Bye Bye 12b1 fees ED Jones

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vbrainy's picture
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Joined: 2006-07-26

What in the world will you guys do when the SEC gets rid of your
12-b-1 fees?  Starting every year from square one has got to hurt.
 

gad12's picture
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Joined: 2006-12-06

You think that will really happen?

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

Jones isn't the only firm that would feel it IF 12-b-1 fees go away.  The name of the fee might change, but I don't believe that they will go away completely.  It is an interesting discussion the SEC is having though.
 

GolFA's picture
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Joined: 2007-06-19

Can't see how the SEC would screw the smaller investor by doing away with them. How many of us really use our big clients to " subsidize our small clients " , and do some social work. 12b1s just help pay for servicing small clients. This elitist liberal Spitzer stuff will swing the other way. Spurred by Hillary jacking taxes, folks will demand a lighter federal hand and choice.

aldo63's picture
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Joined: 2006-09-11

we all will be hurt by this. that is why i am a big first trust,Van kampen and claymore uit producer. just trying to stay ahead of the ball of s**t

Maxstud's picture
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Joined: 2005-12-29

vbrainy wrote:What in the world will you guys do when the SEC gets rid of your
12-b-1 fees?  Starting every year from square one has got to hurt.
 Adjust to the new reality and take care of business.  If it happens.  Isn't it really the B and C share fees they are most concerned about?

gad12's picture
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Joined: 2006-12-06

Maxstud wrote: vbrainy wrote:
What in the world will you guys do when the SEC gets rid of your
12-b-1 fees?  Starting every year from square one has got to hurt.
 
Adjust to the new reality and take care of business.  If it happens.  Isn't it really the B and C share fees they are most concerned about?
 
Interesting point on the B shares.  That should hurt the MF since they already paid the advisor.  Correct?

Broker24's picture
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Joined: 2006-10-12

The big concern is disclosure, not the charging of fees, per se.  The fees will not go away.  Commissions on MFD's have gone down so much over the years, before long there will BE NO commissions.  That just isn't going to happen.  You can't up-end an entire industry.  That will screw the little investors (who wants to pay wrap fees for their little $20K rollover??).  They will allow them, but will likely need to be disclosed on customer statements as a fee of some sort (outside of the performance of the fund).

AllREIT's picture
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Joined: 2006-12-16

Broker24 wrote:The big concern is disclosure, not the charging of
fees, per se.  The fees will not go away.  Commissions on
MFD's have gone down so much over the years, before long there will BE
NO commissions.  That just isn't going to happen.  You can't
up-end an entire industry.  That will screw the little investors
(who wants to pay wrap fees for their little $20K rollover??). 
They will allow them, but will likely need to be disclosed on customer
statements as a fee of some sort (outside of the performance of the
fund).

Yes you can upend an entire industry. Most likely we will see a cap on 12b-1 fee's to 25bp, what would be very cool is a ban on revenue sharing.

Of course that would kill the payout to EDJ GP's by 70%.

Greenbacks's picture
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Joined: 2004-12-21

Banning sub/TA fees
Can you imagine what that would do not only to discount brokers
But it would also have a huge effect on the wires house payouts.
Also LPL and other indies bottom line!
Interesting thought! 

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

The fund families would just figure out another way to make themselves financially important to the firms they want to work with.  Not just with Jones, but with everyone else that does revenue sharing. 
We'd also quickly launch the fee based accounts they've been talking about.  The GP payout might miss a beat, but it wouldn't be a long beat.  And I wouldn't be starting at $0 every month anymore.  

ezmoney's picture
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Joined: 2004-11-30

12b1's aren't going anywhere.

Edward Pwns's picture
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Joined: 2007-05-23

What's all this nonsense about the little guy getting hurt if 12B-1 fees go
away? Like you give a shisa about the little guy. Trails are gravy, and you
don't want your gravy to go away.

I really hope you don't actually believe the PR put out by the mutual fund
industry.

vbrainy's picture
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Joined: 2006-07-26

aldo63 wrote:we all will be hurt by this. that is why i am a big first trust,Van kampen and claymore uit producer. just trying to stay ahead of the ball of s**t
LOVE UITs myself

GolFA's picture
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Joined: 2007-06-19

Edward Pwns wrote:What's all this nonsense about the little guy getting hurt if 12B-1 fees go away? Like you give a shisa about the little guy. Trails are gravy, and you don't want your gravy to go away. I really hope you don't actually believe the PR put out by the mutual fund industry.
What are you talking about? C shares can be cheaper than A shares at 1% wrap. Maybe you don't give a shisa about the little guy - my point was, some little guys come to me and I help them because I am a nice person and do care.
If you think the way this industry offers to charge clients is just PR, I question whether you really have a diversified book and can relate to reality.

vbrainy's picture
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Joined: 2006-07-26

GolFA wrote:
Edward Pwns wrote:What's all this nonsense about the little guy getting hurt if 12B-1 fees go away? Like you give a shisa about the little guy. Trails are gravy, and you don't want your gravy to go away. I really hope you don't actually believe the PR put out by the mutual fund industry.
What are you talking about? C shares can be cheaper than A shares at 1% wrap. Maybe you don't give a shisa about the little guy - my point was, some little guys come to me and I help them because I am a nice person and do care.
If you think the way this industry offers to charge clients is just PR, I question whether you really have a diversified book and can relate to reality.

How long have you been in the business.  How nice that you care for the little guy.  Most little guys (under$50,000) are better served by staying in their 401k program or trading on line.
You need $30,000,000 to survive in this business.  That is 300 clients.  You can't really take good care or many more people than that.  Oh, unless you just charge the upfront comission and run.
Financial Advisors cannot help everyone who they come by, and they should not.  Spend time on people who value your business and will pay for your time and expertise.

GolFA's picture
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Joined: 2007-06-19

Well I run more than 30m but I have less than 300 clients. Biggest is 5m + and smallest is a few K. I don't think there are many meaningful hard and fast rules, you get to build it as you see fit. Of course I care about the little guy, I work by referral only. Sweet spot is around 300k. It seems to work okay for me, I am the product, not my affiliates or particular ideas or investment vehicles. I am sure you can relate, anyway.

scrim67's picture
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Joined: 2005-04-28

GolFA wrote:Well I run more than 30m but I have less than 300 clients. Biggest is 5m + and smallest is a few K. I don't think there are many meaningful hard and fast rules, you get to build it as you see fit. Of course I care about the little guy, I work by referral only. Sweet spot is around 300k. It seems to work okay for me, I am the product, not my affiliates or particular ideas or investment vehicles. I am sure you can relate, anyway.
I guess one of the few downsides of working in a bank program is average account size.   Out of my 450 households only around 10 have more than 300k with me.    My average account is about 50k.     I would imagine over time this average account size will rise.   Since I only cover one branch I really need to focus more on bringing in assets outside of the bank since I've "cherry picked"  most of the low hanging fruit here already.     I have around 25M  under management and hopefully will reach 30M around the end of the year.   Hopefully then I will feel like I can "survive".
Scrim

GolFA's picture
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Joined: 2007-06-19

Interesting, Scrim. Vbrainy brings up a good point about economy of scale, and I would think an "average" of 250k would be " necessary". But I was just looking at my net net payout, it is about 38% of AUM after everything ( solo independent office, help, ticket charges, E & O, entertainmnet, my car, phones - everything). And, I keep a lot of money in low key stuff like CDs, and the wrap accounts are at 1% under 1m and lower over 1m.
Wow, didn't know my payout was only 38%. But I don't have to wear a suit, and work about thirty hours a week, close to home - still - maybe your bank situation is not that bad, even with smaller accounts, if they would pay for some staff to provide some service, maybe you could get more referrals from your bigger accounts if you could spend time golfing with them.
Believe it or not, Bond Guy's marketing appeals to me - I'm wondering if anyone ever goes from independent back to wire house, just for the support, I guess the payout would be at least 38% net net? What is the bank payout net net? ( Don't think I could do a bank at this point!) But for raw cold calling power, check out that Bond GUy stuff on the cold calling section.

ezmoney's picture
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Joined: 2004-11-30

I don't think you're too bright.

GolFA's picture
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Well I guess you are pretty clever, then, not to mention articulate.
Seriously, it takes a hard-headed business person to evaluate all of the options, Fact is, I'm a damn good cold caller and haven't done it for about ten years. Wire house support could free me up and make me more productive and make my life simple. But then, you don't really know much about me, anyway.

ezmoney's picture
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Maybe I was too tough on you, however what you say doesn't make sense. I'm a solo indy, and I can assure you that I after expenses I'm making about 70% net. Where in the world are you coming up with 38%?? 
I don't do volume business, therefore I don't need to waste money on an assistant. I answer my own phone and I do my own paperwork. I will continue it this way north of 500 gross/year.
I would never dream of going back to a wire for more support, much less anything else. WAKE UP MAN!!

gad12's picture
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vbrainy wrote:GolFA wrote:
Edward Pwns wrote:What's all this nonsense about the little guy getting hurt if 12B-1 fees go away? Like you give a shisa about the little guy. Trails are gravy, and you don't want your gravy to go away. I really hope you don't actually believe the PR put out by the mutual fund industry.
What are you talking about? C shares can be cheaper than A shares at 1% wrap. Maybe you don't give a shisa about the little guy - my point was, some little guys come to me and I help them because I am a nice person and do care.
If you think the way this industry offers to charge clients is just PR, I question whether you really have a diversified book and can relate to reality.

  Most little guys (under$50,000) are better served by staying in their 401k program or trading on line.
 

Most little guys MAY be better in a assett alocation fund, but trading online?  Do you really believe you can't bring one percent of value to the AVERGAGE little guy?  Profitably no, but if you are a "nice person"? Statistics say avg individual investor realizes 3-4%.  Gotta e able to beat that after fees.

troll's picture
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Joined: 2004-11-29

ezmoney wrote:Maybe I was too tough on you, however what you say doesn't make sense. I'm a solo indy, and I can assure you that I after expenses I'm making about 70% net. Where in the world are you coming up with 38%?? 
I don't do volume business, therefore I don't need to waste money on an assistant. I answer my own phone and I do my own paperwork. I will continue it this way north of 500 gross/year.
I would never dream of going back to a wire for more support, much less anything else. WAKE UP MAN!!Do you mind if I ask what kind of business you focus on that you feel will allow you do hit those kind of numbers as an indy without any help?

GolFA's picture
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Joined: 2007-06-19

Alright, I recalculated and my payout on AUM is something like 44%, that's bottom line schedule C divided by AUM.  My wrap accounts are at 1%, have lots of C shares and certificates. And total GDC is about 275k 12 month trailing.
My Indy is not top paying, and I have a solo office, very comfortable with some part time help.
I'm just saying, if you are kind of laid back with the fees and money turnover, the payout ain't that hot. Payout on GDC is interesting, but ROI on AUM seems to just get hosed in any b/d scenario, so why not let them pay fixed costs and focus on asset gathering.
Part of me says, just move to Merrill and focus on cold calling, and the other part says screw the whole broker dealer thing completely. Or do nothing, just go play golf, probably not a bad idea.

GolFA's picture
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Joined: 2007-06-19

 make that, four point four tenths of one percent per year of AUM.

GolFA's picture
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One more comment, I net four point four tenths on one percent AUM and some guy is going around whining about 12b1 fees. And the common man needs help, needs me to take the stress of equity investing in good times and in bad, absorb the discomfort of making him take action today for tomorrow. Go figure.

Indyone's picture
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Joined: 2005-05-30

I see now...you're phrasing things differently that we're accustomed to.  I'm pretty close to you...right at 275K pace this year, 36 million in assets, net about 68% of my gross, so if I run the calculation like you are, it looks like this...
275K/36 mil AUM = velocity of about 76 bps
.7639 X 68% net = 52 bps net on my book compared to your 44 bps
so, your AUM is a little higher than mine, but my velocity being slightly higher evens things out.
...and EZ...I'm using a part-time assistant now...once I get to 50 million AUM, I'm hiring another licensed assistant...I'd rather have a little help than all the money.  Even with 1.5 assistants. I'm still figuring on personally netting well over 200K per year...I can live on that.

GolFA's picture
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Indy, nice to see the comparision, thanks.
I guess when you look at the net net, and recurring revenues, one thing you could say, life is good. The opportunity cost of switching indies appears limited, versus starting your own RIA firm or something. Still not sure about the exposure of going RIA, the only two solo RIAs I know may be slightly crazed ( probably just a coincidence).
EZ, I think most of us find that having an assistant takes us to the next level - mentally, if nothing else. No man is an island.
 

FL Broker's picture
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aldo63 wrote:we all will be hurt by this. that is why i am a big first trust,Van kampen and claymore uit producer. just trying to stay ahead of the ball of s**t
 
Indeed!  Gotta love UITs -- those ugly red-headed stepchildren of the investment world!  I do and my clients certainly do as well.  Great point, Aldo!

ezmoney's picture
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Joined: 2004-11-30

About 35% is managed money, 40% VA and the balance is stocks/bonds and mutual funds. Using the lpl platform, I really don't see how one can justify an assistant until north of 500k. Again we (indies) for the most part are not doing a volume business.
Can you really justify an assistant grossing 300k? I have plenty of hours in the day to prospect, meet clients, and run my business.
When I do hire an assistant it will be my wife(cheap labor) She is also part of my sucession plan. She will get licensed so if anything happens to me she can take over the business which currently pays reccurring income of approx. 120k net. on 16 mill aum.

GolFA's picture
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You're doing fine, sounds like a nice plan for  you. Don't forget, as your money grows, your fixed costs diminish as a percentage of gross and every new dollar is profit. Spending a little on labor can mean a huge increase in your own quality of life. Clients like it too - a lot of good comes from having that " third party" sounding board in your practice. I have been fortunate to have a stable, caring assistant work for years at about 16 hours per week, four - four hour days. My wife tried it, she hated the paperwork, overexposure to me, and relatively low wages. A smart person without a college degree can work really well for the role.

bspears's picture
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Joined: 2006-11-08

I just went Indy a few months back and  have a full time assistant in my office. With the transfers, she is obviously great help, but as I become more in tune to processes within the LPL system, I see a less need for her here fulltime.  I recently asked her to make a list of what she feels she is responsible for here in our office.  She made the statement about being able to do everything in about 2hrs per day so I'm hoping to put her on a 4hr, 5 day schedule very soon. So, basically I'm glad to hear other opinions on this, especially GolFA.  It makes me feel better about reducing her hours.  I love the LPL system, and how in control of the situation I have become. 

GolFA's picture
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That's great. As far as an assistant, the consistency factor - working part time, being positive, motivated, high energy - plus the specialization and experience factor, means for us ( me and my wife as non participating co-owner) paying a better hourly wage, and now I am paying a quarterly bonus, based on new clients aquired through referral from client-bring-a-friend appreciation events (golf lesson lunches and lunches for non golfers). Bonus is also based on achievement of things like mastery of Morningstar Workstation " planning" tools, pulling together Allbridge reports for client reviews, making the files look nice for wrap account compliance reviews - and basically managing all of compliance.
The return you get from a great assistant ( even unlicensed) is bigger than a buck. And of course, reinvesting in the business compliments taking money out that gets taxed at 40%, or whatever. The key is to try to get the right person and align interests, just what we try to do with our clients I guess.

rightway's picture
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vbrainy wrote:What in the world will you guys do when the SEC gets rid of your
12-b-1 fees?  Starting every year from square one has got to hurt.
 

Why even subject yourself to that risk?  Just use money managers
with a visible fee.  You get the same or better results for the
client, make more money for yourself, and enjoy complete transparent
fee structure.  I just don't get the whole weak C share
thing.  A shares are different I guess but why work for 25 bp's
and subject yourself to scruitiny when you decide to get get
paid.  It is black and whit to me, a decision I made years ago,
and AM I GLAD I DID!!

GolFA's picture
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C shares are just another choice among many for the client. Wrap accounts are more complicated, have minimums and the b/d gets paid more than the broker and can be more expensive to the client. On smaller accounts, there are numerous features - advantages -benefits to be consider. Not just black and white, unlike reality.

troll's picture
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GolFA wrote:C shares are just another choice among many for the client. Wrap accounts are more complicated, have minimums and the b/d gets paid more than the broker and can be more expensive to the client. On smaller accounts, there are numerous features - advantages -benefits to be consider. Not just black and white, unlike reality. Exactly HOW does the b/d get paid more on wrap accounts?  Educate me please....

GolFA's picture
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C shares pay 1% GDC to b/d, b/d takes regular haircut, rep gets regular " payout ".
Wrap account at 1%, b/d takes regular haircut, minus " admin fees", and the net is lower than C shares. At least, that's how it works in my situation.

troll's picture
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GolFA wrote:C shares pay 1% GDC to b/d, b/d takes regular haircut, rep gets regular " payout ".
Wrap account at 1%, b/d takes regular haircut, minus " admin fees", and the net is lower than C shares. At least, that's how it works in my situation.There is retention at my firm as well.Maybe you aren't charging sufficiently high fees?

FreeLunch's picture
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Joined: 2007-06-16

Charge 1.5%

The Judge's picture
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Something that rookies or those in the business less than 6 years might want to keep in mind: we are going on 5 years now of an excellent market. Clients (should) be doing well and seeing their monthly statement increasing on a regular basis. Fees are not quite as much of an issue in times like these.
This changes dramatically when you go through an extended downturn (i.e 200--2002). The quarterly fees they see on their statement are basically adding insult to injury and many clients' will be very unhappy about it.  You will tell them that you (too) are taking a cut in pay due to the decrease in value; you are still keeping in touch and reminding them that while the market is down, they haven't lost "as much" as a comparative index; you'll try and keep them from selling out because it's not the long-term plan and (oh by the way) that will eliminate the fees they are paying you. Yes, I'm speaking from experience.
I'm not bashing fee-based accounts (I utilize them often) and not implying that mutual funds' (C share in particular) will be immune from a down market (i.e. unhappy clients).  But I will say that during the 2000-2002 period I saw the managed money focused advisors significantly affected, though not quite as much as the transactional (trading stocks) brokers.  I saw advisors whose business was geared around conservative/diversified funds fare much better, with a lot less angst from clients.  And no individual stocks blowing up on them.
As always, the key is to just keep bringing it in.  New accounts, new assets.

rightway's picture
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GolFA wrote:C shares are just another choice among many for the
client. Wrap accounts are more complicated, have minimums and the b/d
gets paid more than the broker and can be more expensive to the client.
On smaller accounts, there are numerous features - advantages -benefits
to be consider. Not just black and white, unlike reality.

If this is the way it is at your firm I feel for you.  The true
costs of C shares are often above 3% (include trading).  You get
1% pre-pay-out.  I run managed accounts where I am the portfolio
manager and charge 1.0% to 2.0% (depending on size)- that is what the
client gets charged and that is what I get (pre-pay-out).  I stick
it with a money manager the client gets charges 1.7% to 2.3% and I get
68% of that pre-pay-out.  All around better for the client and
better for me.

If the household is too small to qualify for a managed account I do not
open it.  If it a large Household with just a small account I use
a mutual fund wrap with visible fee's (I can aggregate the fee's based
on their other assets). 

It seems like people find a way to NOT show fee's...to the extent of
really picking on managed accounts and I just don't get it.  I
very rarely get a complaint about the fee's, even in the tough
markets. 

GolFA's picture
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Joined: 2007-06-19

From my point of view, I like to keep my book very simple and competitive to clients, " bullet proof " in terms of value delivered versus cost to client and so on.
Let's use a real example, Rightway. I use ETFs, individual stocks, but mainly funds, and I use wrap, A shares, C shares, whatever. Flexibility is good and a primary benefit of broker dealer affiliation.
Oppenheimer Main Street Opp class A has an expense ratio of about 1.08%, and the class C is about 1.83%. By the way, how do you get 3%, I pay the trading fee and client pays 1.83% per year.
Class A in wrap at 1% with no load costs client about 2%, class C is cheaper. I get part of the trails at wrap, so maybe I get paid the same on wrap or C shares.
Point is, at C shares, client pays less and I get paid about the same.
As for raising my wrap fee to 1.5%, if I am the client, and as was pointed out in a down market, I'm paying about 2.5% instead of about 2% or 1.83%.
Rightway, I don't get your logic. I think I get about 68% on wrap, net.
" It seems like people find a way to NOT show fee's...to the extent of really picking on managed accounts and I just don't get it.  I very rarely get a complaint about the fee's, even in the tough markets. "
Maybe I am taking your comment wrong, but it feels a little aggressive, given the facts.
 
 

GolFA's picture
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The Judge wrote:
Something that rookies or those in the business less than 6 years might want to keep in mind: we are going on 5 years now of an excellent market. Clients (should) be doing well and seeing their monthly statement increasing on a regular basis. Fees are not quite as much of an issue in times like these.
This changes dramatically when you go through an extended downturn (i.e 200--2002). The quarterly fees they see on their statement are basically adding insult to injury and many clients' will be very unhappy about it.  You will tell them that you (too) are taking a cut in pay due to the decrease in value; you are still keeping in touch and reminding them that while the market is down, they haven't lost "as much" as a comparative index; you'll try and keep them from selling out because it's not the long-term plan and (oh by the way) that will eliminate the fees they are paying you. Yes, I'm speaking from experience.
I'm not bashing fee-based accounts (I utilize them often) and not implying that mutual funds' (C share in particular) will be immune from a down market (i.e. unhappy clients).  But I will say that during the 2000-2002 period I saw the managed money focused advisors significantly affected, though not quite as much as the transactional (trading stocks) brokers.  I saw advisors whose business was geared around conservative/diversified funds fare much better, with a lot less angst from clients.  And no individual stocks blowing up on them.
As always, the key is to just keep bringing it in.  New accounts, new assets.

Well said, Judge. Asset allocation and diversification are our buddies. But these alone do not a good advisor make. As far as portfolio management (at the asset allocation level), I hope most of us have suspended the Nick Murray " stocks are the only thing that is gonna getcha there" pitch for something like, " our nearer term expectations for the market are more most now, given the great run we have had for about six years, we need plenty of bonds and dividend paying stocks to help protect what we have gained, and  help get some return, no matter what happens over the next couple of years in this economy."

rightway's picture
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GolFA wrote:Oppenheimer Main Street Opp class A has an expense
ratio of about 1.08%, and the class C is about 1.83%. By the way, how
do you get 3%, I pay the trading fee and client pays 1.83% per year.

Oppenheimer Main Street Funds, Inc: Oppenheimer Main Street Fund; Class C Shares

2.88%

The trading costs in the fund, not yours.  Here is your C share
fund...g above...almost 3%.  Get a subscription to
Pesonalfund.com.  Your not "bulletproof"...none of us are.

GolFA's picture
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Joined: 2007-06-19

It still comes down to index relative performance. There are plenty of good C share class funds that can keep up with the indexes, so the client gets to have an advisor. The bigger the account, the more the options in terms of ETFs, individual securities, diversified investment classes.
It sounds like you have a competitive arrangement, thanks for the perspective.

blarmston's picture
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I will second Rightway's suggestion to get a subscription to personalfund.com
When you take a look at some of the internal, hidden trading costs of some of these funds oyu can see that these fees can double or TRIPLE the disclosed management fees...
I have seen some funds have trading costs of well over 3-4%, PLUS the disclosed 12B-1 and internal management fees. When presented to a client, it does make the SMA/ Managed Money argument that much more relevant.
Truth is, clients dont know about these costs, and most FA's dont either...

badmove?'s picture
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Joined: 2006-06-10

If the NET return is still greater than the benchmark, what is the issue?

GolFA's picture
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Yeah, blarm, it seems that personal fund trading cost data is just another way of explaining why a lot of managed funds drop below their index or style peers. Who cares about gross trading costs, anyway? It seems a mix of managed and passive funds is " nice ",  especially for small cap, international and so on. If the managers can create value and carve out their fees, so be it. Selling the trading fee story, per se or in isolation, seems disingenuous.

blarmston's picture
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If the NET return is still greater than the benchmark, what is the issue?
I would agree with you. That's why I use Columbia Marsico 21st or Cohen and Steers International Realty, for example. They are expensive internally but at the end of the day they beat their benchmark and peer group.
I made mention of the website because in reality most FA's arent aware of those costs....

AllREIT's picture
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Joined: 2006-12-16

GolFA wrote:Yeah, blarm, it seems that personal fund trading cost
data is just another way of explaining why a lot of managed funds drop
below their index or style peers.

It's very simple, look at the funds turnover, and ask yourself if that is consistent with a long term investment philosophy.

Constantly passing money back and forth across the bid/ask spread deli slicer wears it down pretty thin.

This is yet another reason why index funds are better than active mutual funds. Very little internal trading costs.

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