Why I'm leaving

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Magician's picture
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Joined: 2008-05-19

I just spent a entire hour explaining to the field supervision guy why I sold someone out of AF. They had held them for ten years.

I had to tell him that I wasn't comfortable with index funds. He asked me what I meant, and I told him that AF were loaded indexes. He flipped out and told me I sold a client out of a perfectly good product so I could make a commission. It was like a 10k ticket on a 22k net month.

If they took a look at my rank funds over the last few years, they could see that I never sell American Funds. Yeah, we get to run our offices our way. What a joke!

Had to vent. Please tell me this is not something I would experience as an indy. BSpears, anybody?

Broker24's picture
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Joined: 2006-10-12

No, but I have to ask, you booked a 10K ticket on it?  I would probably scratch my head at that too, but I guess it depends on what you did with the funds.  If your best explanation was that AF are "closet index funds", I would have b!tch slapped you too.  You would (rightly so) need a good explanation for moving someone out of any good funds (not just American) just to put them in some others.  I assume that was at least 500K of funds.  You had to move all of it??  I find that a tough one to swallow.

deekay's picture
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Joined: 2007-05-15

Go RIA, and you've got no compliance officer PERIOD. 
But if you could justify your decision to sell the American Funds, you wouldn't be having to justify your decision.  Seems to me you didn't do your homework for the compliance folks.  Remember:  document document DOCUMENT!

Indyone's picture
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Joined: 2005-05-30

You'll have to complete a switch letter as an indy also, although I've never received call one about my justification for making a change as a result of what I put on the switch letter.  The only dings (no phone calls...just a field auditor comment) I've gotten is when I forgot to do the stinkin' switch letter...

troll's picture
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Joined: 2004-11-29

To properly respond to this, I would have to know what they had and what you moved them into.  At first blush, this does not pass the smell test.  AF have done very well for the last 10 years, closet indexing or not.  Was this your idea, or did the client start the conversation?

avise's picture
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Joined: 2007-12-11

First, you should expect compliance anywhere to want to know why you are switching $500k from a client's funds to another investment.  I have client sign a switch letter before I move any assets around. Why would I ever want to deal with arbitration? Second, I'm no apologist for AF, but a quick X-Ray shows that a AGTHX v SP500 comparison does not show AF to be an Index with load:Asset Allocation                                 Net %                           Net %Cash                         7.68                             0.00US Stocks                69.53                          100.00Non-US Stocks        18.07                             0.00Bonds                       4.46                             0.00Other                        0.25                             0.00Short term and long term performance numbers also show a great difference, to AF's favor:Trailing Returns                    3Mo             1Yr          3Yr           5Yr             10YrPre-Tax Portfolio Return       6.83           1.21        11.90       13.09          10.43Benchmark Return                5.77          -6.70        7.57         9.77             4.21+/- Benchmark Return          1.06           7.91        4.33         3.32             6.22The Top Holdings overlap is only MSFT and GE. Schlumberger, Ltd. SLB 2.41 Google, Inc. GOOG 2.31Cisco Systems, Inc. CSCO 2.14 Microsoft Corporation MSFT 2.04 Oracle Corporation ORCL 2.01 Roche Holding Ltd __ 2.00 Berkshire Hathaway Inc. A BRK.A 1.50 General Electric Company GE 1.40 Target Corporation TGT 1.34Yahoo, Inc. YHOO 1.34vs. ExxonMobil Corporation
(XOM)
3.91%
 

General Electric Company
(GE)
3.19%
 

AT&T, Inc.
(T)
2.00%
 

Microsoft Corporation
(MSFT)
1.96%
 

Procter & Gamble Company
(PG)
1.86%
 

Johnson & Johnson
(JNJ)
1.59%
 

Chevron Corporation
(CVX)
1.53%
 

Bank of America Corporation
(BAC)
1.45%
 

International Business Machines Corp
(IBM)
1.38%
 

J.P. Morgan Chase & Co.
(JPM)
1.26%
 Finally, what did you tell this client to convince them to move? Cause whatever it was it was a hard sell, and "Index with load/Closet Indexer" is a concept that only makes sense in the rarefied world of the personal finance magazines where retired rock critics are sent to write about "8 great investments you need today"

new_indy's picture
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Joined: 2007-03-28

If you believe you did the right thing, and the client agreed, do the switch letter and move on.  Opportunity costs may or may not play in your favor.  I doubt I would have dumped it all, simply because an index fund is OK as a portion of a portfolio.  If it was in an IRA and there were no tax consequences, it makes it even more likely I would have diversified it.  If you just dumped it into another fund, I doubt I would have done it at all.  To really know what to say, I would have to know what you did with the assets.
 
As to all of that, even indy's have compliance.  You still need to do what is right for the client.  You don't have to argue over anything as an indy, you just have to prove what you did was in your clients interest first and yours second, not the other way around.

Magician's picture
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Joined: 2008-05-19

B24 - It was a 10k TICKET, not 10k net.

I had more than enough reasons. Different strategy - the fact that the asset mix inside the funds was nearly identical.

I got paid $200 NET. That's why I said it was a small part.

Magician's picture
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Joined: 2008-05-19

The rest of the funds were in Oppenheimer, Franklin - this all transferred in. I worked within those fund families.

C'mon - I'm not going to reposition 200k.

And I take that back - I only got 3% on the trade. As for past performance - if you're selling on past performance - you've got a problem.

new_indy's picture
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Joined: 2007-03-28

Then go indy, it sounds like you did the right thing based on the info provided.  As an indy, you just have to justify that it is in the clients interests and that you explained everything.  Indy firms aren't ogres and don't really care what fund family you are working with.  Plus it might have made more sense to put the client into a completely different asset class that you may not even have access to where you are at.

Broker24's picture
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Joined: 2006-10-12

OK, now it doesn't sound quite as bad. Your original post appeared as if you dumped around 500K into another fund family, with the justification that AF is all closet index funds. I guess it's still hard to believe that you had to move from AF into FT and Oppy (I don't really see the benefit of one over the other, just as I would likely not move from either of those into AF if I had them in a portfolio), but if it somehow matched your "process", then I guess you just need a switch letter. Doesn't sound like you were fishing for commish. But still, I can see why compliance would question it.

And FYI, compliance really doesn't care which fund companies you use. I once got an FSPend when moving stuff from Janus to AF. And that's comparing apples to oranges. I almost always get an Fspend when I dump fund familes (I rarely dump fund familes - I usually try to work within them if it makes sense)

nestegg's picture
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Joined: 2007-06-14

Wow...I don't think you would even need to go indy to avoid that issue, I would think most wirehouses would have no issue with that. I haven't ever been questione don a trade in 8+ years @ AGE.

troll's picture
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Joined: 2004-11-29

Magician wrote:B24 - It was a 10k TICKET, not 10k net. I had more than enough reasons. Different strategy - the fact that the asset mix inside the funds was nearly identical. I got paid $200 NET. That's why I said it was a small part.
 
Ok, that makes much more sense.  Still curious what you dumped and what you bought though.  At my firm, as long as the switch letter was complete, never would have been questioned on this trade.

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

My guess is that it wasn't really the trade that caused the hour long conversation.  It  was the attitude you had when talking with your FSD.  Most FSDs are relatively reasonable when it comes to making switches.  Unless you cop a tude with them, then they can get a bit pissy.  I can just imagine his reaction when your explanation to make a switch on a fund (AF or otherwise) was that it is an index fund with a load. 
 
 
 
 

indythankgod's picture
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Joined: 2007-12-23

"As for past performance - if you're selling on past performance - you've got a problem."

So what your saying is all funds are equal as of today? You have to look at what the money managers did in the past to get an objective view of how they perform during good and bad markets. Does it guarantee anything? Absolutely not. But it gives an indication of their golf/work ratio and how forward thinking they are. Also, so you could care less that CAIBX made $ during '00,'01,&'02? Are all college football coaches equal today? If you were looking to hire someone to run your team would you look at his win/loss ratio or do you throw it out b/c it was the past. Do you think Tiger Woods will be a good golfer in '09? Sounds to me like you're coo coo for coco puffs.

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

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As already stated, you would need a switch letter signed by the client to make a change from one fund family, or any other type of investment, to another with an explanation of why the change was made.  We don't get to do just anything that we want to, but we are also not pressured to put all of our client's assets in to American Funds or any other investment.
 
American Funds are pretty good as a core holding for your conservative clients.  They have never blown up in my face like some fund families have, but they do lack some of the asset classes and sector plays that are available in other funds.  For instance they lack a BRIC sector, Real Estate and other more narrowly focused categories.  That might have been a better explanation than yours.
 
Also a word of caution for moving from one investment to another, even within the same fund family, in a taxable account: You should ALWAYS find out what the cost basis is and discuss the tax ramifications with the client.

BondGuy's picture
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Joined: 2006-09-21

Ah, the dreaded mutual fund switch!
 
This thread serves to confirm my view that  advisor advised investors are out of their minds investing in mutual funds. it's not because the funds are bad. The advise is bad. Or, at the least, put on a scale and weighed against the advisor's best interest. And that unintended consequence of regulation is the problem.
 
There was a day when advisors could make mutual fund investments based on only one criteria; their client's best interest. That day has passed.
 
With today's regulatory environment, where the regulation tale wags the investment dog, advisors are given pause before calling clients and advising them to do the right thing. That call, in some situations, could be a career decision. This thread is a good example of case in point. The conflict of interest couldn't be more clear, even if "being more clear" were possible.
 
There are many reasons to sell a fund. Yet, in today's environment selling is unlikely. Not because it shouldn't be done, but because the advisor fails to take action. The reasons for not acting are two fold. First, making that change, especially in short term situations, is now taboo. And secondly, newly minted advisors don't know any better. They're  being taught to overlook near term events, regardless of how material those events may be. They are taught that the near term doesn't matter because mutual funds are long term investments. They are guided in this thinking not by their firm's investment analysts, but by the no investment knowledge compliance departments.  Add this to the new "buy the fund family" approach to marketing mutual funds, versus finding the best fund in each asset category, and the advisor advised client doesn't stand a chance of getting honest investment advice. They get advice that best serves the firm first and then them as clients of the firm.
 
 
Another sad part of this is that newly minted advisors don't know any better.
 
Let's face it, if you put your clients into a stock today and found out tororrow that it was headed substancially down because the world had changed you'd call them in a New York minute to sell that stock. That ain't happenin' with a mutual fund. Not if you want to keep your license or not forfeit your commission. And if you sold that stock you would be completely unencumbered as to where to go with that money. Do what's best for the client. Buy what's best. Again, not happenin' with a mutual fund. With mutual funds we are handcuffed and the client suffers for it. 
 
And then there's the mutual fund exchange. Here's a great rule where instead of moving long suffering underperforming assets to the best in class you have to instead move them to a mediocre performer within the same family as the loser fund you're trying to get out of. Yeah, that makes sense. Buy a fund you ordinarily wouldn't touch just so you can stay employed.
 
Exchanges best serve only the firms, which avoid regulatory scrutiny in employing them. If the fund being used for the exhange is good enough to invest the client's money into why wasn't it the primary recommendation?  Clearly, exchanges serve the firms first and client interest second. Afterall, the alternative would be to seach the entire mutual fund universe for the BEST possible alternative. Gee, even though that's what the client is paying you to do you gotta put the firm first, and exchange it is. How ironic that the best alternative is ALWAYS in the same fund family.
 
Do all this; don't make the calls that should be made,  buy into near term events don't matter, do mutual fund exchanges into "me to" mediocre don't quite fit right funds, and then look the client straight in the eye and tell them what a good job you are doing. That's us when we buy mutual funds for clients.
 
And therein lies the irony. The regulators in their zeal created all these rules to protect investors. What they've done is consign them to mediocrity and much worse. And yes under the old rules there were some scum bags that abused clients. What's changed is that today's clients are subjected to wholesale abuse by advisors who put their best interest in front of that of their clients.
 
Moving 1/2 mil out of American Funds? If the advisor acting in the best interest of the client believes it is the best thing to do then why not?
 
 
 

new_indy's picture
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Joined: 2007-03-28

BondGuy... I am really starting to like you...
 
The regulators would most like index funds, 60/40 split.  That is what this whole 401k fee issue is all about.  The bloomberg report even brought it down the trade costs within the managed funds.  If it is managed, there has to be trade fees within the fund or it isn't being managed.... Crazy daze...

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

 
Great points Bond Guy.  This is why I have moved many of my clients into fee based managed accounts.  No longer encumbered by being forced to invest in the same fund family to get breakpoints, I now can fund the best fund for the portfolio from hundreds of other funds or ETFs or individual stocks. Whatever the best investment is for the moment instead of being forced to hold onto a losing or declining investement because we are so over regulated that we can't do what is really in the client's best interest.
 
Exchanges in a fee based account are not srutinized in the same way as in a commission account because there is no vested interest switching to generate commissions.  The exchanges are for the betterment of the portfolio in a fee account.
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WestH's picture
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Joined: 2008-03-29

Let's see... Your time is worth $900 an hour, & you spend a whole hr on a $200 net trade?
 
If you did that in a fee based account, then who cares what funds you move in or out of?
 

bspears's picture
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Joined: 2006-11-08

I think it has more to do with HQ's relationship($$) with American than it does about the client.  HQ knows where its bread is buttered and its about the kickbacks.  Just think of all the resources waisted on a 10k trade...must have been a slow day in the compliance bull pen.  "HEY JOHN, WE GOT A LIVE ONE.  MOVEMENT OUT OF AMERICAN FUNDS, TIME TO KICK SOME IR ASS."  CODE RED...CODE RED....

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

My guess is it went more like this:  FA places trade to move AIVSX to TEBIX.  That trade triggers a system generated wire with questions about why the trade was done, how long the client held the fund, what fee was paid, and if he had the client sign a switch letter.  In his response he puts that the client has held AIVSX for 10 years.  He paid 5.75% on the original purchase.  No switch letter was signed.  Making switch because AIVSX is simply a closet index fund with a load and no longer matches my management style. 
 
FSD reads the response, has a question, calls FA to get answer.  FA gets defensive because a lowly FSD is questioning his judgement.  They argue for an hour about the trade because FA really can't give a rational explanation other than the closet index fund one and FSD doesn't believe that is an acceptable reason to liquidate fund and pay another sales charge.  Both believe they are looking out for the best interest of the client, just disagree on the mechanics. 
 
I got a wire today from my FSD on a switch out of AMCPX for ITHAX.  I answered it with something that didn't contain any attitude, got a switch letter signed from my client, and spent 10 minutes on the whole thing.  I guarantee it wasn't the trade, but Magician's attitude that cost him an hour on the phone. 

Broker24's picture
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Joined: 2006-10-12

iceco1d wrote: Not to veer off this enlightening topic...but doesn't American "kickback" the smallest AUM % of all of EDJ's revenue sharing funds?  And $0 up front for new sales?

You're correct. It's the smallest by far. And they are barely a player in the new advisory platform. And Jones refunds any revenue sharing income from that platform back to the client's account.

Broker24's picture
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Joined: 2006-10-12

Spaceman Spiff wrote: My guess is it went more like this:  FA places trade to move AIVSX to TEBIX.  That trade triggers a system generated wire with questions about why the trade was done, how long the client held the fund, what fee was paid, and if he had the client sign a switch letter.  In his response he puts that the client has held AIVSX for 10 years.  He paid 5.75% on the original purchase.  No switch letter was signed.  Making switch because AIVSX is simply a closet index fund with a load and no longer matches my management style. 
 
FSD reads the response, has a question, calls FA to get answer.  FA gets defensive because a lowly FSD is questioning his judgement.  They argue for an hour about the trade because FA really can't give a rational explanation other than the closet index fund one and FSD doesn't believe that is an acceptable reason to liquidate fund and pay another sales charge.  Both believe they are looking out for the best interest of the client, just disagree on the mechanics. 
 
I got a wire today from my FSD on a switch out of AMCPX for ITHAX.  I answered it with something that didn't contain any attitude, got a switch letter signed from my client, and spent 10 minutes on the whole thing.  I guarantee it wasn't the trade, but Magician's attitude that cost him an hour on the phone. 

Spiff, sometimes you go off the deep end defending Jones. But if I were to guess, based on my experience also, your post is EXACTLY how the entire conversation probably went. To a "T". As long as I have given a reasonable explanation, and gotton a switch letter if needed, I have never had a trade overturned, or even debated (and that is regardless of the fund families involved, since it is all pretty much system generated "trip-wires").

noggin's picture
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Joined: 2004-11-30

In my region when a company got kicked off the preferred list, i.e. Federated and Putnam, Ir's would make a "call list" and it was well known that as long as they switched into American everything would be lovely. Switching out of American would get a beatdown....

Akkula's picture
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Joined: 2008-02-17

Hmm, it sounds like every time I come across EDJ account I should ask the person, "Let me guess, you are invested in American Funds, right?"
 
Also, isn't this the weakness of using a straight up brokerage account?  You can't make a trade without generating a commission.  It seems like a wrap account really makes things much easier especially if you don't believe in a blind buy and hold strategy that ignores the medium term realities of the market and the economy.

BondGuy's picture
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Joined: 2006-09-21

Spaceman Spiff wrote:My guess is it went more like this:  FA places trade to move AIVSX to TEBIX.  That trade triggers a system generated wire with questions about why the trade was done, how long the client held the fund, what fee was paid, and if he had the client sign a switch letter.  In his response he puts that the client has held AIVSX for 10 years.  He paid 5.75% on the original purchase.  No switch letter was signed.  Making switch because AIVSX is simply a closet index fund with a load and no longer matches my management style. 
 
FSD reads the response, has a question, calls FA to get answer.  FA gets defensive because a lowly FSD is questioning his judgement.  They argue for an hour about the trade because FA really can't give a rational explanation other than the closet index fund one and FSD doesn't believe that is an acceptable reason to liquidate fund and pay another sales charge.  Both believe they are looking out for the best interest of the client, just disagree on the mechanics. 
 
I got a wire today from my FSD on a switch out of AMCPX for ITHAX.  I answered it with something that didn't contain any attitude, got a switch letter signed from my client, and spent 10 minutes on the whole thing.  I guarantee it wasn't the trade, but Magician's attitude that cost him an hour on the phone. 
 
And herein lays the problem. When it comes to mutual funds, this advisor has someone looking over his shoulder second guessing his investment recommendations. Whether that person is a supervisor, or a compliance person their intersts are not aligned with those of the client. Both of these individuals put the firm's best interests ahead of those of the client. Whether it be to protect the shelf space income or to reduce compliance exposure to regulators, neither of these people is thinking of the client when they make the call to question a trade, or when they bounce a trade.  It's gotten so bad in some places that some BOMs don't want any switches on their trade blotters, regardless of the circumstances. They don't want anything that would cause compliance auditors to spend more time in their office. Of course that's wrong. That they claim to be acting in the client's best interest in their decision making process that is just so much smoke.
 
A number of years ago I did a mutual fund switch that moved shares of AF's Capital Income Builder to a muni fund from another manager.  The client's investment objective had changed, the shares had been held for 12 years, and were all profit. It wasn't a big trade, nor was it a substancial percentage of the client's assets. Relatively speaking it was a  minor trade. I also met all the requirements of the firm for doing a switch, LT hold etc. In fact, because it was held for over five years, a switch letter wasn't required.
 
 I knew it was time to move from that firm when I got a call from compliance not only questioning the trade but also recommending another American Fund to exchange into. Are you kidding me? When I politely pointed out that the fund the compliance person was recommending wasn't a tax free fund and didn't fit the client's new investment objective she became exasperated, told me she wouldn't approve the switch, and hung up on me. I later found out that she was a failed broker who had flunked out at not one, but two firms. It was easy to see why she failed. Yet this failure who had no business anywhere near client accounts now held sway over how those clients could invest. This same story plays itself out at every firm everyday. The tail wags the dog.
 

bspears's picture
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Joined: 2006-11-08

WELLL....Bondguy....obviously you've never worked at Edward D Jones and Companies.  IF you had you would know that it aligns itself with the client ALWAYS.  You must be totally mistaken if you think Jones management, compliance, janitors or other low lifes not named, would feel compelled to protect its "shelf space" revenue stream.  Other words, our shit don't stink ...thank you.  Magician..you need to move the clients back to the American Funds, go to mass, repent, have your ass spanked(I suggest asking Miss Jones), and work the next Saturday Promo....

IndyEDJ's picture
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Joined: 2006-12-13

Magician:
 
Been there, done that, and I went Indy.  The reason that Compliance is harder on you that us Indy's is that Jones has to show the regulators that they can supervise IRs in the field from St Louis.  The other firms in the business have a supervisor/ compliance officer on staff called a branch manager in their office.  When you go Indy, you are licensed as a Series 24 and you are the branch manager.  Compliance does get easier over here but you still have to deal with them.
 
IndyEDJ

Broker24's picture
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Joined: 2006-10-12

IndyEDJ wrote:Magician:
 
Been there, done that, and I went Indy.  The reason that Compliance is harder on you that us Indy's is that Jones has to show the regulators that they can supervise IRs in the field from St Louis.  The other firms in the business have a supervisor/ compliance officer on staff called a branch manager in their office.  When you go Indy, you are licensed as a Series 24 and you are the branch manager.  Compliance does get easier over here but you still have to deal with them.
 
IndyEDJ
 
Very good point.  Lack of field BOM's creates a higher degree of required oversight in order to maintain our single-broker office setup.  But again, that's why you should just answer the FSpend politely and move on.  All Compliance is looking for is a documented explanation.

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