Fee-based Advisors

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Borker Boy's picture
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Joined: 2006-12-09

I've listened to Adam Bold (the guy from the Mutual Fund Store) a couple times, and he steadily bashes the crap out of commission-based brokers and praisees those who use the fee-based method of compensation. 
He derides unscrupulous brokers, but seldom gives the "whole story" when talking about the performance/quality of funds other than those he uses. Bob Brinker, however, hates brokers in general and thinks everyone should use Vanguard or Fidelity; nevertheless, he's usually spot-on when it comes to answering questions about funds. 
My question is whether the 12b-1 and other operating expenses are included, or separate, from the annual management fee assessed by the fee-based advisor. If they're not included in the 1-1.5% annual fee, I don't see how this method could possibly be more cost-effective for the client, since once you're in A shares, you can transfer to other funds within the family without frictional costs.
 

bornagainbankr's picture
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Joined: 2007-07-16

The MF store charges .65 if I remember correctly

advisor28's picture
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Joined: 2007-06-04

BB-
Allow me to enlighten you: In many cases the 12b-1 fee is included in the overall expense ratio, however not paid out to the advisor. In some instances you have institutional priced mutual funds and no-loads so the expense ratio is lower.  Jones has always tried to compete on cost with funds and annuities-always a losing battle in the long run. The greatest benefit in my opinion comes from the universe of funds you are able to utilize.  For example when you sit down with your $100K rollover client you will show them American or Franklin mutual funds A share 100 break this is a staple of every Jones office, I know I used to be a growth leader. If I decide to use the fee based program I will utilize an all star line up of funds in all asset classes, which may include some American or Franklin. No one family of funds does everything well, I know you will come with the founding funds trio and YES it can be BEAT with LESS risk NET of all fees...You are also given the flexability to openly move among the universe of mutual funds as needed, this is very attractive in IRA's.  The clients appreciate my pay being tied to their performance and don't forget the possible tax deduction since this is a fee not a commission.  Look what happened when most Jones brokers fired Putnam and went to American Funds, A share pop again. I encourage a response, no disrespect but I know the model I cut my teeth on it at 21.  Cost is only an issue in the absence of value.

Ashland's picture
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Joined: 2007-03-06

The Founding Funds strategy is great if you don't mind that 80% of your bonds(approx 16% of your total portfolio) are of the high yield variety. Also, it's possible to have a down quarter w/ full sales charge of 20%. We haven't seen that in the last 5 yrs but it's coming.

advisor28's picture
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Joined: 2007-06-04

Ashland- I appreciate your attention to detail however this was only used for illustrative purposes.  You are correct and the point to BB should hopefully be getting clearer.

Borker Boy's picture
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Joined: 2006-12-09

Thanks for the replies, but for clarification, you're saying the Mutual Fund Store charges .65% of the assets in total annual fees? What's an average annual management fee?
I'll be looking at the fee-based option before too long, but I'm still a tad skeptical of what the annual costs to the client will be.
"Cost is only an issue in the absence of value." 
 

advisor28's picture
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Joined: 2007-06-04

Reprogram your thought process..your fear of the fee winning or losing you the business in a competitive situation is your downfall not your strength.

troll's picture
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Joined: 2004-11-29

"I'll be looking at the fee-based option before too long, but I'm still a tad skeptical of what the annual costs to the client will be."
Here is a chart that shows you:
Table 1. shows the effect of investment management fees on your IRA balance. This exhibit assumes you invest $2,000 on January 1st of each year and earn a 10% rate of return before deducting management fees. The table shows your IRA balance after deducting your advisor's fee. Most folks find the results hair raising.

Table 1. The Effect of Management Fees on your IRA Balance. Assumes $2,000 yr. contribution, 10% annual return before management fee.

IRA Balance after
5 Years
10 Years
20 Years
30 Years
40 Years

Mgmt. Fee @ 0.02%
$13,423
$35,022
$125,696
$360,454
$968,249

Mgmt. Fee @ 0.25%
$13,334
$34,556
$122,204
$344,402
$907,762

Mgmt. Fee @ 0.50%
$13,238
$34,077
$118,528
$327,816
$846,479

Mgmt. Fee @ 1.00%
$13,047
$33,121
$111,529
$297,150
$736,584

Mgmt. Fee @ 2.00%
$12,672
$31,291
$98,846
$244,692
$559,562

Mgmt. Fee @ 3.00%
$12,307
$29,567
$87,730
$202,146
$427,219
NASD uses this chart, BTW.
The client pays all fund expenses in addition to the annual fee and may well end up paying 2% or more overall. Consider this quote from an Ameriprise salesman: "Some of the problems arise when we use mutual funds with 12-b1 fees that pay you a trail as well as your SPS* fee as well as the mutual fund expense and transaction cost expense. By the time all is added up, the cost of the mutual fund investment within SPS is at least 4% annually to the client."
I also question what an 'advisor' does year after year after year to earn this fee. Pretty much everything is set up in the first year, why not drop the fee way back after that.
And, yes, you are correct, it is often much cheaper for the client to pay a commission, better yet, a one time flat fee or hourly fee.
Just to note, Rick Ferri charges .25% annually. 
  http://www.portfoliosolutions.com/v2/main.aspx?id=about_us/f ees
Also, if the safe withdrawal rate in retirement is 4%, what does that leave your client after paying 2% or more in investment fees?
Please consider these articles and the study and know how you will never, ever do this to your clients:
http://advisor.morningstar.com/articles/Doc.asp?docId=4482
http://www.bankrate.com/brm/news/BoomerBucks/20061206_invest ment_advice_a1.asp
http://latrobefinancialmanagement.com/Research/Assessing%20t he%20Costs%20and%20Benefits%20of%20Brokers%20in%20the%20Mutu al%20Fund%20Industry.pdf
Remember, you are taking responsibility for the financial future of your clients. Please do not hurt them like so many others are doing.

CAPM's picture
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Joined: 2007-08-17

william1 wrote:Please consider these articles and the study and know how you will never, ever do this to your clients:
Remember, you are taking responsibility for the financial future of your clients. Please do not hurt them like so many others are doing.
And it's time for you to answer MY question: What about the large number of advisors that DON'T USE MUTUAL FUNDS?  Still waiting, still waiting........

CAPM's picture
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Joined: 2007-08-17

Borker Boy wrote:
I've listened to Adam Bold (the guy from the Mutual Fund Store) a couple times, and he steadily bashes the crap out of commission-based brokers and praisees those who use the fee-based method of compensation. 
He derides unscrupulous brokers, but seldom gives the "whole story" when talking about the performance/quality of funds other than those he uses. Bob Brinker, however, hates brokers in general and thinks everyone should use Vanguard or Fidelity; nevertheless, he's usually spot-on when it comes to answering questions about funds. 
My question is whether the 12b-1 and other operating expenses are included, or separate, from the annual management fee assessed by the fee-based advisor. If they're not included in the 1-1.5% annual fee, I don't see how this method could possibly be more cost-effective for the client, since once you're in A shares, you can transfer to other funds within the family without frictional costs.
 
Adam Bold is a crook.........

troll's picture
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Joined: 2004-11-29

"What about the large number of advisors that DON'T USE MUTUAL FUNDS?  Still waiting, still waiting........"
And I'm still waiting to find out how many advisors don't use mutual funds and how their returns are compared to DIY'ers. As I understand it, most use mutual funds. I asked this question long ago - no reply.
Also, it seems that some of the problems that apply to mutual fund selling advisors (asset allocation and chasing past returns) would also apply to selling stocks - maybe even more so.

Spaceman Spiff's picture
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Joined: 2006-08-08

The Mutual Fund Store can sometimes charge much more than 65 bps/yr.  I have a prospect I'm working on that is getting charged over 1%.  It's a fine portfolio, but you can tell it's cookie cutter.  Way too much risk for what this prospect has told me about himself.  Add to it that the guy at the MFD store NEVER makes proactive calls to his client and the fee becomes ridiculous. 
advisor28 - if the only reason to pay your fee is that you can buy whatever fund you want, I can beat that all day long.  You've got to prove that it's not all about performance and choice of investments.  Tell me about how your asset allocation strategy is stronger than mine.  Tell me about the other services that your fee provides me.  Tell me about the planning process that you employ when working with me and my money.  I want to know what that money gets me. 
I'm not going to argue that fee based biz in general is bad.  Fee based biz with no service is bad.  Commission based biz with no service is bad too.  Fee based biz is just more expensive in the long run.

anonymous's picture
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Joined: 2005-09-29

Just to note, Rick Ferri charges .25% annually. 
He charges 2.5% on an $80,000 account.  He charges 25% on an $8,000 account.  I don't have a point with this.  Advisors can charge what they want.  Clients are free to pay or not pay for the advice.
 

Dust Bunny's picture
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Joined: 2007-05-07

I've already given you several examples of my client's accounts and asked you to explain how a no load indexed fund is going to solve the problems that I presented.  All you do is continue to quote a survey that has nothing to do with how the real world operates.
My book is about 30% stocks, 10% etfs, 25% individual bonds and par bonds(preferreds), 25% mutual funds and the rest in VAs and miscellaneous things like UITs. 
Most advisors use a product mix like the above and actively manage the client's portfolios on a regular basis. Not all clients are interested in indexing or even in obtaining market returns.  Most of my clients are retirees or pre retirees who are interested in income streams, principal preservation and estate planning issues.   The other larger group of clients are small business owners who need not just advice in growing their investments for retirement, but other business issues like disability, non qualified retirement plans, business succession funding etc.    The idea that all we do is offer mutual funds and just park money in a fund is incorrect. Wrong wongedy wrong.
Here is another scenario for you to stick...somewhere.  Client is retired.  Was a DIY investor and day traded his retirement account from over 500k to about 250K during the stock market boom and bust in 1998- 2000.  Absolutely needs to withdraw income for 5 years to the tune of 35,000.... approximately 15% of the value which as we all know is too much to withdraw.    At the end of 5 years he will no longer need to make these withdrawals.  The goal is to provide the income and preserve as much of the capital as possible.  
Explain what you would recommend for this client and why I shouldn't get paid to micromanage this difficult account?

CAPM's picture
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Joined: 2007-08-17

william1 wrote:And I'm still waiting to find out how many advisors don't use mutual funds and how their returns are compared to DIY'ers. As I understand it, most use mutual funds. I asked this question long ago - no reply.
Don't know what DIYers get, that's your area.  My client's portfolios have an average beta of .77, and my average return in all accounts last year was 12.5 percent.  I doubt you know what beta is, but some people on here do.
Quote:Also, it seems that some of the problems that apply to mutual fund selling advisors (asset allocation and chasing past returns) would also apply to selling stocks - maybe even more so.
Again, you use blanket statements with no real thought included, which is your MO on here.........kind of like the drivel on amerisux where 90% of the posts on there are YOURS.........

troll's picture
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Joined: 2004-11-29

"I've already given you several examples of my client's accounts and asked you to explain how a no load indexed fund is going to solve the problems that I presented."
I've already shown how you have taken my comment on index funds completely out of context and how your scenerios are full of holes and set up to trap me.
I find no reason to hold a discussion with someone that says this to me: " I get really mean and nasty when people tick me off.  You know...woman scorned and all that stuff.   Ask my ex husband... something about a fillet knife and the uphosltery in his truck."
Dishonest and psychotic? Not someone I want to waste my time with. As I told you, post your scenerios on Vanguard Diehards. You might learn something. And see someone about those rages.

troll's picture
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Joined: 2004-11-29

"Don't know what DIYers get, that's your area.  My client's portfolios have an average beta of .77, and my average return in all accounts last year was 12.5 percent.  I doubt you know what beta is, but some people on here do."
Amazing that none of the financial advisors out there can honestly admit the problem and seriously consider how to remedy it.

Greenbacks's picture
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Joined: 2004-12-21

Advisor28 and all other reps.
The fee for advisory accounts is not tax deductable. Wirehouses tried pushing this crap for years. They say they cannot give tax advise but yet I have heard them make that statement 
It does not fly!   
As far as Rick Ferri is concerned yes his fee is low but he also is very passive investor. We both use DFA
But he will only do a account review once every couple of years
 

CAPM's picture
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Joined: 2007-08-17

Greenbacks wrote:As far as Rick Ferri is concerned yes his fee is low but he also is very passive investor. We both use DFA
So, he's wrapping index funds?  Boy, is he smart! 

CAPM's picture
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Joined: 2007-08-17

william1 wrote:
"Don't know what DIYers get, that's your area.  My client's portfolios have an average beta of .77, and my average return in all accounts last year was 12.5 percent.  I doubt you know what beta is, but some people on here do."
Amazing that none of the financial advisors out there can honestly admit the problem and seriously consider how to remedy it.
Ok........I'll admit it..........I charge as MUCH as Vanguard Brokerage Services, but my clients get a financial advisor, not an 800 number........
There..........I feel a lot better.........

Dust Bunny's picture
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Joined: 2007-05-07

william1 wrote:
"I've already given you several examples of my client's accounts and asked you to explain how a no load indexed fund is going to solve the problems that I presented."
I've already shown how you have taken my comment on index funds completely out of context and how your scenerios (blatant spelling error)are full of holes and set up to trap me.
I find no reason to hold a discussion with someone that says this to me: " I get really mean and nasty when people tick me off.  You know...woman scorned and all that stuff.   Ask my ex husband... something about a fillet knife and the uphosltery in his truck."
Dishonest and psychotic? Not someone I want to waste my time with. As I told you, post your scenerios (another blatant spelling error) on Vanguard Diehards. You might learn something. And see someone about those rages.

Wow, this is the master debator and logic professor's way to counter an arugument; just refuse to address it??    There is no trap in the above scenario. You just can't answer questions because you are nothing but a parrot sqwawking things you don't understand.   Instead of addressing the issue, you avoid it.   I hope your students aren't paying much in the way of tutition, since it is obvious that they are being cheated out of a decent education.  Talk about being overcharged for services not rendered.

troll's picture
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Joined: 2004-11-29

What is/are the question(s) that don't get answered?
As best I can determine William offers an opinion--supported by several studies that anybody who can read may read--and within moments a hue and cry comes up from the peanut gallery about questions not answered.
What are the questions?

troll's picture
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Joined: 2004-11-29

Hey Kids,
Let's continure this conversation over at the site in my signature line. We won't have to worry about the trolls.

CAPM's picture
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Joined: 2007-08-17

DAtoo wrote:
What is/are the question(s) that don't get answered?
As best I can determine William offers an opinion--supported by several studies that anybody who can read may read--and within moments a hue and cry comes up from the peanut gallery about questions not answered.

william doesn't offer an opinion, unless 2nd grade comments count........as for you, we already know your "issues"........
 

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