Fee vs Transaction Based

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Butkus's picture
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Joined: 2005-11-10

I'm interested in learning more on the rationale for fee-based business, and more specifically 'wrap accounts'. If a client had $300k IRA money and  a transaction based rep put him in American Funds, Franklin and Van Kampen at $100k each (say, AMCAP, New Perspective, Fundamental Investors, American Mutual, Mutual Qualified, Mutual European, Franklin Small Cap Value, Franklin Strategic Income, Franklin Income, Templeton Foreign, Van Kampen MidCap Growth, and the 3 Van Kampen Growth & Income funds), how would a 1.25% annual wrap fee be better for the client? Let's assume he's 60 in good health and taking a 5% distribution. The load-adjusted return on the above portfolio after 20 years would be about 20bp below nav. They are all team managed and pretty consistently favorable on returns and beta, plus the families offer other good choices without incurring additional sales charges. Some data supporting the fee based approach would be useful to me.

scrim67's picture
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Joined: 2005-04-28

in my wrap program my client also gets:


  • quarterly rebalancing

  • the advisory aboard has the ability to tweak asset allocation models based on a variety of factors

  • newsletters

  • cost reporting statement

  • quarterly performance reports

  • access to quite a few leading mutual fund famililes approved thru due diligence by our adv board

and most importantly myself as their financial quarterback.    Is that worth an extra 1-1.5% annually as opposed to doing it themselves? 
scrim
 

Indyone's picture
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Joined: 2005-05-31

Besides the things mentioned by Scrim, it's not hard to put a hypo together using funds from several (more than three) fund families and show better performance (even with the wrap fee), better asset class representation and less overlap.
Plus, when I need to swap a fund out, there's no load charged.  If you want to ride that fund list without changes for the next twenty years, it's your choice, but if I were your clients, if that's all I was getting, I'd research some good no-loads and skip you altogether.

Philo Kvetch's picture
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Joined: 2005-05-17

Butkus, have you looked at the amount of overlap in the funds that you've mentioned?  I'd hesitate to call what you suggest a properly diversified portfolio.

iconsult100's picture
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Joined: 2005-09-07

I have a tough time asking someone to pay a load upfront.  I do solely managed money and mutual fund wrap. 
Although the fund families you mentioned are good now, they may not always be.  A wrap program allows you to be flexible without additional costs to the client.  It also puts you on the same side of the table with that client.
Ask yourself this... if you put 300k into those funds and get your upfront money, are you still going to rebalance the portfolio and meet with that client regularly 4 years from now, when that client is generating no revenue for you?  I doubt it.  And if you do, you'll be in sales mode to generate more revenue.
I firmly believe in "pay as you go."

Dirk Diggler's picture
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Joined: 2005-12-30

I love variable annuities. You get a nice upfront commission, with the ability to automatically rebalance and exchange fund families, without a load, and you don't have to injure the client with an extra 1.5% fee, in perpetuity, to do it.

mrad's picture
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Joined: 2005-01-07

No, depending on the variable annuity, you get to "injure the client" with a fee much more in the ballpark of 1.75 to 2 depending on the riders you choose. 

Philo Kvetch's picture
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Joined: 2005-05-17

mrad wrote:No, depending on the variable annuity, you get to "injure the client" with a fee much more in the ballpark of 1.75 to 2 depending on the riders you choose. 
With all due respect mrad, you should look at some other, better, annuity contracts. 

csmelnix's picture
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Joined: 2005-06-01

Also,
With fee based accounts, you don't limit yourself and your client to mutual funds to solve all the issues.  There are a lot more investment vehicles out there than the Preferred 8 that provide much more for clients.  One of the best points raised I agree whole heartedly with is that you as the advisor take on the consultant role providing much greater reporting and analysis with the client.  When you slam them into the cookie cutter portfolio you describe and subscribe to, you trade it and forget it.  When that's the only value added you bring to the table then you right, A share is all the works and you should only get that measly .25bps for pay (minus 60%).

csmelnix's picture
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Joined: 2005-06-01

I should have said - " When that's the only value added you bring to the table then YOUR right, A SHARES are all THAT works and you should only get the measly 25bps for pay (minus 60%)."

peacock's picture
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Joined: 2004-12-09

Fee Based advisory account-
Create the appropriate allocation (growth, growth and income, and aggressive growth is not asset allocation) and select the very best fund in each asset class.  NO BIASED APPROACH.  Very simple to us, but extremely difficult to the client.  2 of the "gowth and income" funds from Van Kampen are the same fund, only one holds bonds. Anyone from Jones just doesn't understand the fee based method, you're brainwashed not to.   

Philo Kvetch's picture
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csmelnix wrote:I should have said - " When that's the only value added you bring to the table then YOUR right, A SHARES are all THAT works and you should only get the measly 25bps for pay (minus 60%)."
No, what you should have said is "YOU'RE".  Its a contraction of "you are".

csmelnix's picture
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Joined: 2005-06-01

You're; I'm sorry may be I am stupid?

dude's picture
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I have a fairly contraversial attitude towards this question of fee v.s. commission.  before I give my 2 cents I'll say upfront that I have done mostly fee based mutual fund and SMA wrap invesments.
I am beginning to believe that charging a fee (in the range of 1 to 1.5% or more) is only appropriate where an advisor is taking an active, personal role in the management of the portfolio or financial affairs of the client (outside of just hiring and firing money managers or "automated" bill pay systems, reviews, basic finacial planning etc...).  Whether that means they are using a tactical approach to weighting the portfolio asset classes, picking individual securities or handling "value added" services akin to family office type activities.
There are several foundations I base this perspective on: 
1)  We should be paid for the value we add (which I understand can be somewhat subjective)
2)  Adding value is a result of expertise applied and services rendered
3)  If the clients had a clear understanding of what we do behind the scenes (which they don't), What would their perceptions of "fair value" be?
My experience with most wrap programs is that they are a plug 'n play product with similar amounts of expected work as an A share mutual fund.  Yet we end up getting paid more (over time), for essentially sitting on the assets, oh sure we send out birthday cards and take the customer's out for dinner, call them to talk with them about their kids and "update their financial plans"
Of all the professionals out there (attorneys, cpa's, doctors) that we are trying to identify our profession with, not one gets paid like we do for the amount of work we do (not considering the marketing aspect of our work which can be vicious). 
My stand is that if you are a securities "salesperson" (which most people selling fee based products and financial planning are) than you should be paid like a salesperson.  If you are a money manager (clear definion being: taking an active day to day role in the investment of your clients $$) You should be paid like a money manager.  If you are a true blue wholistic wealth manager (not just by title or marketing gimmick) then you should be paid like a wholistic wealth manager.
When management consultants get hired to solve a problem for a company (which I think is comparable to solving financial problems fo r clients) they get paid a one time fee.  If they have to revisit the company multiple times to track progress and oversee results, they get paid a fee for the work done, not an ongoing % (other than maybe a retainer which is different than a % fee) based on the value of the company. 
My contention is that a huge majority of the people in our business like to imagine themselves as something they truly are not and put up a convincing image to the public (it's what Wall Street is famous for).  This is why there is so much legislation dealing with our industry.
Do I have a perfect solution, no.  Do I think it's of value to have a candid and open discussion on the issues and alternatives, yes.

Cowboy93's picture
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Joined: 2005-05-10

dude, I understand your thoughts.  I have "sold" both concepts in my few years doing this...and relatively well (I think...).  If I was a client, I'd feel that the way in which I compensated a person was far less important than the total long term cost, and what I got for my $.  You are right that many less-than-wonderfully qualified people want to make lots of $ for dumping people into an allocation model (theirs or someone else's) and not much else.
When looking the pros and cons, I think I personally would pick a fee-based approach to hedge my bets with the advisor--what if he/she gets run over, retires, decides to become a buddhist monk, etc. before I've gotten my service out of that upfront chunk?  And maybe as importantly, I know that people pay attention when I'm paying them, so I might prefer to pay them a little each year, which adds up to more over time, to ensure they keep paying attention.  Plus all the benefits already stated about manager selection, etc.
I think the fee-only folks will continue to gain market share--I can't imagine paying A share loads if I could pay someone a flat fee to develop an allocation and go buy the funds no-load for close to $0 at Schwab or wherever.  I agree with you--if you set and forget (or don't "add value"), an hourly/flat fee approach will bury the fee-based guy.  I've somewhat tried to use the myriad of client-confusing cost approaches to my advantage, just by explaining them.  Of course, that in itself confuses some, but at least they feel like I'm trying to tell them how the game is played and that I know what I'm talking about.  As for me, I vote for fee-based as it seems "cleaner" in the long term...as someone mentioned--now a 300k retired client is someone I need to really keep in touch with vs. a somewhat revenue-dead account.  Luckily, market forces will continue to evolve to tell which is "better."
One random thought--how come mutual funds get to always be "fee based"?  It doesn't cost twice as much to manage my $100,000 as my $50,000, so how come they take 2x out of the fund's assets?!

dude's picture
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Cowboy,
Your last comment strikes at the heart of my concerns.  It doesn't take any more work for me to manage $500k vs $100k, yet I get paid 4 to 5 times as much.  Am I getting paid for adding value, when I'm not really managing the money?  As far as the fee based model for money managers, I tend to think that their compensation being tied to the account value is a good thing, although a tiered system of declining fee as assets go up is probably most appropriate.  I think this (a tiered fee system) would be difficult (if not impossible) for a mutual fund to do.

Cowboy93's picture
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OK, I guess I was saying "me too" w/regard to funds/money mgrs--if they can charge it, then I can too.  We have a workable compromise--I can live with a tiered scale being "right", and most fee-based platforms do scale down, but usually at pretty large accounts it seems ($1m+).  I think the main problem with fee-based is not the concept, but the level of fees....paying 1.25% on top of mf seems crazy...I think 100bps should be the absolute top, but until people get educated enough to realize what they really pay, fees will still be higher than they "should" or could be.  Again, I say this is a way to differentiate--explain all the fees and then keep yours below market for protetction when they do get squeezed.  ETFs can help keep the total pretty reasonable.  NOW, go debate me on the training vs. product thread where I tried to stir you up as well...

scrim67's picture
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Joined: 2005-04-28

This whole issue is quite the slippery slope, no?
If I always found the least expensive route for my clients I would have to drop out of this profession.    I've asked this before, "What is a financial advisor worth?"   
In the long term our clients will be the ones to tell us if our services are worth it.
scrim

dude's picture
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As far as arguments that commission makes an advisors advice biased, I say B.S.
If a client of mine has A shares and wants to  buy property and asks my advise: No great harm to me since .25 bps is a relatively small hit to my income, if it makes sense I tell him to do it.
Now, if I'm fee based, I'm much more BIASED to advising the client to keep his $$$ with me.
I'm not saying that fee based is a bad model.  Just the way it has been marketed and implemented.  The vast majority of fee based Wrap programs I have seen are plug 'n play static (stragtegic is the marketing hype) allocations.  I also believe that the "manager oversight" that an advisor supposedly offers is another marketing gimmick that generallly offers little value. 
Here's what's really funny about the whole thing is that the science supporting ibbottson (and most allocation model approaches) is that the markets are efficient (markowitz's theory is based on the efficient market hypothosis), therefore indicating that it's impossible to add value through security selection.  In addition the Brinson and Associates study (92% of returns come from allocation 6% from security selection and 2% timing) is used to support this approach and yet the advisor puts forth that he/she is adding value through managing managers (a.k.a. "security selection") or tactical allocation (a.k.a. "market timing").  What gets me thinking is that one has to use conflicting and contradictory market attitudes to sell the product.
So in essence it seems that if one believes in the foundations that make up Modern Portfolio Theory, they are having two faces to say that they are adding value through security selection, or market timing (a.k.a manager selection, tacticall allocation).  If the science one uses supports the concepts of Efficient Market Hypothosis, how can you then use active managment (mutual funds, money managers etc..) to populate the asset classes without being hippocritical?  Also all of the "standard features" of wrap programs: auto rebalancing, performance reporting etc.... are usually "automatic" and done by the back office, is this really adding value?

bankrep1's picture
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Dude,
Fee based advice used to be primarily offered through independent registered investment advisors many of whom are classic indexer's MPT guys.  The bear market opened the wirehouses eyes that there is a more predictable level of growth, hence the move toward fee based accounts predictable revenue streams etc.
As far as active/passive ETF's and index funds don't offer revenue sharing or marketing support for seminars and the like.  You do the math... 

troll's picture
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dude wrote:
So in essence it seems that if one believes in the foundations that make up Modern Portfolio Theory, they are having two faces to say that they are adding value through security selection, or market timing (a.k.a manager selection, tacticall allocation).  If the science one uses supports the concepts of Efficient Market Hypothosis, how can you then use active managment (mutual funds, money managers etc..) to populate the asset classes without being hippocritical? 

This assumes that everyone buys MPT 100%, and that's simply not correct. There's a spectrum of adherence in the theory that makes it possible.
dude wrote:
Also all of the "standard features" of wrap programs: auto rebalancing, performance reporting etc.... are usually "automatic" and done by the back office, is this really adding value?

It is if it's your back office, or do you figure everything the firm does that the broker doesn't do personally should be free? 

troll's picture
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dude wrote:
My experience with most wrap programs is that they are a plug 'n play product with similar amounts of expected work as an A share mutual fund.  Yet we end up getting paid more (over time), for essentially sitting on the assets, ...

That's not even remotely true in my experience....

dude's picture
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Look,  I appreciate the subjective nature of this topic as well as the value that we offer our clients. 
My experience is based on being at a Morgan office w/ 40 plus brokers, being at a bank program and although not offering wrap accounts per se had many allocation funds that were a mirror image of the portfolio architect and fund solution (morgan stanley fund wrap accts) programs and AGE where we have what seems to be 10 different variations on the smae essential theme (static or tactical allocations, 8 to 10 asset classes, auto rebalancing, auto this, auto that, offered in SMA, ETF or Fund flavors).  Also add to that my various friends and contacts (in addition to former and current coworkers) who all LOVE the idea of getting paid to sit on the assets.  Maybe I'm way out of line here but it seems to me that there is some validity to my observations. 
I'm not necessarily making an impassioned argument for one side, just bringing up some of what I percieve to be some of the downfalls of a fee based approach.  Maybe this discussion will help shore up those cracks, maybe not.  Thanks for the civil and mature responses guys.
 

Dirk Diggler's picture
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Why are we even having this conversation? Didn't we all get in this business so we could do what we want to do and get paid however we want to get paid? Asset-based fees are not my cup of tea, but I don't give a crap if other people like to do that. If it's bad for people, the free market will shake it out.
I like getting paid up front commissions. It's MY preference. It's an option that is perfectly LEGAL and available to me. It is MY choice. It takes a lot of work to get an account. Why would I want to risk people leaving in a year or two after only making a couple of points? Frankly, I like commissions because clients tend to stay with me. They're not likely to get stolen by some piker who wants to charge them an annual fee.
If some people like earning annual fees, have at it. It's no more or less legal than what I do. Just don't friggin' criticize me for running MY business MY way.

dude's picture
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Why are we having any coversations at all Dirk?

dude's picture
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Maybe because this is a forum?  Maybe because there are issues that affect our industry?  Maybe because some of us have questions?  Maybe because some of us have answers?  Maybe some of us just like to come here and stroke our ego's?

dude's picture
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Cowboy said:
OK, I guess I was saying "me too" w/regard to funds/money mgrs--if they can charge it, then I can too.  We have a workable compromise--I can live with a tiered scale being "right", and most fee-based platforms do scale down, but usually at pretty large accounts it seems ($1m+).  I think the main problem with fee-based is not the concept, but the level of fees....paying 1.25% on top of mf seems crazy...I think 100bps should be the absolute top, but until people get educated enough to realize what they really pay, fees will still be higher than they "should" or could be.  Again, I say this is a way to differentiate--explain all the fees and then keep yours below market for protetction when they do get squeezed.  ETFs can help keep the total pretty reasonable.  NOW, go debate me on the training vs. product thread where I tried to stir you up as well...
Reply:
Damn, this post (as well as the one prior)is one of the most balanced attitudes I have heard on this subject.  I think you are right on target when it comes to this issue.  Thanks for the dialogue.

troll's picture
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dude wrote:
.....who all LOVE the idea of getting paid to sit on the assets. 

"Sitting on assets"? Is it really your experience that brokers open these accounts and never look back? Really? I've seen that with guys who hammer small accounts into B shares, but not with guys working with SMAs, much less brokers who work with real money, most all of which is run in this fashion.

troll's picture
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dude wrote:
I think the main problem with fee-based is not the concept, but the level of fees....paying 1.25% on top of mf seems crazy...

That's one of the reasons I don't like wrap fund programs. Now that fully balanced SMA programs can start $60k, I don't know why anyone uses them.
dude wrote:I think 100bps should be the absolute top,
You do have that authority, right?

iconsult100's picture
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Dirk Diggler wrote:
I love variable annuities. You get a nice upfront commission, with the ability to automatically rebalance and exchange fund families, without a load, and you don't have to injure the client with an extra 1.5% fee, in perpetuity, to do it.

And Mr. Client, the money I make you will be taxed as ordinary income instead of the low 15% capital gains tax.  And im going to charge you 2% or more for bells and whistles, but you have to die to collect them...  Sound Good? 
Who are you looking out for?  You or your client?  I think it's pretty obvious.

Dirk Diggler's picture
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iconsult100 wrote:Dirk Diggler wrote:
I love variable annuities. You get a nice upfront commission, with the ability to automatically rebalance and exchange fund families, without a load, and you don't have to injure the client with an extra 1.5% fee, in perpetuity, to do it.

And Mr. Client, the money I make you will be taxed as ordinary income instead of the low 15% capital gains tax.  And im going to charge you 2% or more for bells and whistles, but you have to die to collect them...  Sound Good? 
Who are you looking out for?  You or your client?  I think it's pretty obvious.

You know what, son? I'll bet that if your firm didn't haircut annuities, so you only get to share in 4% of the 7.5% GDC, paid at your miniscule rate, you'd sell annuities, too. If I sell a $100,000 annuity, I make $6,750. If you sell one, you only make $1600 at a 40% payout, and I'm probably being generous with the 40%.
If I were you, I'd hate me too.

Cowboy93's picture
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dude, thanks for the props...I've done a lot of thinking in the shower the last few years.  Usually I try to apply my general skepticism as a consumer against myself as an advisor--it makes my head hurt.  I think the key point is to develop a philosophy, stick to it, explain it to your clients without bashing the alternatives--more like "..but I like this way better because...", always thinking of the golden rule thing (now we use cool words like fiduciary instead).  My problem is I haven't completely settled which road to go down, and perhaps there is some benefit to have multiple approaches depending on the client's background.
Butlermunch--to answer your ? above--no jackass, what I meant was...."that's where I think the market will settle (100bps) over the many years I'll be doing this, so that's where I'm setting the ceiling in my business."  SMA=tricked up mutual fund in my opinion, for most people...who don't take the time and effort to customize and/or are dealing largely w/qualified money.  Some tax benefits, but that's only a great benefit vs. high turnover stuff...lower turnover funds can make a difference too.
But whatever floats your boat...the 100bps I'm referring to is for the piece where we pick managers and then occasionally rebalance, but do other planning, hand-holding, reviews, etc.  That goes for SMAs too, where I would guess MS's cut is 100bps, but of course I could be wrong.
The appeal of indexing to me is that it eliminates arguments like this....someone KNOWS they won't be #1 in their asset class, but at least they can be pretty confident they'll be close to the 75th percentile or so over a long period of time (in liquid, more "efficient" markets, eg large cap US, etc).  In a way it lowers risk--call it "underperformance risk."  Then you and I can go spend time do more personalized stuff for people.  All that said, I haven't used a lot of passive stuff yet.

troll's picture
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Cowboy93 wrote:
Butlermunch--to answer your ? above--no jackass, what I meant was...."that's where I think the market will settle (100bps) over the many years I'll be doing this, so that's where I'm setting the ceiling in my business." 

Is that directed at me? I don't understand it and I haven't spoken with you. Perhaps you meant someone else. When dude brought up 100 bps I asked him if he can't already do that. I know I can lower a mutual fund wrap to 1% if I care to, I wondered if he could.  BTW, I can't imagine the "market" of advisors working for 100 bps on small accounts. Hell, Vanguard gets 45 bps to clone an index, surely we deserve more for bringing a client to realize their financial goals.
Cowboy93 wrote:
SMA=tricked up mutual fund in my opinion, for most people...who don't take the time and effort to customize and/or are dealing largely w/qualified money.  Some tax benefits, but that's only a great benefit vs. high turnover stuff...lower turnover funds can make a difference too.

I couldn't disagree more. An SMA versus a mutual fund wrap eliminates an entire layer of fees, makes your holdings more visable, allows you to control cash levels (instead of holding mutual funds that each hold some indeterminate level of cash) and gets you out of the herd in the mutual fund that will be pulling out funds (and forcing the manager to liquidate) when they should be adding and avoids overlap. Additionally, you'll be able to know and define SMA managers far better than any fund.
Cowboy93 wrote:
But whatever floats your boat...the 100bps I'm referring to is for the piece where we pick managers and then occasionally rebalance, but do other planning, hand-holding, reviews, etc.  That goes for SMAs too, where I would guess MS's cut is 100bps, but of course I could be wrong.

You want 100 bps all in including the manager's fee? How is the due diligence, trading, custody, reporting, etc, all paid for, not to mention your time and attention? If it's 100 bps all in the manager gets 45 to 55 bps and the balance is supposed to pay for everything else?
Cowboy93 wrote:
The appeal of indexing to me is that it eliminates arguments like this....someone KNOWS they won't be #1 in their asset class, but at least they can be pretty confident they'll be close to the 75th percentile or so over a long period of time (in liquid, more "efficient" markets, eg large cap US, etc).  In a way it lowers risk--call it "underperformance risk."  Then you and I can go spend time do more personalized stuff for people.  All that said, I haven't used a lot of passive stuff yet.

I don't know why I'd want to go a route that I'm very, very confident underperforms what I'm already doing.

troll's picture
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Cowboy93 wrote:
Butlermunch--to answer your ? above....
 
Ahhhh, I see the confusion. The way dude had formated his post I skipped over that he was quoting you.

iconsult100's picture
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Dirk Diggler wrote:iconsult100 wrote:Dirk Diggler wrote:
I love variable annuities. You get a nice upfront commission, with the ability to automatically rebalance and exchange fund families, without a load, and you don't have to injure the client with an extra 1.5% fee, in perpetuity, to do it.

And Mr. Client, the money I make you will be taxed as ordinary income instead of the low 15% capital gains tax.  And im going to charge you 2% or more for bells and whistles, but you have to die to collect them...  Sound Good? 
Who are you looking out for?  You or your client?  I think it's pretty obvious.

You know what, son? I'll bet that if your firm didn't haircut annuities, so you only get to share in 4% of the 7.5% GDC, paid at your miniscule rate, you'd sell annuities, too. If I sell a $100,000 annuity, I make $6,750. If you sell one, you only make $1600 at a 40% payout, and I'm probably being generous with the 40%.
If I were you, I'd hate me too.

9 out of 10 clients who have an annuity don't even know why they have it.  It was sold to them with little regard for their circumstances.  As for the payout.... I just don't care upfront money, I've built a business for the long term, I dont have to find a way to generate revenue from the same client year over year.  I don't have to give them the big tax bill when they take the money out.  I don't have to lock up their money for 8 years.  The list goes on and on.
Annuities have their place, but they are not an alternative for an SMA or mutual fund wrap. 
 

Dirk Diggler's picture
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iconsult100 wrote:Dirk Diggler wrote:iconsult100 wrote:Dirk Diggler wrote:
I love variable annuities. You get a nice upfront commission, with the ability to automatically rebalance and exchange fund families, without a load, and you don't have to injure the client with an extra 1.5% fee, in perpetuity, to do it.

And Mr. Client, the money I make you will be taxed as ordinary income instead of the low 15% capital gains tax.  And im going to charge you 2% or more for bells and whistles, but you have to die to collect them...  Sound Good? 
Who are you looking out for?  You or your client?  I think it's pretty obvious.

You know what, son? I'll bet that if your firm didn't haircut annuities, so you only get to share in 4% of the 7.5% GDC, paid at your miniscule rate, you'd sell annuities, too. If I sell a $100,000 annuity, I make $6,750. If you sell one, you only make $1600 at a 40% payout, and I'm probably being generous with the 40%.
If I were you, I'd hate me too.

9 out of 10 clients who have an annuity don't even know why they have it.  It was sold to them with little regard for their circumstances.  As for the payout.... I just don't care upfront money, I've built a business for the long term, I dont have to find a way to generate revenue from the same client year over year.  I don't have to give them the big tax bill when they take the money out.  I don't have to lock up their money for 8 years.  The list goes on and on.
Annuities have their place, but they are not an alternative for an SMA or mutual fund wrap. 
 

Is it not possible that the annuities that I sell are the one's that have "their place"?

troll's picture
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dude wrote:
Look,  I appreciate the subjective nature of this topic as well as the value that we offer our clients. 
My experience is based on being at a Morgan office w/ 40 plus brokers, being at a bank program and although not offering wrap accounts per se had many allocation funds that were a mirror image of the portfolio architect and fund solution (morgan stanley fund wrap accts) programs and AGE where we have what seems to be 10 different variations on the smae essential theme (static or tactical allocations, 8 to 10 asset classes, auto rebalancing, auto this, auto that, offered in SMA, ETF or Fund flavors).  Also add to that my various friends and contacts (in addition to former and current coworkers) who all LOVE the idea of getting paid to sit on the assets.  Maybe I'm way out of line here but it seems to me that there is some validity to my observations. 
I'm not necessarily making an impassioned argument for one side, just bringing up some of what I percieve to be some of the downfalls of a fee based approach.  Maybe this discussion will help shore up those cracks, maybe not.  Thanks for the civil and mature responses guys.
 

You know, dude, I think this is an interesting subject ad you make some valid points, but, you seem to have completely glossed over the other side of the "what's a fair price" equation. All you've considered to this point is what would the client like to pay. (What other business considers that factor first, and pays no attention to the pricing power of competitive forces?) You haven’t considered what services have to be priced at in order to cover every expense to the firm, including paying you.<?:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
When Porsche builds a car, they consider what their costs are,(from engineering, production and marketing to servicing) what return on their efforts they can live with, what buyers are willing to pay, and what force their competitors will have on those prices. Why should we be any different? Shouldn’t market forces determine what we charge, and not some “what does the client want to pay, what’s “fair” and besides, we don’t really do much anyway” equation?

 

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mikebutler222 wrote:dude wrote:
Look,  I appreciate the subjective nature of this topic as well as the value that we offer our clients. 
My experience is based on being at a Morgan office w/ 40 plus brokers, being at a bank program and although not offering wrap accounts per se had many allocation funds that were a mirror image of the portfolio architect and fund solution (morgan stanley fund wrap accts) programs and AGE where we have what seems to be 10 different variations on the smae essential theme (static or tactical allocations, 8 to 10 asset classes, auto rebalancing, auto this, auto that, offered in SMA, ETF or Fund flavors).  Also add to that my various friends and contacts (in addition to former and current coworkers) who all LOVE the idea of getting paid to sit on the assets.  Maybe I'm way out of line here but it seems to me that there is some validity to my observations. 
I'm not necessarily making an impassioned argument for one side, just bringing up some of what I percieve to be some of the downfalls of a fee based approach.  Maybe this discussion will help shore up those cracks, maybe not.  Thanks for the civil and mature responses guys.
 

You know, dude, I think this is an interesting subject ad you make some valid points, but, you seem to have completely glossed over the other side of the "what's a fair price" equation. All you've considered to this point is what would the client like to pay. (What other business considers that factor first, and pays no attention to the pricing power of competitive forces?) You haven’t considered what services have to be priced at in order to cover every expense to the firm, including paying you.<?:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
When Porsche builds a car, they consider what their costs are,(from engineering, production and marketing to servicing) what return on their efforts they can live with, what buyers are willing to pay, and what force their competitors will have on those prices. Why should we be any different? Shouldn’t market forces determine what we charge, and not some “what does the client want to pay, what’s “fair” and besides, we don’t really do much anyway” equation?

 

mike has hit the nail on the head. also, if you price yourself low, like everyone else, you have presented yourself as a commodity. people associate high prices with high quality. why not be more expensive than everyone else? it sends a strong message.

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mikebutler222 wrote:
You know, dude, I think this is an interesting subject ad you make some valid points, but, you seem to have completely glossed over the other side of the "what's a fair price" equation. All you've considered to this point is what would the client like to pay. (What other business considers that factor first, and pays no attention to the pricing power of competitive forces?) You haven’t considered what services have to be priced at in order to cover every expense to the firm, including paying you.<?:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
When Porsche builds a car, they consider what their costs are,(from engineering, production and marketing to servicing) what return on their efforts they can live with, what buyers are willing to pay, and what force their competitors will have on those prices. Why should we be any different? Shouldn’t market forces determine what we charge, and not some “what does the client want to pay, what’s “fair” and besides, we don’t really do much anyway” equation?

Amen!
I also agree with whoever said that SMA are NOT the same as MF's.  Every SMA that I have worked with has kicked MF porfolio's butt in all but one occassion.
We should look at our business the same way we look at portfolio's.  Diversify!  Diversify! Diversify! 
I agree with Dirk that annuities are appropriate for some people.  If I get paid for it then good for me.  They can get guaranteed income for Nperiod certain- good for them.  Who cares if there is an 8 or 10 year hold if they are 50yrs old and aren't retiring for another 15yrs?  Can I give guaranteed income with a death benefit with MF's or stocks?
Some clients I can get big commissions now and they will be happy and some clients slow drip and they will be happy.  Bottom line- I get paid they are happy.  If they aren't- they leave.  Does it mean I'm a bad person?  No, just not a good match.
As mentioned earlier if we were to be sooo dirt cheap and undevalue ourselves too much we'd be out of business.  Fee's also have to cover our ticket charges.

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Dirk Diggler wrote:mikebutler222 wrote:dude wrote:
Look,  I appreciate the subjective nature of this topic as well as the value that we offer our clients. 
My experience is based on being at a Morgan office w/ 40 plus brokers, being at a bank program and although not offering wrap accounts per se had many allocation funds that were a mirror image of the portfolio architect and fund solution (morgan stanley fund wrap accts) programs and AGE where we have what seems to be 10 different variations on the smae essential theme (static or tactical allocations, 8 to 10 asset classes, auto rebalancing, auto this, auto that, offered in SMA, ETF or Fund flavors).  Also add to that my various friends and contacts (in addition to former and current coworkers) who all LOVE the idea of getting paid to sit on the assets.  Maybe I'm way out of line here but it seems to me that there is some validity to my observations. 
I'm not necessarily making an impassioned argument for one side, just bringing up some of what I percieve to be some of the downfalls of a fee based approach.  Maybe this discussion will help shore up those cracks, maybe not.  Thanks for the civil and mature responses guys.
 

You know, dude, I think this is an interesting subject ad you make some valid points, but, you seem to have completely glossed over the other side of the "what's a fair price" equation. All you've considered to this point is what would the client like to pay. (What other business considers that factor first, and pays no attention to the pricing power of competitive forces?) You haven’t considered what services have to be priced at in order to cover every expense to the firm, including paying you.<?:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
When Porsche builds a car, they consider what their costs are,(from engineering, production and marketing to servicing) what return on their efforts they can live with, what buyers are willing to pay, and what force their competitors will have on those prices. Why should we be any different? Shouldn’t market forces determine what we charge, and not some “what does the client want to pay, what’s “fair” and besides, we don’t really do much anyway” equation?

 

mike has hit the nail on the head. also, if you price yourself low, like everyone else, you have presented yourself as a commodity. people associate high prices with high quality. why not be more expensive than everyone else? it sends a strong message.

Hear Hear.  I charge fees that are slightly above average with a commitment to the client for utmost integrity, superior service, and innovative thinking.  I've rarely had anyone complain about my fees or ask for a discount.  Usually, too, I refuse the discount request unless they plan on adding more assets to the relationship or sending me referrals in return.  One of the best moves I ever made was to refuse to take an account from this stupid old skinflint lady who wanted me to charge her only 1% on a discretionary equity account because "I've met with your competition(a rookie at Merrill) and I know that is the going rate."  I explained politely that I provided a level of service, expertise, and experience that was beyond the industry norm, and if she expected me to work for the 'going rate', we were going to have a problem.  Closed my notepad and waited for her reply.  She said she had to think it over and walked away, but when she said good bye she reminded me to call her if I ever changed my mind on the discount issue.
I felt great for standing up for my pricing, and it was one of the most memorable meetings I've ever had....and a great decision.  If price was the real important issue with her, let her go ahead and torture someone else.  I've had clients like her and all they end up being is one big headache.
 
Just my 2 cents...

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Dirk Diggler wrote:
mike has hit the nail on the head. also, if you price yourself low, like everyone else, you have presented yourself as a commodity. people associate high prices with high quality. why not be more expensive than everyone else? it sends a strong message.

I agree with your point, but how is that accomplished positioning a variable annuity, when all the fees and charges are embedded?

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Dude, I have been impressed with you in the past . . but I think you are really underestimating your value.
From my experience, fair, expert, unbiased advice AND servicing the client's financial needs is worth a wrap fee.  Honestly, do you see people out there doing things with client focus?  Look at the yahoos on this forum.
I just took on a 35 year old customer who not only was sold annuities that were wrong for her THEY CHARGED HER EXTRA and put them in an IRA.
Once I get all of her assets here, I am going to do an in depth review of everything she has.  That takes time and skill.  Then I will put together a plan for her and we will monitor it together.
PLUS, I am a Financial Advisor.  I have a fiduciary responsibility to do the best for my customer.  There is liability in that.  There is value in that for the customer.  I am NOT a broker, which is a salesperson.
So, yes, I usually use a managed account.  I refund the 12-b-1 fees back to the customer.  But, I am here for them.  I care.  I am good.  I give them peace of mind.
It is like Nick Murray says.  I save 1% in time for you.  1% in worry, then I make at least 1% more than you could.  So that is 3% and I am charging you 1.5%.
Dude, I think you are good.  Just don't discount what you are worth.  And what we are all worth.

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Mike Butler wrote:
You know, dude, I think this is an interesting subject ad you make some valid points, but, you seem to have completely glossed over the other side of the "what's a fair price" equation. All you've considered to this point is what would the client like to pay. (What other business considers that factor first, and pays no attention to the pricing power of competitive forces?) You haven’t considered what services have to be priced at in order to cover every expense to the firm, including paying you.<?:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" /><?:NAMESPACE PREFIX = O />
When Porsche builds a car, they consider what their costs are,(from engineering, production and marketing to servicing) what return on their efforts they can live with, what buyers are willing to pay, and what force their competitors will have on those prices. Why should we be any different? Shouldn’t market forces determine what we charge, and not some “what does the client want to pay, what’s “fair” and besides, we don’t really do much anyway” equation?
 
Reply:
 
I'm not making a case for being cheap, nor am I trying to undercut the value we bring to our clients.  I believe in getting paid what I'm worth and almost never discount my fee.   
 
You are wrong that businesses don't consider what a customer is willing to pay first.  In fact most companies will do extensive market research to determine efficient pricing before committing to full production.  If I remember economics correctly it has something to do with the "utility curve"?
 
I think cowboy93 said it right when he pointed out that the problem we are facing is charging for a PRODUCT when we're really selling ADVICE.  It is the packaging that causes me some questions. 

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Maybeeee wrote:
Dude, I have been impressed with you in the past . . but I think you are really underestimating your value.
From my experience, fair, expert, unbiased advice AND servicing the client's financial needs is worth a wrap fee.  Honestly, do you see people out there doing things with client focus?  Look at the yahoos on this forum.
I just took on a 35 year old customer who not only was sold annuities that were wrong for her THEY CHARGED HER EXTRA and put them in an IRA.
Once I get all of her assets here, I am going to do an in depth review of everything she has.  That takes time and skill.  Then I will put together a plan for her and we will monitor it together.
PLUS, I am a Financial Advisor.  I have a fiduciary responsibility to do the best for my customer.  There is liability in that.  There is value in that for the customer.  I am NOT a broker, which is a salesperson.
So, yes, I usually use a managed account.  I refund the 12-b-1 fees back to the customer.  But, I am here for them.  I care.  I am good.  I give them peace of mind.
It is like Nick Murray says.  I save 1% in time for you.  1% in worry, then I make at least 1% more than you could.  So that is 3% and I am charging you 1.5%.
Dude, I think you are good.  Just don't discount what you are worth.  And what we are all worth.
Reply:
Thanks for the input.  I'm not challenging anybody's value here.  Like I said, I understand the subjective nature of this topic.  I'm hoping to fuel a discussion about the relative merits and downfalls of our different compensation models from a very critical standpoint.  It's my contention that if we are all uncomfortably honest about these issues it can only help to create greater confidence in the compensation model we choose to implement. 
I often wonder that if I were to leave the business and 5 years from now seek out a financial advisor (assuming I didn't want to handle it myself), knowing what I know about the different aspects of this business, what would I think is a fair price or compensation package.  
How much would I feel comfortable paying someone to manage my $500,000 (imaginary # here), if they were going to "wrap" it up.  I don't think I'd pay someone $10,000 (or even $5,000 for that matter) a year to "manage managers".  I'd pay $10,000 a year to someone who took direct management of the funds and had a well defined, successful investment strategy.  Of course I would only own stocks, since fundamentally I don't believe in bonds (neither soes Nick Murray) and would understand the volatility of the strategy.
When we charge for the product (a fee as a % of assets) as opposed to a flat (retainer type) fee; it seems to me that it implys the value creation is in the oversight and managing of the assets not the handholding, financial planning etc.......
I'm making a distinction between asset allocation, financial planning and investment policy type services (which to me are under the category of ADVICE) and the direct management of invesments (which to me are under the the category of SERVICE).
 

dude's picture
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Here's how I would prefer to pay an advisor:
A flat fee for work done on a financial plan (by the hour at perhaps $300 to $500 an hour depending on the advisors expertise)
A retainer (not based as a % of assets) for manager selection, monitoring, education and ongoing services, priced based on actual work performed (plus accounting for the advisor's profit, which is well deserved)
A fee as % of asset for direct money management.
 
Do I think this is the ideal solution, NO.  Do I think it's a start to challenge us to better justify our value, MAYBE. Do I think that I will learn something valuable from all of you (maybe even Mr.10% ), DEFINITELY.  Maybe y'all will learn something in the process?

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dude wrote:

You are wrong that businesses don't consider what a customer is willing to pay first. 
 

 
I never said businesses don't consider that. My point is that's all you're considering in your equation. There's no space in your model for covering the costs involved, including having you, to deliver those services. It's as if the only determiner of price is what the customer thinks is "fair". I think I'll go in the local Porsche dealership and tell them I think $35k for a new 911 is "fair". Wish me luck. 
 
dude wrote:
 
I think cowboy93 said it right when he pointed out that the problem we are facing is charging for a PRODUCT when we're really selling ADVICE.  

I honestly don't know just what that means. We sell financial solutions and a relationship to make it work. If someone wants to simply pay for the time required to be told what mutual funds to buy, they already have that option in most every CFP's office in their town. Few, if any, want that pricing model.

troll's picture
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dude wrote: <?:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
Here's how I would prefer to pay an advisor:
A flat fee for work done on a financial plan (by the hour at perhaps $300 to $500 an hour depending on the advisors expertise)

Already available, even at most wirehouses.... if not by the hour, by the plan, total.
dude wrote:
A retainer (not based as a % of assets) for manager selection, monitoring, education and ongoing services, priced based on actual work performed (plus accounting for the advisor's profit, which is well deserved)

I assume "work performed" isn't just things the broker does personally, but everything the firm provides the client. If not based on assets under management, how's this retainer figured? If by some rate not associated with asset size, you're asking the lower sized accounts to subsidize the fees of larger accounts. The liability in dollar figures is greater for larger accounts, they're often more complex, and they usually demand more attention. They shouldn’t pay for those things? I’d like to see you further flesh out this retainer idea.
dude wrote:
 
A fee as % of asset for direct money management.

And if they provide SMAs? What then? What does the client pay to have access to managers they other wouldn’t have large enough assets to open an account with?
dude wrote:
….Do I think it's a start to challenge us to better justify our value….

 
I honestly haven’t found this to be an issue with clients. They either see my value and employ me, or they don’t, and I don’t have to worry about them. As to my own view of what I provide, not only am I convinced I bring value, I’m certain I’m a bargain in the process.
 
 
 
 
 
 

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Value and pricing is obviously somewhat relative.  For example, I've heard from some reps in the northeast that the "going rate" for SMA business there is closer to 1.5% or so, so regardless of what one promises to deliver in value it's tough to get an account from an informed investor if you're charging 2% or more.  Providing the same services in the South or other areas of the country might encounter no investor resistance in charging 2-2.5% or so.
And, no matter what value you can represent to a client for fee-based business, regardless of price, it isn't worth anything unless you deliver on it.  Many reps who get on the fee-based bandwagon simply view it as a way to capture assets and get an annuitized income -- not necessarily always their own fault, because b/ds often promote it that way.  They fail to continue to service those clients, have quarterly reviews, etc., and clients begin to wonder what it is they're paying for, while their rep is out gathering more assets to "manage". 
When the market tanked after the dotcom bust, many reps who never experienced a bear market stuck their heads in the sand as they were afraid to call clients, yet that's the time when client contact should be the highest.  As a result, many of these clients left in droves.  But reps that continued to deliver value through client contact, hand-holding, and continued monitoring, rebalancing & reviews, for the most part were able to maintain their clients because they continued to deliver value.  These same reps were able to have a hayday in winning all those lost accounts from the clients who paid fees, but never heard from their rep.
Re discounting (fees or commissions), as several have already said, we must charge for what we're worth.  If we win a new client because of low fees/commissions, chances are we'll lose that same client when the next guy who's focusing more on price comes along with a lower price. 

Dirk Diggler's picture
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skeedaddy2 wrote:Dirk Diggler wrote:
mike has hit the nail on the head. also, if you price yourself low, like everyone else, you have presented yourself as a commodity. people associate high prices with high quality. why not be more expensive than everyone else? it sends a strong message.

I agree with your point, but how is that accomplished positioning a variable annuity, when all the fees and charges are embedded?

It's not.

Dirk Diggler's picture
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Joined: 2005-12-30

maybeeeeeeee wrote:
Dude, I have been impressed with you in the past . . but I think you are really underestimating your value.
From my experience, fair, expert, unbiased advice AND servicing the client's financial needs is worth a wrap fee.  Honestly, do you see people out there doing things with client focus?  Look at the yahoos on this forum.
I just took on a 35 year old customer who not only was sold annuities that were wrong for her THEY CHARGED HER EXTRA and put them in an IRA.
Why were the annuities wrong?
Once I get all of her assets here, I am going to do an in depth review of everything she has.  That takes time and skill.  Then I will put together a plan for her and we will monitor it together.
How sweet of you!
PLUS, I am a Financial Advisor.  I have a fiduciary responsibility to do the best for my customer.  There is liability in that.  There is value in that for the customer.  I am NOT a broker, which is a salesperson.
Salesmen are good. If you take away all the salesmen, the economy comes to a screaching halt.
So, yes, I usually use a managed account.  I refund the 12-b-1 fees back to the customer.  But, I am here for them.  I care.  I am good.  I give them peace of mind.
I feel a little weepy.
It is like Nick Murray says.  I save 1% in time for you.  1% in worry, then I make at least 1% more than you could.  So that is 3% and I am charging you 1.5%.
He used to say some good things about commissions, too. Will  you still quote him when he changes his spots again?
Dude, I think you are good.  Just don't discount what you are worth.  And what we are all worth.
I agree.

Dirk Diggler's picture
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You know what's really fun? When I tell a prospect that I'm gonna turn off the "broker meter" (annual fee) when he moves his account. They grin when they hear that. They like saving money. Get's 'em every time.
Me: How much are you paying?
Prospect: 1.5% per year.
Me: Would if make you mad if I turned off the broker meter and didn't charge you an additional fee?
Prospect: Golly, no, Dirk. You can do that?
Me: Yepper. What's your social security number?

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