etfs vs mutual funds

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troll's picture
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I am new to the industry and have many questions. For the first one, I have heard many opinions supporting both. Can I get some ideas from you guys about building portfolios with each. I suppose etfs have lower commisions but which is best for the client? Does it boil down to hiring a manager aka mutual fund or buying etfs and being the manager yourself?

Baba Booey's picture
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Use a manager who implements with ETF's.  Mutual Funds should (in my opinion) only be used for clients who have under $25k.  They are a thing of the past.  Everyone else should have some type of actively managed portfolio.  I like to use an active ETF manager.

Sportsfreakbob's picture
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Babacan you mention a few names of active ETF managers? I am doing it myself. I would gladly turn it over to one if i could find one who does what i do, which is very tactical

Squash1's picture
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I agree with Baba.... I use an active/tactical ETF manager for 25-30% of the portfolios I do..

Baba Booey's picture
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Not to be a commercial for them, but they are awesome....they are on our managed account platform.
www.tagllc.net

SB0807's picture
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I would have to disagree about mutual funds being a thing of the past. Cetainly ETFs have gained immense popularity in the last few years. However, as far as most people I encouter they either A) have no clue what an ETF is or B) don't know the different between an ETF or mutual fund is. Its still easier to pitch a mutual fund portfolio than it is an ETF portfolio to a prospect/client.

Don't get me wrong, I use actively managed ETF portfolios as well. I just think they can be just as effective as a properly allocated mutual fund portfolio.

Squash1's picture
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funds are overly expensive to take up more than 25% of any portfolio... unless the clients don't qualify for anything else..

troll's picture
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explain a little more squash. rememeber im new. and at jones

Squash1's picture
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Mutual Funds have additional costs other than what is listed on the prospectus.. including trading costs, which are estimated to be 0.60% for every 100% in turnover...
 
Also for non qualified you are getting taxed(capital gains/dividends) at the end of the year as if you owned it the entire year.
 
For example the managed ETF portfolio I used charges 65bps(.65%) that is including trading charges..
 
Also mutual funds have to worry about other issues also, redemptions, increased cash, manager turnover(which can sometimes change the style).
 
Many mutual fund investors own between 5 and 10 funds. The average equity fund has in excess of 80 holdings.  If properly diversified, this would represent holdings of 400 to 800 at the very least – with very unknown holdings and weightings for investors.  There is tremendous overlap exposure possibilities at any given time, one manager could be selling the same stock another is buying.  This creates capital gains tax exposure that is unnecessary and could result in double payment for a transaction that didn’t need to occur.  Since you cannot speak directly with the managers of the funds you are at complete mercy their decisions are prudent and in agreement with your goals and objectives.  Also the average mutual fund manager has only been managing their current fund for approximately 5 years.
 
 

Squash1's picture
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Sorry about the changes in font, my Internet Explorer was acting goofy, shrunk the first part down so far I couldn't see it..

troll's picture
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I understand the expense parts. That is why I am trying to learn about ETFs because I don't have enough time to do individual stock research. But if there is other ways then fill me in a little and I will play catch up later. I am assuming you are talking individual equities and you manage the portfolios yourself? I assume the only other way is to be the analyst also and research equities. At Jones, we are limited on choices. I was told I should quit thinking so much and sell A share American Funds or I would starve.

Baba Booey's picture
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Not trying to hate....but Jones doesn't have the fee based model active ETF's managers are best suited for...
The portfolios Squash and I are talking about are basically transparent mutual funds...implemented with etf's rather than individual stocks.  If that doesn't make sense, just keep selling A shares.  

troll's picture
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Yeah it makes sense. So you advise clients to invest in a portfolio that TAG provides and let them manage it for you? I am assuming that you are not an advisor then, just a smart shopper or do you build portfolios modeled after TAG's portfolios. I am more curious on learning some of the managing parts of the business. Despite the title I was given, I do not consider myself a Financial Advisor. I think Jones guys should still be Investment Representatives. Not sure how they pulled that one off.

SB0807's picture
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Baba Booey wrote:
Not trying to hate....but Jones doesn't have the fee based model active ETF's managers are best suited for...
The portfolios Squash and I are talking about are basically transparent mutual funds...implemented with etf's rather than individual stocks.  If that doesn't make sense, just keep selling A shares.  
 
Nothing wrong with A shares certainly. A case can be made for just about anyway you would like to build your book. That's the beauty of this business.

Baba Booey's picture
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JAXSON wrote:
Yeah it makes sense. So you advise clients to invest in a portfolio that TAG provides and let them manage it for you? I am assuming that you are not an advisor then, just a smart shopper or do you build portfolios modeled after TAG's portfolios. I am more curious on learning some of the managing parts of the business. Despite the title I was given, I do not consider myself a Financial Advisor. I think Jones guys should still be Investment Representatives. Not sure how they pulled that one off.
 
I am a Financial Advisor, not an Investment Manager....I get paid to allign my clients with best or breed managers, make sure they are on-track for retirement, make sure they continue to invest during tough times, not sell out at the bottom of the market...and make sure they don't run out of money during retirement.
 
I don't get paid to recommend CSCO over INTC...

troll's picture
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That's the direction I would like to go. I am not sure how much longer I will hang out here. If You have a sec or two PM your background and so forth. Also do you reccommend CFA, CFP, or other types of continuing ed. Thanks

Spaceman Spiff's picture
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Jaxson - unless  you have people to talk to about ETFs or mutual funds, it's a moot point.  You need to learn to prospect and close business before you need to worry about ETFs vs mutual funds. 
 
I can make a very good case for you that, using the right money managers, an actively managed portfolio can absolutely outperform an ETF based portfolio.  Conversely, iceco1d could make a very good case for the opposite.  I would only take your mentors advice so far.  You have to do your homework and find out what money managers in the Jones system work well together.  For instance, ANCFX is a great G&I fund from American, but Hartford's ITHAX is a great growth fund that just kills anything growth related that Jones has to offer.  American also doesn't have a mid cap or small cap domestic fund.  You'll want to find one. 
 
You'll eventually want to consider CFP, but get your business on its feet before you commit yourself to that program.  We have a very smart guy in our region who just about got himself fired because he was studying for the CFP instead of running his biz.  So, now he has his CFP for his biz card, but his business is in the toilet.  Shoot for $30 million AUM before you start the CFP.  Or consider waiting until you hit Seg 4.  Ironically those two will probably happen about the same time. 
 
Baba - "but Jones doesn't have the fee based model active ETF's managers are best suited for"  -  If by this you mean that Jones advisors can't build a custom ETF portfolio and manage it themselves, you are mistaken.  You might want to check your facts before you tell the new guy something like this. 

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Also worth mentioning is that there are some mutual funds out there with costs and tracking errors very similar to their ETF counterparts.  Granted, most of these funds are run by Vanguard, but they do exist. 
 
There are pros & cons to both.  The best advice you could get is Spiff's though.  There is nothing wrong with wanting to learn truly how to best serve your clients, and NOT be another fund-of-the-day-peddling-drone...but you have to get some balance.  Getting your CFP and being out of business won't help your clients very much. 
 
Also, no offense, but you are YEARS of learning away from even having a remote shot at passing the CFA.  There are finance professors that fail it.  You should erase those letters from your vocabulary for at least 10 years.  You should put the letters "CFP" on the shelf for at least 5 years.

troll's picture
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Mentor? What's that? Oh you mean the guy that asked a newbie like myself if he should sell prefered Bank of Amer stock a couple weeks ago. I may be wrong but I personally want to stay away from most financials right now common or pref. Or maybe I could get a hold of my field trainer and ask him.... oh yeah he went to RJ while I was in KYC. I think I will continue figuring things out myself. I have done enough to get this far. Besides most in my region are busy trying to save there own a$$. They don't have time to f with me. I most likely will be gone soon anyway.
 
Spiff I am just aking for information not advice. You can give me advice another time on another post.
 
If anyone else would like to share information or lead me in a direction to some good Financial Advisor (not Investment Rep) info and resources it would be appreciated.

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Spaceman Spiff wrote:Jaxson - unless  you have people to talk to about ETFs or mutual funds, it's a moot point.  You need to learn to prospect and close business before you need to worry about ETFs vs mutual funds. 
 
I can make a very good case for you that, using the right money managers, an actively managed portfolio can absolutely outperform an ETF based portfolio.  Conversely, iceco1d could make a very good case for the opposite.  I would only take your mentors advice so far.  You have to do your homework and find out what money managers in the Jones system work well together.  For instance, ANCFX is a great G&I fund from American, but Hartford's ITHAX is a great growth fund that just kills anything growth related that Jones has to offer.  American also doesn't have a mid cap or small cap domestic fund.  You'll want to find one. 
 
You'll eventually want to consider CFP, but get your business on its feet before you commit yourself to that program.  We have a very smart guy in our region who just about got himself fired because he was studying for the CFP instead of running his biz.  So, now he has his CFP for his biz card, but his business is in the toilet.  Shoot for $30 million AUM before you start the CFP.  Or consider waiting until you hit Seg 4.  Ironically those two will probably happen about the same time. 
 
Baba - "but Jones doesn't have the fee based model active ETF's managers are best suited for"  -  If by this you mean that Jones advisors can't build a custom ETF portfolio and manage it themselves, you are mistaken.  You might want to check your facts before you tell the new guy something like this. 
 
I told you I wasn't trying to hate...all I was saying is that Jones isn't known for having the suite of advisor programs that other firms are...I think you would agree with that.

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Baba - I understand you weren't trying to hate, but the comment you made was incorrect.  
 
Jaxson - My apologies for offering you a piece of advice.  You are obviously in a much better position than I originally thought.  See, I thought you were new to the industry.  I thought you didn't understand the cost differences and performance differences between an ETF portfolio and a mutual fund portfolio.  I thought you understood that there are some qualifications you have to meet before you can even sit for the CFP or get reimbursed for it by your current (and evidently temporary) employer.  You must already be fully verson on MPT, core/satellite portfolios, turnover, internal trading costs, tracking errors, and all those silly little things.  You must already be aware that your options with looking at ETFs within the confines of EDJ are limited. 
 
Perhaps you should do my LP (and your ego) a favor and find out where your original field trainer went.  And follow him.  Hope you have your BME this month noob.

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Spaceman Spiff wrote: Baba - I understand you weren't trying to hate, but the comment you made was incorrect.  
 
Jaxson - My apologies for offering you a piece of advice.  You are obviously in a much better position than I originally thought.  See, I thought you were new to the industry.  I thought you didn't understand the cost differences and performance differences between an ETF portfolio and a mutual fund portfolio.  I thought you understood that there are some qualifications you have to meet before you can even sit for the CFP or get reimbursed for it by your current (and evidently temporary) employer.  You must already be fully verson on MPT, core/satellite portfolios, turnover, internal trading costs, tracking errors, and all those silly little things.  You must already be aware that your options with looking at ETFs within the confines of EDJ are limited. 
 
Perhaps you should do my LP (and your ego) a favor and find out where your original field trainer went.  And follow him.  Hope you have your BME this month noob.

Damn! I think people are starting to get on Spiff's nerves.

Here's my $.02, for what it's worth. If you have qualifications from previous careers, you can still sit for the CFP and applying for the CFA is similar. Ironically, the CFA, while a much more difficult exam, has less strict requirements than the CFP.

If you seek knowledge while building your business and learning, then seek out the CFA. If you are looking for three letters to put after your name, then the CFP will work.

I don't think that being new prevents you from pursuing those goals. It's all about balance.

If you have a lot of prospects and you don't know what you are talking about... I don't see the good in that.

I think you will run into people who know what they are talking about often more than you do. And being prepared for those meetings will net you larger accounts (I hope that wasn't too close to giving advice).

No offense - and I'm sure I will be flamed for this - but Jones does not provide that knowledge. The focus is on selling - which it should be, you are a sales rep. But you will not receive investment knowledge by soaking up what you read on JonesLink or listening to Alan Skrainka.

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Agreed.  On both the getting on my nerves and on the Alan Skrainka comment.  Jaxson seems to be a little too big for his britches.   He's either pompous, arrogant, or self confident.  I'm not sure which.  I have my opinion.
 
I've voiced my opinion to most everyone that will listen to me at HQ (which is not very many) that Jones does a great job teaching our FAs to prospect and sell, but a horrible job at teaching even the basics of portfolio construction and money management.  But, from what I've seen coming from other firms, neither does anyone else.  I am of the opinion that if Jones could create a sales force that can get the clients in the doors AND then how to build a better mousetrap, we'd be unstopable.  I've even proposed that Jones have a class that actually teaches a crash course in MPT, portfolio construction, portfolio evaluation (for those free portfolio reviews we're always offering), and the science of money management.  Not to the level that you might get with the CFP or CFA courses, but more than what you might get if you started with Morgan or Merrill.  Can you imagine a sales force that could both doorknock and strategically review existing portfolios to find the flaws and weaknesses?  Like I said, unstopable.   

troll's picture
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You must already be fully verson on MPT, core/satellite portfolios, turnover, internal trading costs, tracking errors, and all those silly little things.
Did you mean fully versed on MPT?
 
If so the answer is no. I am not. The only thing I know how to do is skin a buck and run a trout line.
 
That is why I brought this post up. To find different opinions on the two items. If I wanted more I would have asked more. I already have a book of clients through a CPA friend and former college. I had planned on obtaining my CPA license but decided to join a firm for "the best training blah blah blah" My bad decision and now I am dealing with that. But what I am trying to do is become their Financial Advisor. I guess I am asking the wrong questions or asking the wrong way. I know a lot comes from experience and I in no way want to take that from any vets. But I am asking in this post is:
 
I like mutual funds.......
I like ETFs.......
 
And lets see where it goes. We will get to the other stuff on another post.

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Spiff from what I know about your ETF program, is simply that it is asset allocation and rebalances when the allocation gets to far away from the original percentages set.
 
That is crap. Now if it does something else let us know...

troll's picture
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Spaceman Spiff wrote:Agreed.  On both the getting on my nerves and on the Alan Skrainka comment.  Jaxson seems to be a little too big for his britches.   He's either pompous, arrogant, or self confident.  I'm not sure which.  I have my opinion.
 
 
I am all the above just depends on which gets me what I want. But, from reading posts, I am no where near the most pompous, arrogant, or self confident. There are some on here that make me laugh my a$$ off. It is so funny to read what people say from behind a computer.

liquid's picture
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This is amusing, but really sadly juvenile!

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Squash1 wrote:Spiff from what I know about your ETF program, is simply that it is asset allocation and rebalances when the allocation gets to far away from the original percentages set.
 
That is crap. Now if it does something else let us know...
 
I don't even think they have ETF models.  I think all he can do is put ETF's inside a wrap and manage it himself.  Could be wrong though.  Squash and I are talking about Tactical Portfolios, not necessarily models that lie neatly on the effecient frontier..

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He can't move the etfs, without client permission, and can only do so according to set percentages inside the platform... That is what my buddy from EDJ told me

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Spaceman Spiff wrote: Agreed.  On both the getting on my nerves and on the Alan Skrainka comment.  Jaxson seems to be a little too big for his britches.   He's either pompous, arrogant, or self confident.  I'm not sure which.  I have my opinion.
 
I've voiced my opinion to most everyone that will listen to me at HQ (which is not very many) that Jones does a great job teaching our FAs to prospect and sell, but a horrible job at teaching even the basics of portfolio construction and money management.  But, from what I've seen coming from other firms, neither does anyone else.  I am of the opinion that if Jones could create a sales force that can get the clients in the doors AND then how to build a better mousetrap, we'd be unstopable.  I've even proposed that Jones have a class that actually teaches a crash course in MPT, portfolio construction, portfolio evaluation (for those free portfolio reviews we're always offering), and the science of money management.  Not to the level that you might get with the CFP or CFA courses, but more than what you might get if you started with Morgan or Merrill.  Can you imagine a sales force that could both doorknock and strategically review existing portfolios to find the flaws and weaknesses?  Like I said, unstopable.   

Yeah. I tried that when I was at Jones - and you have a lot more pull at the HO than I ever did.

I don't know about the other firms, as far as what they teach, but I'll take your word for it. It's likely the leadership at every firm fails their FA's in this aspect.

Clients really don't care if you are a good salesman. They just want you to be competent.

The other thing that Jones needs to do, IMHO, is actually charge for a portfolio review. The first time I told someone that I was going to be charging them to come in and sit down with me when I went off on my own, I held my breath, because I thought they were going to laugh in my face and tell me they could go to EJ and get it for free.

But man, I've never seen someone fork over a check or credit card so quickly as when I tell people my fees. Not much had changed from when I was at Jones the week before, but if I had offered a "free" review, I don't think I would have gotten the business.

Hey JAXSON - sorry to hijack your thread.

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This will get him fired up, but it's true.  They have an outdated investment model that only works well for clients under $25k, or 65 year olds that own 30 year munis.

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The way I understand it, we only offer quality investments for the long term investor. So you don't ever sell your invesment. You just buy more to rebalance. Unless they have 100k and you put them in advisory solutions. But thats way down the road for me. I will not be trained on that until seg 4 or 5 I guess.

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I would love to be able to charge for a portfolio review.  I've had too many tire kickers waste precious hours of my time.  Most folks who seriously want my advice will ask how much it will cost.  Even if it's only $100, they feel if they are paying for it, it's worth it.  
 
I would suggest that in order for clients to feel that you are competent you need to sell them on giving you a shot.  EVERYONE in this biz is a salesman.  Even the biggest producers out there are, at the very first meeting, nothing but a salesman. 
 
Baba - we do have ETF models.  They're based on client risk tolerance and accessed through Advisory Solutions.  I, like Squash  They are simply asset allocation models, not "tactical" models like you describe.  I find that "tactical" word to be a bit ironic.  Seems to me that if a portfolio were truly tactical, and the manager was truly able to quantify "important signals of potential forthcoming changes in the capital markets" and adjust their portfolios accordingly, the moderate portfolio wouldn't have taken such a beating like the rest of the people out there.  Goldman's Strategy funds use that same "tactical" approach.  All the tactics in the world didn't save their bacon either.  Now, I'm sure they have to stay within certain guidelines for their asset allocation strategy, but to tout yourself as superior because you are a "tactical" money manager to me is a little pretentious.  I guess  their crystal ball must be a little clearer than everyone elses.  So, how does that work?  You bring in a client, then outsource their portfolio to some guy in NY?  They charge a fee, then you charge a fee on top of that fee?  Is that pretty much it?  Nice gig.
 
OK, I'm done hijacking poor Mr. Jaxson's post.  Tell him where he can go to figure out whether he is an active or passive guy.  

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I use the Moderate and my clients were down 14% last year....those are great conversations.  You're telling me that didn't add value by being "tactical"....benchmark 60/40 was down 25%.  1100 bps of outperformance isn't too bad.

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Spaceman Spiff wrote:I would love to be able to charge for a portfolio review.  I've had too many tire kickers waste precious hours of my time.  Most folks who seriously want my advice will ask how much it will cost.  Even if it's only $100, they feel if they are paying for it, it's worth it.  
 
I would suggest that in order for clients to feel that you are competent you need to sell them on giving you a shot.  EVERYONE in this biz is a salesman.  Even the biggest producers out there are, at the very first meeting, nothing but a salesman. 
 
Baba - we do have ETF models.  They're based on client risk tolerance and accessed through Advisory Solutions.  I, like Squash  They are simply asset allocation models, not "tactical" models like you describe.  I find that "tactical" word to be a bit ironic.  Seems to me that if a portfolio were truly tactical, and the manager was truly able to quantify "important signals of potential forthcoming changes in the capital markets" and adjust their portfolios accordingly, the moderate portfolio wouldn't have taken such a beating like the rest of the people out there.  Goldman's Strategy funds use that same "tactical" approach.  All the tactics in the world didn't save their bacon either.  Now, I'm sure they have to stay within certain guidelines for their asset allocation strategy, but to tout yourself as superior because you are a "tactical" money manager to me is a little pretentious.  I guess  their crystal ball must be a little clearer than everyone elses.  So, how does that work?  You bring in a client, then outsource their portfolio to some guy in NY?  They charge a fee, then you charge a fee on top of that fee?  Is that pretty much it?  Nice gig.
 
OK, I'm done hijacking poor Mr. Jaxson's post.  Tell him where he can go to figure out whether he is an active or passive guy.  

 
Spiff, why is it that you and I still don't see eye to eye investment-wise?  Your post above would seem to side with me quite a bit!
 
BTW - the Goldman portfolio funds you mention have a target asset allocation.  They can then make "tactical shifts' up to 8% per asset class.  So if the target allocation for the Commodities Strategy fund in a particular model/fund is 15%, the fund manager can adjust it anywhere between 7% and 23% each quarter.
 
 

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jaxson-just sell. the jones system is what it is--mutual fds. I did my 3 years and left. now I do the RIA ETF thing with tactical positioning (we are about 15% in equities now so our clients have not last any more since the quick Oct drop- with the nice rise in futures and gold). I can change 200 clients allocation is 10 minutes with no phone calls. it is TOTALLY apples/oranges/diff world......... i.e. work with what you have! it works fine for alot of folks

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Baba Booey wrote:I use the Moderate and my clients were down 14% last year....those are great conversations.  You're telling me that didn't add value by being "tactical"....benchmark 60/40 was down 25%.  1100 bps of outperformance isn't too bad.
 
I echo that, we were down 12% vs the benchmark dow jone moderate down 22%, the 10% difference more than makes up for small added expense..

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Sportsfreakbob wrote:Babacan you mention a few names of active ETF managers? I am doing it myself. I would gladly turn it over to one if i could find one who does what i do, which is very tactical
 
Riverfront is pretty interesting.

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iceco1d wrote:Spaceman Spiff wrote:I would love to be able to charge for a portfolio review.  I've had too many tire kickers waste precious hours of my time.  Most folks who seriously want my advice will ask how much it will cost.  Even if it's only $100, they feel if they are paying for it, it's worth it.  
 
I would suggest that in order for clients to feel that you are competent you need to sell them on giving you a shot.  EVERYONE in this biz is a salesman.  Even the biggest producers out there are, at the very first meeting, nothing but a salesman. 
 
Baba - we do have ETF models.  They're based on client risk tolerance and accessed through Advisory Solutions.  I, like Squash  They are simply asset allocation models, not "tactical" models like you describe.  I find that "tactical" word to be a bit ironic.  Seems to me that if a portfolio were truly tactical, and the manager was truly able to quantify "important signals of potential forthcoming changes in the capital markets" and adjust their portfolios accordingly, the moderate portfolio wouldn't have taken such a beating like the rest of the people out there.  Goldman's Strategy funds use that same "tactical" approach.  All the tactics in the world didn't save their bacon either.  Now, I'm sure they have to stay within certain guidelines for their asset allocation strategy, but to tout yourself as superior because you are a "tactical" money manager to me is a little pretentious.  I guess  their crystal ball must be a little clearer than everyone elses.  So, how does that work?  You bring in a client, then outsource their portfolio to some guy in NY?  They charge a fee, then you charge a fee on top of that fee?  Is that pretty much it?  Nice gig.
 
OK, I'm done hijacking poor Mr. Jaxson's post.  Tell him where he can go to figure out whether he is an active or passive guy.  

 
Spiff, why is it that you and I still don't see eye to eye investment-wise?  Your post above would seem to side with me quite a bit!
 
BTW - the Goldman portfolio funds you mention have a target asset allocation.  They can then make "tactical shifts' up to 8% per asset class.  So if the target allocation for the Commodities Strategy fund in a particular model/fund is 15%, the fund manager can adjust it anywhere between 7% and 23% each quarter.
 
 
 
I'm not as far off as you think.  Sometimes on here I take a lot more than I give.  Yesterday was a give back kind of day. 
 
I do agree with you for the most part.  I still like mutual funds.  But, I've been using ETFs with people in Advisory Solutions.  The beauty of that program is I can switch back and forth if I choose to do so.  Or I can use a mix of both ETFs, index funds, and traditional mutual funds.  No, it's not discretionary.  I want my clients to at least hear why I'm doing what I'm doing and get their buy in, whether they truly understand it or not.  I believe discretionary accounts could open you up to additional legal issues than their non-discretionary counterparts.  Nothing like an arbitrator with a grudge to side with a client who got pissed at you because at your discretion moved to 40% international in 2007. 
 
Those TAG folks look to be a good outfit.  I'm still a little fuzzy with the whole tactical approach and not moving to 100% treasuries in June or July of 2007.  If they were modeling out 2-3 years in the equity sector, then surely their models projected a 50% decline in the markets.  I also believe the average advisor saying he's using a tactical approach is somewhat dicey.  You've got to be really good to be able to pull that one off.  And I think there's a fine line between tactical and luck.   

MinimumVariance's picture
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Joined: 2008-08-20

there are enuf sector specific ETF's you can run either momentum or reversion-to-mean strategies. The ability to short etf's is key.
 
As to why anybody wasn't 100% in T-bills in 2007? Thats such an unbelievably stupid question it doesn;t deserve to be answered.

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