
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AllREIT wrote: Of course you could have a split fee policy, that charges 0.25 for bonds and 1.5 for everything else.

With a 60/40 split your final cost is 1% of total assets anyway so why split it out?

bankrep1's picture
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Captain wrote: bankrep1 wrote: Rightway I agree with all the things you have said,
but I still use them quite a bit, it is cheaper than a wrap and basically
allows me to offer the same thing at a better price.

If there comes a point in time when we can't use C shares for some
reason I will seek out another alternative (maybe dropping my NASD
licenses and operating as a fee-only RIA), but as of right now I think they
are the best thing for most clients. I think the most they will do is have C
shares convert similar to what American Funds does.

First, I disagree with the C-share comment as being 'the cheaper
alternative'. I don't think you understand that fee-based accounts offer
institutional share classes which 1.) eliminate the 25 bp trail, and do not
have the additional .75% which then embeds the share class with the 1%
that you receive through a C share. Those items eliminated, you have a
wrap platform, at the very least, on par with the funds used within a C-
share platform.C Agree here it is basically the same

Second, NO way can someone say that a C-share investment platform is
more flexible for the advisor or for the client. You cannot pick and
choose a C-share American Funds fund, JP Morgan C-share fund, and
then expect to be able to manage the portfolio effectively, using
rebalance, tactical asset allocation, etc. You cannot move from one fund
family to another, which is a complete restriction of the movement and
management of the funds within your platform.
C Agree here it is basically the sameYou shouldn't be moving them that often anyhow, I find them very effective

Also, wrap programs have the advantage of the potential for a tax
deduction. If they remit the fee to their Roth, or regular IRA, it could be
taken as a deduction. You cannot do this with a C-share. Period.

How many firms allow cients to do this? How many actually do it?

Lastly, I realize that this is a 'C-share within a retirement account'
discussion, however, it's morphed into something else. People who say
'I'll just transition to an RIA when they eliminate C-shares....', are
completely ignoring the potential tax risks to the client when you swap
from the C-share (which, by the way... in an RIA format you cannot keep
the trail) to an A-share alternative. There will be a tax consequence
which cannot be justified just so you get paid.

Why would you switch from a C share to an A share? I said I might choose to work as a fee only advisor, if I do that I will convert all of my accounts to fee based advisory accounts and drop my series 7

C-shares do not win this argument. Face the fact that most advisors may
tell their clients that they pay a fee within their mutual funds, but would
rather NOT have the reminder on the statement each quarter (i.e. the
advisory fee). Clients can be told once, but the lack of a reminder makes
them feel that it's not expensive.

Ask people would they rather see a fee or know they are paying it and not see it, you will be suprised by the answers you get

My take is this... the fee-based investment solutions are more flexible.
You can exchange among a group of 5,000 different funds. You don't
have to limit your management to the funds within the C-share fund
family you chose, and you can offer your client the flexibility of remitting
their fee separately with the potential of tax deducting the fee.
The current wirehouse environment utilizing wrap programs use mutual funds and charge 1.5% on average. C shares are cheaper

I don't see the benefit of using a c-share for anything.

By the way there was an article in the Journal of Financial planning that is Pro C share stating of all commission based structures it is the most fair and puts the client in the best situation

Good discussion, however.

rightway's picture
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vagabond wrote:Fees exceed 4%?  So institutional investors pay
about 2% in trading fees?  Gosh, I"ll do it for 1% and pick up the
ticket charges.  If there are any MF managers out there feel free
to PM me.

Do some research and you will be surprised how th fee's break out in a
mutual fund.  Go beyond Morningstar and Mutualfund.com.  Then
you will see what the SEC see's...then you won't want to prospect the
MF managers anymore.

rightway's picture
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mranonymous2u wrote:"The stark reality is that most clients DO
NOT know they are paying thousands of dollars in fee's.  When you
factor in trading costs with C shares the fee's often exceed 4%...yes
4%. '"
Cite a source please.
I'm not sure, rather, I'm sure I'm not following what you are saying.
If xyzcf is a C share with a 1% trail and xyzaf is the same fund in
an A share format, is there a higher trading cost factor in the C
share?
Maybe there is a larger cash reserve due to the "hot money" aspect
of C shares, but the trading would generally be in the same ball park
for the A's and the C's right?
Or are you saying that a person with a portfolio that includes C
shares and other trading securities that his overall portfolio might
have a 4% "fees" total?
IMHO, the next target will be "Managed Money" where the broker is
taking 2 to 3% fees for "watching over the managers".  I think
you'll see those fee max's trimmed to 1% before you see the SEC go
after C shares.
Just to be clear, the only time I use C shares is when the CEF that
I own goes to it's historical high in Premium and then I'll switch into
C shares until the CEF drops back to a discount, and then I'll switch
back into the CEF. 
Mr. A 

You must be kidding.  A managed account where the client ownes the
securities with no imbedded gains, options to quit the manager and hold
the securities, ability to harvest losses, and total VISABILTY of
costs?  Or an investment where a new investor gets a basis on
positions years before they actually "owned" it, no option to leave
without complete capital gain, and fee's buried in a 40 page
perspectus?  No, the SEC is smarter than you.  Sorry sport.

troll's picture
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embeddedvisibility

rightway's picture
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FU  its the holidays.

troll's picture
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rightway wrote:FU  its the holidays.
roflmFao @ "FU".....rock on baby.....

AllREIT's picture
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rightway wrote:vagabond wrote:Fees exceed 4%?  So institutional investors pay
about 2% in trading fees?  Gosh, I"ll do it for 1% and pick up the
ticket charges.  If there are any MF managers out there feel free
to PM me.

Do some research and you will be surprised how th fee's break out in a
mutual fund.  Go beyond Morningstar and Mutualfund.com.  Then
you will see what the SEC see's...then you won't want to prospect the
MF managers anymore.

C'mon Interactive brokers charges, 0.015 per share for VWAP (Volume
weighted average price). VWAP orders are common for large block trades,
no one is paying anything close to 1% on orders. If you look at the
unbundled commisions, that is much closer to what MF's actually pay for
trades.

http://www.interactivebrokers.com/en/accounts/fees/commiss ion.php

However some mutual funds with high turnovers do so much trading, that
trading costs do become a serious expense. This also happens if you
have soft-dollar arangements, whereby the MF sends orders to brokers in
exchange for research and other services (for example golf and junkets
to tropical islands)

However, the big MF companies do most of their trading directly with
market centers or at most one thin layer away from the market center.
I.e the MF doesn't want to deal with price improvment, so they send it
to trading broker who will automatically optimise trades.
 

AllREIT's picture
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Joined: 2006-12-16

Incredible Hulk wrote: AllREIT wrote: Of course you could have a
split fee policy, that charges 0.25 for bonds and 1.5 for everything
else.

With a 60/40 split your final cost is 1% of total assets anyway so why split it out?

The key point is that it makes sense to charge for where you are adding
value (managing equities) and not where you are not (holding bonds and
other passive investments).

However, untill clients wise up, you are going to see alot of wrap/fee programs that will make your eyes water.

I've seen %2 wrap programs. For 2% I'd better be getting hedge fund performance, and not Growth Fund of America.

mranonymous2u's picture
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rightway wrote:Bankrep, your speakin' logic, and the SEC don't play that.  The stark reality is that most clients DO NOT know they are paying thousands of dollars in fee's.  When you factor in trading costs with C shares the fee's often exceed 4%...yes 4%.  Take a client that you had the conversation with 3 years ago about the fee's, and even you mentioning it at your quarterly reviews, and suddenly put a $1,200 quarterly line item deduction on there statement and see what happens. 
One more try: Cite a source please.
rightway wrote: You must be kidding.  A managed account where the client ownes the securities with no imbedded gains, options to quit the manager and hold the securities, ability to harvest losses, and total VISABILTY of costs?  Or an investment where a new investor gets a basis on positions years before they actually "owned" it, no option to leave without complete capital gain, and fee's buried in a 40 page perspectus?  No, the SEC is smarter than you.  Sorry sport.
Leaving to the side that almost no one ever uses those features (according to the wholesalers and portfolio managers I have spoken to.) Aside from the fact that many mutal funds still have embedded LOSSES from the bear market (you're still using the spiel from the last millennium) The question is about C shares in IRA accounts where the "tax advantage" is irrelavent.
Mr. A

rightway's picture
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Joined: 2004-12-02

Heres an abstract

Measuring the True Cost of Active Management by Mutual
Funds

ROSS M.
MILLER
Miller Risk Advisors; SUNY at Albany - School of Business

June 2005

Abstract:
     Recent years have seen a
dramatic shift from mutual funds into hedge funds even though hedge funds charge
management fees that have been decried as outrageous. While expectations of
superior returns may be responsible for this shift, this article shows that
mutual funds are more expensive than commonly believed. Mutual funds appear to
provide investment services for relatively low fees because they bundle passive
and active funds management together in a way that understates the true cost of
active management. In particular, funds engaging in closet or shadow indexing
charge their investors for active management while providing them with little
more than an indexed investment. Even the average mutual fund, which ostensibly
provides only active management, will have over 90% of the variance in its
returns explained by its benchmark index. This article derives a method for
allocating fund expenses between active and passive management and constructs a
simple formula for finding the cost of active management. Computing this active
expense ratio requires only a fund's published expense ratio, its R-squared
relative to a benchmark index, and the expense ratio for a competitive fund that
tracks that index. At the end of 2004, the mean active expense ratio for the
large-cap equity mutual funds tracked by Morningstar was 7%, over six times
their published expense ratio of 1.15%. More broadly, funds in the Morningstar
universe had a mean active expense ratio of 5.2%, while the largest funds
averaged a percent or two less.

blarmston's picture
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Joined: 2005-02-26

Try checking out Personal Fund .com. They have the true total expenses of funds on there. Type in a ticker, and you will get the disclosed expense ratio, and you also get the transaction costs. Those costs, which are not public knowledge, can easily double or triple the fees on MF's..... Choose wisely young hobbit...

aldo63's picture
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Joined: 2006-09-11

i have the password and have looked at it.
i just think that all the other sites cant be wrong and this one is right.

mranonymous2u's picture
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Joined: 2006-11-29

Rightway,
You're kidding me right?
First let me say that I made a lifelong enemy of the head of mutual fund sales at my old firm when I asked him back in 95(?) why we were going to charge our clients 1% to run a fund that was 50% Zero Coupon treasuries and 50% actively managed equities. As such, this abstract is nothing news to me.
Second, let me say, I don't buy mutual funds (with the exceptions of the occasional Annuity, ETFs and CEFs) so I don't have a dog in this fight.
Thirdly, let me say that what this thread is about is C shares as opposed to A's and B's in retirement accounts, not the disadvantage of mutual funds in general. IF we allow that mutual funds are appropriate investment vehicles (and, no I don't want to go down the path you seem to be so self righteously marching) then we're comparing an apple to an apple and your claim that clients are paying "Thousands of dollars in fees" a non sequitur in that the fees are there regardless of the class.
Fourthly, how is what this guy is saying is an invalid way to  charge for money management any different than your wrap fee with the bonds and or ETF (which are essentially indexing also).
Fifthly, Is indexing any different from owning GE or some other benchmark "core position?"
Sixthly, He's not saying that the fund is actually charging 7%, he's saying that the fund is charging 7% on the assets it "actively trades". Therefore, to say that the client is paying "thousands of dollars" is misleading. If they have $100,000 dollars in the C shares, the client is paying the thousand dollars in management fees (1%) but less than the 100M is lss than the 1M and "thousands", while we all know that the trick is that $1,001 = Thousands, implicates whole multiples of  whole thousands.
Mr. A 

Captain's picture
Offline
Joined: 2006-04-07

rightway wrote: Heres an abstract

size="+1">Measuring the True Cost of Active Management by Mutual
Funds


href="http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?
per_id=299691">ROSS M.
MILLER
Miller Risk Advisors; SUNY at Albany - School of Business [/
FONT]

June 2005
td>

cellpadding="0" cellspacing="0">

      

      
      

      
      

      
      

Abstract:
     Recent years have seen a
dramatic shift from mutual funds into hedge funds even though hedge
funds charge
management fees that have been decried as outrageous. While
expectations of
superior returns may be responsible for this shift, this article shows that
mutual funds are more expensive than commonly believed. Mutual funds
appear to
provide investment services for relatively low fees because they bundle
passive
and active funds management together in a way that understates the true
cost of
active management. In particular, funds engaging in closet or shadow
indexing
charge their investors for active management while providing them with
little
more than an indexed investment. Even the average mutual fund, which
ostensibly
provides only active management, will have over 90% of the variance in its
returns explained by its benchmark index. This article derives a method
for
allocating fund expenses between active and passive management and
constructs a
simple formula for finding the cost of active management. Computing
this active
expense ratio requires only a fund's published expense ratio, its R-
squared
relative to a benchmark index, and the expense ratio for a competitive
fund that
tracks that index. At the end of 2004, the mean active expense ratio for
the
large-cap equity mutual funds tracked by Morningstar was 7%, over six
times
their published expense ratio of 1.15%. More broadly, funds in the
Morningstar
universe had a mean active expense ratio of 5.2%, while the largest funds
averaged a percent or two less.
      

I've read the whole thing, and it's absurd.

They make the assumption that the active portion of most funds is only
10% of the total assets they manage (i.e. core and explore, with 90%
within indexed securities, and the other 10% within other non-indexed
assets). That being the case, they say that the expense ratio on the 90%
of the portfolio shoud be 18 bps. The remaining 10% of the portfolio,
considered to be 'active', is what qualifies the WHOLE portfolio as 'actively
managed'.

So, he applies the total expense ratio to ONLY the active portion of the
portfolio, and that's where you get a 5% to 7% management fee on the
actively managed portion of the portfolio.

It's no different than selling 9 slices of bread for NOTHING, and then
selling the 10th slice for $2. Does that mean that the bread is $2 per
slice?

I put ZERO confidence in that article, and for you to conclude that actively
managed portfolios, including C-shares (yes, I'm defending them now...)
costs in excess of 5% per year, you just don't have a clue.

I think you read the first paragraph, and went no further. That's not what
the article is saying. He's only applying the expense ratio of a portfolio to
the perceived 'active' portion of the portfolio, of which, he concludes is
less than 10%. He also thinks that most mutual funds are closet indexers,
and as a result are expensive.

I've seen this before, and it carries very, very little water. I can't believe
anyone would cite this, in addition to believe it as a part of their
justification for saying 'mutual funds cost 5% per year' in management
fees to own.

Good times.

C

mranonymous2u's picture
Offline
Joined: 2006-11-29

This was sort of the point I was making about self interests in another thread. We all convince ourselves that what we are doing is in the best interests of the client. We tend to look favorably on information that agrees with our self interest and less favorably on evidence that disagrees with our paradigm.
I agree with captian, this "abstract" is "absurd".
Mr. A

mranonymous2u's picture
Offline
Joined: 2006-11-29

But I do want to thank you for citing your source.
It's much easier to get to the bottom of things when we know where the information came from.
Mr. A

troll's picture
Offline
Joined: 2004-11-29

mranonymous2u wrote:
rightway wrote:Bankrep, your speakin' logic, and the SEC don't play that.  The stark reality is that most clients DO NOT know they are paying thousands of dollars in fee's.  When you factor in trading costs with C shares the fee's often exceed 4%...yes 4%.  Take a client that you had the conversation with 3 years ago about the fee's, and even you mentioning it at your quarterly reviews, and suddenly put a $1,200 quarterly line item deduction on there statement and see what happens. 
One more try: Cite a source please.
 
You mean you want the cite where the regulators have said C shares, due to their pricing structure and the fact they never convert to A shares, are a short term investment? Do you recall why the regulators weighed in to push for B shares to convert to A? It had to do with the possibility that the 12b1 lasting forever and in total, going far above what they considered fair and equitable.
mranonymous2u wrote:rightway wrote: You must be kidding.  A managed account where the client ownes the securities with no imbedded gains, options to quit the manager and hold the securities, ability to harvest losses, and total VISABILTY of costs?  Or an investment where a new investor gets a basis on positions years before they actually "owned" it, no option to leave without complete capital gain, and fee's buried in a 40 page perspectus?  No, the SEC is smarter than you.  Sorry sport.
Leaving to the side that almost no one ever uses those features (according to the wholesalers and portfolio managers I have spoken to.)
I don't know where you get that idea, I see people use those features all the time.
mranonymous2u wrote:Aside from the fact that many mutal funds still have embedded LOSSES from the bear market (you're still using the spiel from the last millennium) ...
Two problems with that; 1) The client doesn't have a choice WHEN those taxable events take place. 2) When did you last see a fund distribute losses?
 
mranonymous2u wrote:
The question is about C shares in IRA accounts where the "tax advantage" is irrelavent.
Mr. A

Good point. The concern that regulators will eventually act on C shares in IRAs and the imbalance between using what regulators see as a short term investment vehicle and the long term nature of the IRA goes back to the "logic" they used on the B share dragnet. In that, the regulators said often clients ended up paying far more in fees by having B shares when they could have used ROA to get A shares with break points and much lower total fees. It makes sense to assume that eventually they'll apply that same logic to C shares OR they'll force in a A share coinversion feature.

troll's picture
Offline
Joined: 2004-11-29

mranonymous2u wrote:
IMHO, the next target will be "Managed Money" where the broker is taking 2 to 3% fees for "watching over the managers".  I think you'll see those fee max's trimmed to 1% before you see the SEC go after C shares.

The problem with that logic, imo, is that you're mixing the pricing of a "fee product" with incidental advice (Series 7) with the SMA process where the FA is actually being paid for advice (Series 65).

troll's picture
Offline
Joined: 2004-11-29

bankrep1 wrote:Rightway I agree with all the things you have said, but I still use them quite a bit, it is cheaper than a wrap and basically allows me to offer the same thing at a better price. QUOTE]
Depends what sort of "wrap" you're talking about. If you're talking about a "fee in lieu of commission" account where you are not being paid on advice, your clients avoid all commissions and fund loads, and have access to the institutional version of many funds, it may be cheaper than C shares and it eliminates the inability of the C share buyer to cross fund families, avoid CDSCs, etc.
If you're talking about Series 65 accounts where they slap an advisory fee on top of a collection of mutual funds, C shares may be price competitive, but remember the Series 65 account isn't just avoiding sales charges (as you're doing with C shares over A shares) it's charging for that advisory service as well.

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