myths...fee-based...Ejones...

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DCedjones's picture
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Joined: 2007-01-02

I wanted to quickly dispell a few myths being broadcast by "fee-based" "financial planners" with "CFPs" who "aren't salesmen" [to you CFPs out there...even though I am training for mine, we all know the game...mostly older established guys who are trying to box-out competition from younger guys...they know we cant compete on performance...and they know we all have access to essentially the same good products and info if we choose to use it...so why not compete based on something the newbies cant afford?...the time and cost required to get a CFP and all the additional hoopla...tell me, how much did a CFP impact ave. annual returns for your clients from 1997-2002?]
I have seen enough on this forum and generally on the internet of the digital pollution they spread that attacks the business of many respectable and honest "brokers" with 10 times more ethics than the rest...and as I work for Edward Jones I would like to also dispell similar nonsense that is being purported most likely by the same folks...
As the bible says: "let those who have wisdom understand..."
1) Fee-Based business is still business...any business has inherent conflict of interest with its clients as it depends on the client for survival...any situation of dependency becomes dangerous to the host (we know this even from science)...specifically with fee-based, the danger is COST-CUTTING...many (not all) fee-based folks are boosting their margins by putting clients in the lowest-cost(to the advisor) funds such as Vanguard and Fidelity ETFs, and are refusing to do any further management...why?...because additional transactions mean additional cost for the "fee-based" advisor...and that means less profit...with the dawn of the internet and online discount brokers it is ludicrous to me that I would pay 1-2% of my assets to a "fee-based" advisor who does nothing more than put me in a Vanguard ETF for the rest of my life...who is afraid to trade to protect my downside risk in a bear market because that cuts into his profit!!...I could have easily done that myself...at least a "broker" who is paid on transactional basis has an incentive to make every "transaction" the best possible as that is what guarantees that any future transaction will take place with that client...and knowing all this it drives me bonkers to see the devoutness with which these "fee-based" guys go out into the public forums to damage the image of anyone who is not also doing fees...
2) Edward Jones is moving towards an ideal model of some additional fee-based (we already have some managed account business) as well as preserving the traditional transactional approach...why is this ideal?...it gives consumers choices (the cornerstone of a free market), and it helps "brokers" "advisors" "fee-based planners" (i hate all the jargon b/c we truly are all in the same boat at the end of the day) to balance conflicts of interest with client from both sides...dont have to be too pushy transactionally...but dont have to be an idle asset-gatherer with limited value added either (i.e. just dumping clients in an index fund)...might as well work at the bank if you want to do the latter...
Jones door-knocking model is difficult, but ask yourself this...who would you be more responsive to with your life savings?...a guy on the phone who you have never met?...or a guy (or gal) who has made an effort to come to your door on numerous occassions, introduce themself in person (the classy old-fashioned way) and physically deliver you proofs in writing of all the ideas that have been pitched?...as well as being located in a visible office around the corner from you to add to credibility...i think these aspects of the door-knocking logic are untouchable (still not to say that the work is  not hard and the sales cycle sometimes slower this way...slower but sweeter)
And a final word to the independents...going independent is great...if you want to keep up with the constantly changing rules and regulations (that get stricter) every year in our industry...and you feel confident that you can monitor yourself against pursuit of your own best interest...at Jones we have a compliance department (best in the industry) that does all this work for you...why is that great?...lets try a little analogy...if you were the police looking for folks in the community who are likely to have violated the law, where would you crack down first?...the house on the street located right next to a police station and a retirement community?...or the house further down the street with no visible address markings, thats hidden under the shade of some trees, and that no one else on the street really knows the owner...independents look out...watcha gonna do when they come for you?...
yes its a big hoopla when Jones or a big brand name firm does finally get busted for just above a minor infraction (at least in comparison to some of the other stuff that goes on out there), but that is b/c it has the shock value of watching a nun get carted out of the convent for sneaking in a boyfriend for the night to celebrate new years...you'll never see a registered rep article for each and every indy firm that was busted for "serial axe-murder" of clients...

anonymous's picture
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Joined: 2005-09-29

Come back and post in a few years when you have a clue as to what you are talking about.
You're dangerous because you don't know what you don't know. 

Broker24's picture
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Joined: 2006-10-12

DC, you are an embarrasment to yourself and to our firm.  Do me, the other Jones IR's, and the rest of the folks on this forum a favor and never post again.  Whether or not there is any bit of truth in some of your statements is now irrelevant.

Starka's picture
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Joined: 2004-11-30

Well said, Broker24.

DCedjones has very ably demonstrated the ignorance and arrogance that
draws the ire of the rest of the industry. "10 times the ethics"
notwithstanding.

FreeFromJones's picture
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Joined: 2006-11-29

DC,
     If I were still at Jones, I'd be embarassed that you were on my team.  You quoted the Bible --- As the bible says: "let those who have wisdom understand..." ---  You need to understand that the reason there has been Jones bashing is because of folks like you who want to spout off.  The reason people hate Jones is because of full-page Wall Street Journal articles that hold Jones up as the keeper of the moral code while they are battling their own battle over to disclose or not to disclose revenue sharing.  If Jones folks like you would quit thumping their chests and saying look at me, then I sure the number of I hate Jones postings would dwindle. 
 
Grow-up!!!

babbling looney's picture
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Joined: 2004-12-02

And a final word to the independents...going independent is great...if you want to keep up with the constantly changing rules and regulations (that get stricter) every year in our industry...and you feel confident that you can monitor yourself against pursuit of your own best interest...at Jones we have a compliance department (best in the industry) that does all this work for you...why is that great?...lets try a little analogy...if you were the police looking for folks in the community who are likely to have violated the law, where would you crack down first?...the house on the street located right next to a police station and a retirement community?...or the house further down the street with no visible address markings, thats hidden under the shade of some trees, and that no one else on the street really knows the owner...independents look out...watcha gonna do when they come for you?...
Again the brainwashed line that Independent advisors are running wild, don't actually have compliance departments and poor us have to figure everything out on our own.  Get a clue.  I have more compliance rules and oversight now than ever when at Jones. And much better communications, memos etc with the compliance department. 
Plus I never have to listen again to that joke of a compliance presentation at a regional meeting put on by some shlub who was press ganged into being the "compliance guy".

BrokerRecruit's picture
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Joined: 2005-04-19

DCedjones wrote:Jones door-knocking model is difficult, but ask yourself this...who would you be more responsive to with your life savings?...a guy on the phone who you have never met?...or a guy (or gal) who has made an effort to come to your door on numerous occassions, introduce themself in person (the classy old-fashioned way) and physically deliver you proofs in writing of all the ideas that have been pitched?...as well as being located in a visible office around the corner from you to add to credibility...i think these aspects of the door-knocking logic are untouchable (still not to say that the work is  not hard and the sales cycle sometimes slower this way...slower but sweeter)
As an investor and a client of an FA, I hate the idea of door-knocking, whether you're selling investments (from preferred fund families or MAPs with account minimums of $500k), your religion or the greatest carpet cleaner known to man.  I would rather answer a cold call from a broker and meet with them face-to-face in their office.  I like meeting with people in person - but it has to come from something else other than a knock. 
Plus, what if the door-knocking FA has a face for radio??? 
You're saying that fee-based advisors are biased for selling funds with the lowest cost to them?  What about selling from preferred fund families?  How is that different?  I like Clay Finlay and Oberweis' China Opportunities funds, respectively...Both of which have performed phenomenally this year.  The question I would have for you is a).  can you sell them, and, b).  would you sell them over a piss-poor Van Kampen fund?
I respect guys like Broker24 that at least can formulate a thought on their own (even though they may love the firm) as opposed to spewing the garbage you did, chief.  Best of luck. 
And don't come a-knockin' on my door. 

maybeeeeeeee's picture
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Joined: 2005-02-24

Why do you assume that fee based accounts are never in the best interest of the client?
There have been many discussions between fee based and commission sales.
The client's needs are first.  Money comes with doing the right thing for people.
You can do that either with fees or comissions.
The problem with EDJ is that they try to control how their reps build their business.
I am sure there are many ethical people at EDJ.

Indyone's picture
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Joined: 2005-05-31

You're a company parrot...nothing more.  Come back when you learn to think for yourself.

AllREIT's picture
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Joined: 2006-12-16

Indyone wrote:You're a company parrot...nothing more.  Come back when you learn to think for yourself.

This has to be a troll. No one could be so stupid. I hope.

ExPropTrader's picture
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Joined: 2006-11-19

I've looked at several firms including Jones, and am happy to say that I have decided NOT to go with Jones, and IR's like this one are a big reason why.  To think I could have OD'ed on this Kool-Aid too.

maybeeeeeeee's picture
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Joined: 2005-02-24

Well, you just want to go to a firm that lets you PROSPECT the way you want and build your book the way you want.  From my understanding, EDJ does not let you do that.
Personally, I cannot see myself building a book by door knocking.  And, I would hate to have to sell A shares only.  I LOVE financial planning and I want to be with my clients for the long run.
With A shares only, EDJ seems limited.

ExPropTrader's picture
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Joined: 2006-11-19

maybeeeeeeee wrote:
Well, you just want to go to a firm that lets you PROSPECT the way you want and build your book the way you want.  From my understanding, EDJ does not let you do that.

Actually the door-knocking was one of the few things I like about EDJ.  I would rather get out in my neighborhood and introduce myself to people I have probably already seen out and about than trying to cold call hundreds of strangers a day, takes longer but I've already prepared the wife for 14-hour days for the next couple years, who the heck needs sleep anyway? 
You are 100% correct in my wanting to prospect any way I want, in addition I don't want to start at 0 every month, I don't want to be limited in what products I sell, and I DON'T want any of that dang kool-aid.  And as long as we've got Mr. EDJ quoting the bible....
"Of what use is money in the hands of a fool, since he has no desire to get wisdom." -Proverbs 17:16 

planrcoach's picture
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Joined: 2006-12-13

I wanted to quickly dispell a few myths being broadcast by "fee-based" "financial planners" with "CFPs" who "aren't salesmen" [to you CFPs out there...even though I am training for mine, we all know the game...mostly older established guys who are trying to box-out competition from younger guys...they know we cant compete on performance.
Of course you have some generally valid points. I wonder if you are really close to being a CFP? A rep with experience, perspective, a holistic view of the industry could better argue your points.
How is the revenue sharing on mutual funds at EdJ morally superior to the fees chareged in wrap accounts? You'll never win that arguement.
EdJ is a good firm, better to see how it can fit in with all the other successful branded and independent models. Do yourself a favor and get your CFP license, for a start.

planrcoach's picture
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Joined: 2006-12-13

By the way, DCed, as an Ameriprise franchise owner, I consider myself to be "independent". Why shouldn't I? No one bothers me here, and I don't have to sell any of their stuff. I can do ETFs in wrap, build individual security portfolios, and don't really care about selling insurance and annuities, so who a cares about "choice" there?
So, DCed, if you are established at Jones, and heading toward more "wrap", and like to charge commissions, and so on, why don't you start thinking of yourself as being independent. I am so sick of industry pundits trying to shape our thinking - our perception of ourselves, our self-image, with so many little labels driven by so much ego.
Last I checked, it was the bottom line, profit, that matters. If you get to run that through a schedule C, that's better for everyone. Maybe the real issue is how you are framing your thinking on the big picture.
I appreciate your post, if nothing else, for stirring the pot at the starting line of a new year. You get my vote for most interesting post. Happy new year.

troll's picture
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Joined: 2004-11-29

Broker24 wrote:DC, you are an embarrasment to yourself and to our firm.  Do me, the other Jones IR's, and the rest of the folks on this forum a favor and never post again.  Whether or not there is any bit of truth in some of your statements is now irrelevant.Hate to tell ya Broker, but he's basically touting the company line that we've seen in the past on this board.  He's probably your RL!

troll's picture
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babbling looney wrote:And a final word to the independents...going independent is great...if you want to keep up with the constantly changing rules and regulations (that get stricter) every year in our industry...and you feel confident that you can monitor yourself against pursuit of your own best interest...at Jones we have a compliance department (best in the industry) that does all this work for you...why is that great?...lets try a little analogy...if you were the police looking for folks in the community who are likely to have violated the law, where would you crack down first?...the house on the street located right next to a police station and a retirement community?...or the house further down the street with no visible address markings, thats hidden under the shade of some trees, and that no one else on the street really knows the owner...independents look out...watcha gonna do when they come for you?...
Again the brainwashed line that Independent advisors are running wild, don't actually have compliance departments and poor us have to figure everything out on our own.  Get a clue.  I have more compliance rules and oversight now than ever when at Jones. And much better communications, memos etc with the compliance department. 
Plus I never have to listen again to that joke of a compliance presentation at a regional meeting put on by some shlub who was press ganged into being the "compliance guy".Babs-You forgot the part about how they need "the best compliance department on the street" because they have the least experienced, least-educated sales force sitting out there in those one-man offices....You "graduated", and I suspect you and other top quartile ex-jones'ers are the exceptions that prove the rule in Kool-Aid country.....

Broker24's picture
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Joined: 2006-10-12

Joe, say it ain't so!  The truth is, I am sure there are some people like this in our firm.  In my experience, many IR's relly enjoy working for the company, and acknowledge that there are "weaknesses" in the model.  However, I have never met anyone that would actually talk about other firms, or better yet, an entire facet of the industry the way this punk did.  Most of the people I am close to would think this guy was a complete lunatic if he started talking like that.  Sure, plenty of us exchange stories like ...."oh I got this client that was with XYZ firm who's portfolio was a disaster, blah, blah, blah...".  But honestly, few of us really bash other firms as a whole (OK, disclosure, I bash Primerica - I have yet to see a halfway decent portfolio come out of one of their "offices").  Like every single firm out there, indy, regional, wire, whatever, there are good advisors, there are poor advisors, and there are some borderline criminals.  But it should not really be a reflection of the entire firm.  I am not sure a few knuckleheads on this forum are a proxy for the overall picture of any single firm.
I think this guy is really just trying to get a rise out of us...

noggin's picture
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Joined: 2004-11-30

Broker24- I like you work for Jones. I like you think that there are more of us than there are of that DCED or at least I hope at our company.

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

maybeeeeeeee wrote:
Well, you just want to go to a firm that lets you PROSPECT the way you want and build your book the way you want.  From my understanding, EDJ does not let you do that.
Personally, I cannot see myself building a book by door knocking.  And, I would hate to have to sell A shares only.  I LOVE financial planning and I want to be with my clients for the long run.
With A shares only, EDJ seems limited.

Your understanding is a little clouded if the only info you get about Jones is what you get on this board.  There's as much anti-Jones kool-aid here as there is Jones kool-aid. 
The doorknocking is the way we start our businesses.  It works and gets us people we have actually met to talk to.  However, beyond the initial training period there is no rule that says we have to prospect.  I know lots of brokers who built their book by cold calling, buying lists and mailing seminar invites, or simply joining chamber and networking.  As long as the production numbers are there no one is going to question where you get your prospects.  
If you've ever walked into a business and asked to see the owner, you've doorknocked.  Translate that same concept to a house and you get the picture of what doorknocking is like for us.  Don't knock it until you try it.  
Once we get the prospects in the doors we can sell whatever we want.  Stocks, bonds, funds, etf's, uits, VA, FA, etc.  Our choice, not the firm's.   In my office my preference is funds, but that's my choice, not the firms. 
Where did you get the impression we have A shares only? We can use A, B, or C shares with any given client.  Just like everywhere else, the share class has to be appropriate for the client.  We get a little high and mighty at times because there is so much abuse of B and C shares out there.  For instance, I have a prospect who works with Ameriprise.  $300K+ account, all B shares.  Broker keeps switching from one fund family to another starting the CDSC fees over again.  That's just wrong.  Have the guts to explain how A shares work or put a wrap on his account.  Don't dodge the "I get paid to do what I do" issue with B shares. 
I love Jones, but the guy who started this thread is mental.  Some points have a bit of validity, but the attitude is all wrong.  The only thing missing in the post is the link to the article he put in his local paper that says "ALL OTHER BROKERAGE FIRMS SUCK!!" 
Happy New Year to you all.

babbling looney's picture
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Joined: 2004-12-02

Spaceman is right in that you can prospect anyway you want to at Jones as long as you are producing.   If you are "meeting or exceeding expectations" you are no longer on the radar and you are left alone.
Same thing with the investments. Although they did object to my positioning people into stocks that were not on the research list, such as some regional banks.  In fact they MADE one other rep in our region sell out positions that he had taken because they felt his book was too heavy in that one company. 
Most of the mutual funds sold were A shares with B shares being more and more frowned upon and C shares only for short time positions.  Maybe that has changed.  Don't know... haven't been there for a few years now.
Door knocking was OK.  I didn't mind it too much and it was a good way to introduce myself to people that otherwise I would not have met and who may not be persuaded by newspaper advertising.  I just gives a jump start to a new office or new IR.  But as Spaceman says, you don't HAVE to doorknock past your initial training.
I won't go over old ground, but I am very very happy that I am no longer at Jones.  It had its good points but they were more than outweighed by the bad.  For somebody else, it may be a good fit.  It wasn't for me.

vagabond's picture
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Joined: 2006-09-18

Interesting how DCed first bashes the use of fee-based accounts and then says how great EDJ is for doing it the "right" way and offering the choice to clients.  So wrap fees are good, as long as you are getting it from EDJ?  In the past when a consumer "chose" a fee-based advisor over EDJ (ignoring that many advisors have offered both options) the company line was that they were getting screwed.  Now that EDJ can do the screwing its OK.  I wondered how EDJ was going to spin the fact that they have been saying that wrap fees are bad for the client for years.  It'll be interesting to see what their fee schedule is.

Spaceman Spiff's picture
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I've been at Jones for a long time and I don't ever remember hearing anyone say "wrap fees are bad, period."  The line I've always heard is that wrap fees are not appopriate for all investors.  I have accounts in my office who I will call the day I have fee based and say we're switching...because it makes sense for them.  I think the point Jones people try to make is that there are a lot of clients out there getting screwed because their brokers are either A) charging a fee and then not making any trades to justify the fee or B) charging the fee then churning the snot out of the account to make it look like they are doing something for the client.  I'm interested to hear if Jones can figure out a way to give us the ability to offer both and have us feel good about it.  We'll see.

planrcoach's picture
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Joined: 2006-12-13

On our platform, wrap account fee justification looks like: meeting notes, model and actual portfolio data, buy sell hold recommendations, assumptions and rationale behind those recommendations. In other words, I really do meet with this client, look and think about their portfolio, making appropriate adjustments.
Try to understand Dceds post from the point of view of someone who is going through a lot of rapid change, like we all have. It seems like stress or ego makes us shut out our colleagues sometimes.

FREE's picture
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Joined: 2005-03-05

 I was at jones for over 12 years and the message was very clear-wrap fees are not in the clients best interest. To expensive!! Once a month for at least 5 years I would sent a wire to suggbox and ask why is it that Hartford stock fund at %1.5 exp was any more expensive than a %1 wrap with no loads!!!! The silence was deafening!!! Glad to be gone . By the way I TOOK %94 OF MY ASSETS    

skolbrother's picture
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Joined: 2005-07-12

Spaceman- i actually do remember a GP standing in front of our region saying "we don't like to screw our clients". I will not name him but I bet you may know the name.  he used that exact phrase as he was talking about a discussion he had with someone who had left for Morgan Stanley I believe. I asked the question on numerous occasions why we did not have access to fee based accounts and was repeatedly told essentially "we don't believe they are in the best interest of the client." I am interested to see how they try to position their new stance on this matter.

BrokerRecruit's picture
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Joined: 2005-04-19

Spaceman Spiff wrote: I think the point Jones people try to make is that there are a lot of clients out there getting screwed because their brokers are either A) charging a fee and then not making any trades to justify the fee or B) charging the fee then churning the snot out of the account to make it look like they are doing something for the client.
You hit the nail on the head.  It's not because fee-based programs are abusive, it's because some advisors will do anything to turn a buck.  Anyone can screw a client, whether they use fee-based products or not.  I'm glad the good Jones IRs have seperated themselves from this dolt.
 

vagabond's picture
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Joined: 2006-09-18

Spiff,
I'm glad that you are open minded about fee-based business, but my experience was the same as FREE and Skolbrother.  Whenever the question was asked at a Regional event, the answer was always the same "wrap fees are not in our clients best interest".  There was also no distinction made between "wrap in leiu of commission" and a "fee-based advisory account".  I'll bet most Jones brokers don't know the difference (and to be fair, most advisors in general don't know). 
My personal belief was that EDJ thought that "wrap in leiu of commission" would face the same regulatory issues as C-shares on long term accounts, they never wanted the fiduciary responsibility of fee-based advisory accounts, and their business model needs high up front commission to survive.
Again, I commend you for your open mind. 

usafa93's picture
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Joined: 2005-07-18

DCedjones wrote:
1) with fee-based, the danger is COST-CUTTING...many (not all) fee-based folks are boosting their margins by putting clients in the lowest-cost(to the advisor) funds such as Vanguard and Fidelity ETFs, and are refusing to do any further management...why?...because additional transactions mean additional cost for the "fee-based" advisor...and that means less profit...with the dawn of the internet and online discount brokers it is ludicrous to me that I would pay 1-2% of my assets to a "fee-based" advisor who does nothing more than put me in a Vanguard ETF for the rest of my life...
This makes absolutely zero sense to me.  Does anyone do fee-based business and use Vanguard and Fidelity ETFs?  If so, does it make their business more profitable?
Fee-based business involves a flat fee to the client, with the choice of hundreds of managers.  These managers typically do not include passive investment structures, such as mentioned.  If they do, then it is a matter of strategically allocating across sectors using niche ETFs, which is a service that deserves pay.  And even in that case, does the broker get to share in the "cost cutting?" No. They get their flat fee.
That was quite a diatribe from you.  Could you please address my criticisms of it.

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

I can definitely see how brokers who are operating a "fee-based" office would be reluctant to spend much time managing portfolios after they've been constructed.
It really goes against human nature to continue working as hard as you can on something when you've already been paid.
There are exceptions out there, but I've realized that most brokers are ready to get out of the office and onto the golf course ASAP.

Starka's picture
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Joined: 2004-11-30

Borker Boy wrote: I can definitely see how brokers who are
operating a "fee-based" office would be reluctant to spend much time
managing portfolios after they've been constructed.
It really goes against human nature to continue working as hard as you
can on something when you've already been paid.
There are exceptions out there, but I've realized that most brokers are
ready to get out of the office and onto the golf course ASAP.

I'm assuming here that you are referring to flat fee based accounts.

If that's so, I can tell you that the people running that kind of shop that I
personally know are highy motivated and deal with very high net worth
clients. If you're including asset based brokers, the motivation is to
increase the asset base if they're to increase compensation. The danger I
see there is that individuals might want to increase portfolio values with
no concern for tax efficiency.   

vagabond's picture
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Borker Boy wrote:
I can definitely see how brokers who are operating a "fee-based" office would be reluctant to spend much time managing portfolios after they've been constructed.
It really goes against human nature to continue working as hard as you can on something when you've already been paid.
There are exceptions out there, but I've realized that most brokers are ready to get out of the office and onto the golf course ASAP.

Maybe we're talking two different things here.  When I referred to "fee-based advisory accounts" I was referring to advisory fees based on assets under management.  In this case their is no upfront charge,  the compensation is ongoing, and we are getting paid to ADVISE.  From my experience, I treat these accounts MUCH different than an account where I got paid an upfront commission.  I was also trying to differenciate this from "wrap in lieu of commission" where there is no responsibility to provide advise (and infact advise can only be incidental).  
For the "Fee-based" accounts that I think you are referring to  (where you charge to do a financial plan and/or asset allocation for a fee), if there is no ongoing compensation then I agree that there is no motivation to review the account until the next time the client schedules a paid review.    

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

I think the interesting part of this whole fee based vs commission vs wrap in lieu discussion is still the fact that we get paid for what we do.  You could argue that commission based is far cheaper for the client over the long term.  You could argue that the commission based broker won't keep up with those clients over the long term because there's nothing in it for him past the up front money. You could also argue that fee based is the way to go.  More money working up front, no worries of breakpoints, best of the best if you're using funds, etc.  However over the long term they're going to pay more.  I think the best biz to run, and the way I hope I can at Jones in the next 12 months, is to have the ability to give the client the option.  Put the numbers on the table for them, try to figure out their frequency of trading and go from there.   

Starka's picture
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Joined: 2004-11-30

Spaceman Spiff wrote:I think the interesting part of this whole fee based vs commission vs wrap in lieu discussion is still the fact that we get paid for what we do.  You could argue that commission based is far cheaper for the client over the long term.  You could argue that the commission based broker won't keep up with those clients over the long term because there's nothing in it for him past the up front money. You could also argue that fee based is the way to go.  More money working up front, no worries of breakpoints, best of the best if you're using funds, etc.  However over the long term they're going to pay more.  I think the best biz to run, and the way I hope I can at Jones in the next 12 months, is to have the ability to give the client the option.  Put the numbers on the table for them, try to figure out their frequency of trading and go from there.   
Spiff, it's much more complicatred than "commission is cheaper over the long run".  For example, HNW clients that I know have very few mutual funds.  (An educated investor knows that there are discrete, hidden fees in MFDs.)  With some funds, these fees can run nicely up to a couple of points.  That notwithstanding, for a client to pay 5 3/4% up front, then ongoing fees of say 150 or so bps clearly shows that the client would NEVER catch up to a wrap account charging, say, 125 bps.
What I'm saying is that it's clearly a case-by-case decision process.

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Starka wrote:
Spaceman Spiff wrote:I think the interesting part of this whole fee based vs commission vs wrap in lieu discussion is still the fact that we get paid for what we do.  You could argue that commission based is far cheaper for the client over the long term.  You could argue that the commission based broker won't keep up with those clients over the long term because there's nothing in it for him past the up front money. You could also argue that fee based is the way to go.  More money working up front, no worries of breakpoints, best of the best if you're using funds, etc.  However over the long term they're going to pay more.  I think the best biz to run, and the way I hope I can at Jones in the next 12 months, is to have the ability to give the client the option.  Put the numbers on the table for them, try to figure out their frequency of trading and go from there.   
Spiff, it's much more complicatred than "commission is cheaper over the long run".  For example, HNW clients that I know have very few mutual funds.  (An educated investor knows that there are discrete, hidden fees in MFDs.)  With some funds, these fees can run nicely up to a couple of points.  That notwithstanding, for a client to pay 5 3/4% up front, then ongoing fees of say 150 or so bps clearly shows that the client would NEVER catch up to a wrap account charging, say, 125 bps.
What I'm saying is that it's clearly a case-by-case decision process.

OK, agreed on the case by case.  Your math on the mutual fund side is technically correct, but if you are working with a HNW client and charging them 5.75 upfront on an A share you are doing them a disservice.   If you are using funds you should be able to hit the larger breakpoints and drop those charges down to say 3.5% or even 2.5%.  On our list of preferred funds we only have 6 funds that hit the 150 bps on expenses.  Most of the ones I use are under 125 bps, most of them under 100.  Using numbers like that your 125 bps will cost the clients more in the long run.  Hope you're a better stock picker than Saul or the folks at American, Franklin, or Goldman.

Broker24's picture
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Spiff, you are correct.  Many people like to quote the "5.75%" upfront commission thing.  But I have very few clients that have so little money that they pay that much.  And often I will use a "B" to avoid that upfront.  At $250K, it is typically around 2.5%.  With the funds I use, the expenses are typically 50-95 BP(with some exceptions, but RARELY over 115BP).  So 2.5% upfront and about 75BP ongoing is pretty good for the average investor.  And it gets even cheaper at 500K and 750K (and zero at 1M).
I have never, nor would I ever, have a client pay 5.75 up front and ongoing expenses of 150BP as stated by Starka.
I typically use SMA's for clients with over $1M that have certain situational needs and taxable accounts (i.e. tax efficiency).  But they guy that retires with $1M in his 401K and no other assets - he is probably fine with a quality MFD porfolio. 

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Borker Boy wrote:
I can definitely see how brokers who are operating a "fee-based" office would be reluctant to spend much time managing portfolios after they've been constructed.
It really goes against human nature to continue working as hard as you can on something when you've already been paid.
There are exceptions out there, but I've realized that most brokers are ready to get out of the office and onto the golf course ASAP.

Congatulations, you've just made the case for fee-based business.  You have just described the problem with the Jones model. Put them in A shares, get a nice pop from the load, and then take a small .25 trail every year.  I agree that it is human nature to ignore those clients and to go looking for the next "pop" from new money.
With fee based, there is no "pop."  And, if I have two clients that each have $250K with me.  One pays me $625 gross/year (A shares), and the other pays me $2500 gross/year (1% fee-based), which one am I going to work harder to keep?
I still do primarily A share business, but I too remember Regional meetings where "fee-based is bad" was rammed down our throats.  I asked our visiting GP two summers ago why we didn't do fee-based, and he told me that it's bad for the client.  He said "Can you imagine if we could get 1% from our asset base?  That would be huge, but that wouldn't be right for the client."  I fell for it hook, line, and sinker.
I believe Jones does not like fee based because it will really hurt the amount of money going into preferred funds.  Thus, it will hurt revenue sharing.  If I'm building an A share portfolio, I really work to build an entire portfolio out of one fund family (within reason) which is probably preferred due to my limited exposure to other fund families when I was at Jones. However, with fee based, I will search out the best mid-cap, international, bond fund, etc. I can find regardless of whether it's preferred or not.
It's a lot easier to learn a fund, than to learn a fund family. Thus, the time cost to the broker to look into different funds when building a portfolio is less, thereby hurting the preferred's monopoly.

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"Spiff, it's much more complicatred than "commission is cheaper over the long run".  For example, HNW clients that I know have very few mutual funds.  (An educated investor knows that there are discrete, hidden fees in MFDs.)  With some funds, these fees can run nicely up to a couple of points.  That notwithstanding, for a client to pay 5 3/4% up front, then ongoing fees of say 150 or so bps clearly shows that the client would NEVER catch up to a wrap account charging, say, 125 bps."
If fees were the only determinant this would be true.
But they're not.
(Before we go no further, lets agree that we're just talking about absolute performance, not embedded gains and losses and tax efficiency or any of the other supposed advantages/disadvantages of funds /mananager over the other)
When I was back as a wirehorse, I was at a small meeting with Alan Blake who was at the time a red hot growth manager. He had separate accounts and a mutual fund at Smith Barney (who have the AUDACITY to advertise "We don't have mutual funds so our brokers can give you independent advice!" as if they had never dirtied their hands in that arena). The question was asked of him why his Mutual Fund was doing so much better than his separate accounts (which was where most of the brokers in the room had put money with him).
He said that the reason was that he was constantly getting new money to put into the fund and the money that was in the separate account was static. If you had money in the separate account and the market took a correction, you took a correction. If the account was 1MM, and the manager's stocks that you owned corrected 15%, you were at .85MM, when the market came back, you were at 1MM again.
If you owned 1MM of the fund and it went down the same 15% and people other than youself bought shareson the dip, the manager bought more shares of the fallen angels and when the market came back you had 1.05MM (say, it was much more pronounced in the case of Blake's discussion but it was long ago and I wasn't a growth guy until August 1999!!! So I wasn't keyed into all his nums.).
Owning a fund CAN BE like dollar cost averaging into the market. 
Mr. A 
 

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now_indy wrote:I believe Jones does not like fee based because it will
really hurt the amount of money going into preferred funds.  Thus,
it will hurt revenue sharing.  If I'm building an A share
portfolio, I really work to build an entire portfolio out of one fund
family (within reason) which is probably preferred due to my limited
exposure to other fund families when I was at Jones. However, with fee
based, I will search out the best mid-cap, international, bond fund,
etc. I can find regardless of whether it's preferred or not.

The amount EDJ would make from charging a 1% fee would be so much more than whatever they get from revenue sharing.

The main reason I think Jones sticks to the A share model is that they
don't want brokers managing money. That is something you have to do in
a fee based account.

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The main reason I think Jones sticks to the A share model is that they don't want brokers managing money. That is something you have to do in a fee based account.

So I guess if they are not busy managing money, they have more time to gather it. I notice their branch system endeavours to use very stable local assistants,who often "outlive" the local registered rep. So when the rr leaves, clients still have a relationship with the local assistant, until the new rr gains traction. Along with A shares, this seems to be a very clever way to ensure up front $ to handle and reward asset gathering costs, yet provide long term trails, enhanced by revenue sharing. Got to hand it to the partners.

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You know, you all seem to be coming up with creative suggestions and schemes that Jones uses to "gather" and "keep" assets, and "oooh those guys at Edward Jones are just trying to make money!"  Let's not forget, every firm out there, Indy, Wire, Regional, etc. is in this business to gather, keep, and earn money off assets.  So, whatever the methods, as long as they are ethical and in the client's best interest, are really OK.  As we all know, in this business there are a thousand different ways to get to the same answer.  You can use fee based, fee in lieu of, wrap, A's, B'c, C's, annuities, stocks, bonds, ETF's, REIT's, shorts, spreads, zings, zangs, whatever.  Bottom line, whatever you are doing, if you are making reasonable returns for your clients with reasonable levels of risk, you should make some money doing it - and so should our firms.  Whether it be through commissions, fees, revenue sharing...it doesn't REALLY matter.  We are all just trying to convince ourselves why what we or our firms do or believe in is best.  Do what YOU feel is best, make your client, your firm, and yourself some money, and we can all just get along (key the music....).

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Agreed. A lot of the discussion seems to be, what is best from the rep's point of view?
I am intrigued by the Jones model, and I see many positive features. The simplicity, value and up front clarity of investing in A shares is beautiful from the client's point of view.
The success of Jones, which seems to be working from more small town to more urban, provides a lot of insight into the future.
I say this from the viewpoint of AMP ownership. We are both interested in the mass affluent (100k -1m investable) market. Jones has local presence, and also reps that are capable of working alone, efficiently - generalists, and well trained generalists who do good for the client.
Maybe home office, like my home office, could be more efficient, should be conscious of being more efficient, as we see margin compression affect our industry.
Also, while it is true that affluent clients (1m+ investable), are happy with wire house type broker dealers or larger botique RIAs, it is also true that there seems to be a little snobbery on the part of some wirehouse  people, I am especially thinking about the folks who have a lot of little (less than 100k) accounts - that they do a lot of transactions, market and sector timing and so on. That certain does not make you better than someone who places A shares in funds, with, in the case of the better firms, oversight to make sure that money does not change fund families often.
My point is, there is a huge mass affluent market. Throw in the average boomer who has not accumulated enough $$, that make insurance potentially a part of the solution.
I know I like to steal ideas from Jones, and respect their business model. I do think there will be more pressure on Jones and AMP managment to cut costs and take (even) better care of their established reps. Now would be a pretty silly time to move from one broker dealer to another - I could see going Registered Investment Advisor and cutting out the broker dealer's substantial cut - but, I don't want to give up the additional level of shelter from personal liability that I feel is provided by my broker dealer.

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mranonymous2u wrote: If the account was 1MM, and the manager's
stocks that you owned corrected 15%, you were at .85MM, when the market
came back, you were at 1MM again.
If you owned 1MM of the fund and it went down the same 15% and
people other than youself bought shareson the dip, the manager bought
more shares of the fallen angels and when the market came back you had
1.05MM (say, it was much more pronounced in the case of Blake's
discussion but it was long ago and I wasn't a growth guy until August
1999!!! So I wasn't keyed into all his nums.).
I would have pulled clients money out on the spot if someone told me
that. And if I was client, I would ACAT from a broker believed it.

Open ended mutual funds shares are priced at NAV. Buying and selling shares has no effect on the NAV of other shares.

What happened is that the manager wasn't making sure that the SMA's
tracked the funds portfolio, hence the slippage. And then he relied
upon the ignorance of 99.56% stockbrokers to get away with lying about
it.    

====

You own 100 shares @ 10

the fund drops 15%

You own 100 shares @ 8.50

A Saudi prince invests eleventy Kabillion dollars in the fund.

You own 100 shares @ 8.50

The market rises 17%

You own 100 shares @ 10.00

====

AllREIT's picture
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AllREIT wrote:   

====

You own 100 shares @ 10

the fund drops 15%

You own 100 shares @ 8.50

A Saudi prince invests eleventy Kabillion dollars in the fund.

You own 100 shares @ 8.50

The market rises 17%

You own 100 shares @ 10.00

====

Just to make it clear for the newbie's. When the Saudi prince invests
eleventy Kabillion dollars in the fund, new OEF shares are issued at
the current NAV/share. If the portfolio manger then uses the new cash
to buy up fallen angels the fund's portfolio composition will change.

If the manager fails to rebalance the SMA's to have the same
composition as the fund's new portfolio, there will be some slippage
between the old SMA portfolio and the new fund portfolio.

Constantly rebalancing SMA's is a nuisance, (and it drives up
trading costs, it generates capital gains), but thats why you get paid
the big bucks.

This is the reason that many companies offer SMA's that do not track a
fund but are invested in a similar strategy. It avoids the issue of
tracking a portfolio with dynamic fund flows.

Starka's picture
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"OK, agreed on the case by case. Your math on the mutual fund side is
technically correct, but if you are working with a HNW client and charging
them 5.75 upfront on an A share you are doing them a disservice.   If you
are using funds you should be able to hit the larger breakpoints and drop
those charges down to say 3.5% or even 2.5%. On our list of preferred
funds we only have 6 funds that hit the 150 bps on expenses. Most of
the ones I use are under 125 bps, most of them under 100. Using
numbers like that your 125 bps will cost the clients more in the long run.
Hope you're a better stock picker than Saul or the folks at American,
Franklin, or Goldman."

Spiff m'boy, learn to read past the wholesaler hype. How many of your
beloved 6 families have fees in excess of the 12(b)1? All of them. How
many have funds that have total fees in excess of 2%? All of them. How
many have funds that have total fees in excess of 3%? At least one.
There are valid reasons to use mutual funds, perhaps funds in your
preferred vendors. But lower expenses is not one of those reasons.

Do your due dilligence and ask the tough questions. It's an eye-opener.

jbarnes's picture
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eDWards JONES is the bestest coolest awesomest firm in the whole world
ever...

What's sad is i've seen EDJ give kids that want to be brokers, that talk like
that, a shot at running a book.

God help you if your that ignorant and managing people's hard-earned
money

mranonymous2u's picture
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Starka,
Let's just make sure we're talking about the same set of circumstances
Let's say that your portfolio manager owned only 1 name in the portfolio. XYZ.
Let's say that XYZ is trading at $100 and you have 100 kabillion dollars in the fund so you own 1 KB shares.
Let's say that I have the mutual fund run by the same manager and so far I am the only shareholder, but I have 100KB in the fund and the fund's assets are 1KB shares of XYZ. I own 1 share of the fund.
 The XYZ sector zipps down half way and the shares are now worth $50.
The managed account is now worth 50KB and it holds 1KB shares.
The MF is also worth 50KB and also holds 1KB shares.
A Brazillionaire invests a 100KB into the MF.  He gets 2 shares, there are now three shares existant in the MF. The Fund's total position is 3KB shares of XYX.
Next day XYZ goes up to $100. SMA =100KB
MF=300KB/3 share =NAV of 100KB
You are right. How could it be that he was right also? Hmmm.
Same scenario except that this time he owns .5KB shares of XYZ and .5KB shares of ABC.
Both go down by 50%.
Brazillionaire buys shares, Portfolio manager decides that he likes the prospects of XYZ better than ABC. Buys 100KB of XYZ, zeroKB of ABC.
Just to be fair, we'll say that Lucky Louie Opened a SMA with the manager that day and the manager made the "right decision" to weight his portfolio the same as his other portfolios, (wait, let's hold this off for the next scenario)
He was right, next day XYZ went to $100, ABC did not.
SMA value = .5KB shares XYZ @100= 50KB + .5KB shares ABC @ 50 = 25KB total =75KB
MF vaule = .5KB shares @ 50= 25KB + 2.5KB shares XYZ @ 100=250KB + 25KB= 275KB /3 shares = 91.66KB/share a 22% outperformance.
In this case you are wrong.
Third scenario, wherein the porfolio manager adjusts the weighting of the SMA to the weighting of the MF, and adds in the fourth guy because I already typed most of it.
Two holdings 50% weighting.
50% decline, Reweight to a 75/25 weighting (XYZ/ABC)
SMA= 50KB/4=12.5KB 12.5KB/$50 = .25KB shares ABC and .75KB shares XYZ
MF (post addition) = .5KB shares ABC and 2.5KB shares XYZ
Lucky Louie = .25 KB shares ABC and .75KB shares XYZ
Next day:
SMA = .25KB ABC @50= 12.5KB + .75KB XYZ @ 100= 75KB = $87.5KB
MF we already know has an NAV of 91.67KB (which we know is better than 87.5KB)
LL's beans = 12.5KB + 75KB...OH Louie! If only you had bought the fund!
Sorry Starka, looks like Alan Blake knew more about this stuff than you do. Now about what's best for your clients, shall I pm you my info so you can start the transfers?
Mr. A

mranonymous2u's picture
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SHOOT, it was ALLReit not STARKA.
ALL APOLOGIES TO STARKA!
Allreit, "jou got a lotta 'splainin' to do!"
Mr. A

mranonymous2u's picture
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I whacked Louie, sorry.
Louie's portfolio would have been .5KB ABC at $50 and 1.5KB XYZ @ $50
LL's Beans= .5KB @ 50= 25KB + 1.5KB XYZ@ $100 = 150KB + 25KB =$175KB.
A Kabillion here a Kabillion there, next thing you know you're talking about imaginary real money!
Mr. A

AllREIT's picture
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mranonymous2u wrote:SHOOT, it was ALLReit not STARKA.
ALL APOLOGIES TO STARKA!
Allreit, "jou got a lotta 'splainin' to do!"
Mr. A

Here's the situation I'm talking about. BTW I'm sorry if I came across bad, I was a bit pissy that evening.

My point was that slippage between the SMA's and the underlying funds
happens because the MF portfolio compostion changes as a result of
inflows and the SMA is not rebalanced to match the new portfolio in
real time. Because the portfolios are not the same, performance is
different.

The key issue is that SMA's must have the same percentage composition
as the underlying fund, if fund inflows cause the fund portfolio to
change the SMA's must track that.

Any difference betwen SMA and fund performance (pre-fee's) is the sole
responsibilty of the portfolio manager, and claiming that its an issue
of dynamic vs static money is blowing smoke. It is evading responsibility.

Having seen both sides of this, the fund manager knows that SMA's are
sticky money and so he isn't really as concerend with their performance
as the fund shares. Doing the trades to rebalance SMA's is
timeconsuming and runs up trading costs. Doing group trades results in
issues with large block orders.

mranonymous2u's picture
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I thought this this was disproved with scenario three.
Even IF the Portfolio Manager rearranges the deck chairs, he's doing it with depreciated assets therefore, all other thing being equal he'll underperform the fund (at least in the short term).
That puts the lie to this as a blanket statement: "That notwithstanding, for a client to pay 5 3/4% up front, then ongoing fees of say 150 or so bps clearly shows that the client would NEVER catch up to a wrap account charging, say, 125 bps."
As to the tone. No 'blem, mon!
"Having seen both sides of this, the fund manager knows that SMA's are sticky money and so he isn't really as concerend with their performance as the fund shares."
That's like the waitress coming back to your table and saying "I'm so sorry, they burned the french fries. So to make up for it I brought you EXTRA!" Your reward for sticking with a manager is that he is less concerned with your performance? "Splain to me some more why I would want to do this? (a rhetorical request, please don't go off into the routine, I've been hearing it since Shearson bought Hutton and about Barry Berlind even before. 11kabilliondythird time is not likely to be the charm!)
Managed money is like the middle lane on the highway. Investors like to think that if they just stay there the don't have to actually drive. If you are the driver of your client's assets, you shouldn't be clogging up the highway by trying to get the furthest with the least amount of work either.
Mr. A

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