When I think cookie cutter, I think lifestyle or index funds, as those seem to be a couple of one-size-fits-all approaches that have been popular recently.  LPL has some fee-based models called OMP that might be considered as “cookie cutter” portfolios.

Sorry if this is getting too difficult to read, I'll use blue here.

[quote=tjc45][quote=mikebutler222]

Just my cynical view of the wires that have figured out that fee biz is in their best interest regardless of whether that's true for the clients.

Well, there's no doubt the wires benefit from a stable fee structure over the ebb and flow of a commission based process. There's also the fact that their arbitration costs are lower. OTOH, if the issue was what's most profitable for the wires, they'd be pushing in-house mutual funds, and B shares at that.

B shares are out, too much pressure from the NASD. As are proprietary funds.

Ahh, but they're not out, they're out in "big" amounts. A drive for pure profits would have wirehouses looking to open the "small" accounts where B shares can be used. Secondarily they'd "stress" in a legal way, proprietary funds, which are only "out" when dumb things like contests or paying brokers more to sell them are in play.

Are arb costs down?

They sure are in managed accounts. When the managers are external, you've documented the process to select an AA and the manager's selection, they most certainly are.

Fees are the mantra at the wires. They've taken a consulting process and turned it into a product.

No doubt about that, but, imho, for the reasons I explained.

 The wires are pushing fee big time, thus the move to six figure minimum acct requirements. 

I really do think those two issues are largely unrelated. Larger accounts, whether in fee or commission based accounts are more profitable and expose the firm to less liability.

Mike, I don't see the less liability. In fact I see a new layer of liabilty. With SMA accts it goes to the managers losing money in the markets, when they are the world's most elite managers. That the market went down is lost on the main street investor. Especially in cases where the investor was told the manager was good at managing downside risk.

There's far less liability. 1), churning is completely off the table. 2) Suitability is a minimal liability when everything along the way from AA selection to the selection of the individual managers is documented. 3) Details of the manager's methods and history is documented for the client along with all the usual disclaimers. 4) The firm has no conflict of interest with external managers and a DD process moves them in and out of programs. 5) Losing money in a down market in a descretionary account isn't the sort of thing firms lose often about in arbitration, especially when compared to broker handed non-desc accounts.

 And with fee accts, is the fee justified? This is a whole new frontier for the NASD and they are exploring it with zeal.

They are, but at this point it's to weed out accounts that sat dormant when in "commission" accounts and were moved to a fee basis, and still laid dormant and untouched. Those are pretty much layups for regulators, and should be. I doubt the SEC or NASD will march in and dictate fee rates at current levels as violations of some sort.

A large non fee account may not be profitable to the firm. I have a 2 mil bond acct with an ROA of  .36%. I'm sure the firm would be happier at a .75% fee. Yet, I'm not changing a thing.

It sounds like you're doing the right thing. I've never found a good reason for an on-going bond account to be in fee accounts if the strategy is buy and hold.

To take this another step, a friend of mine who has a 100 million dollar plus muni book recently quit his wirehouse firm under pressure to up his revenue. He was producing about $350K.

That's an amazingly small ROE, even on a bond account. Could it be that production wasn't the issue, but WHY the ROE was so small? A judgement issue? You could almost do that sort of ROE buying nothing but ultra-short (7 to 90 day) auction notes.

If he were really pressured out on ROE basis, he has a great case to take his former firm on about.

The same office pressured a 57million dollar asset size broker to quit because she only produced about 100k during the market rout of 01-03. She correctly saw the writting on the wall and moved her mostly equity book into the money market to ride things out. Right thing for the clients, wrong for the firm.

I think we've dicussed this before. I can fully understand a firm having a problem with a broker making a massive market timing call like that, issues of ROE aside. Imagine the liability issues involved. I doubt her firm's AA policy at the time was move almost all out of equities into the MM. BTW, how did she liquidate a $57M mostly equity book and only generate 100k (was that for the full three years?). Her clients missed the massive up year of 2003 because of a market call to almost 100% cash?

 They forced her out after several warnings and gave her book to some brokers who had no problem putting the money to work- for the firm that is. 

Again, market timing FAs (especillay on that scale)  probably will have a tough time at a wirehouse. You could do that as an indy and carry the liability yourself, but not at a wirehouse. If she felt she had a case, she should have pressed it. It's obvious wirehouse can be successfully sued for nonsense (overtime) so why not try this.

I'd love to see those two cases in detail, something isn't kosher in either story, no offense intended.

Cookie cutter one size fits all, off the rack progams presented as custom tailored pushed on those who don't understand what they're buying.

I'm trying to think of an example of that, and aside from a descretionary mutual fund fee acount, I'm coming up short. Could you provide another example? Also, as to "one size fits all", I really do think the biggest offenders there are guys, usually working as RIAs, that run a portfolio that every client has to own.

Mike this is an easy one. The pitch: Mr. Butler we're going to custom tailor a portfolio to meet your goals using our team of world class institutional managers. The reality: The money is split between 3 or 4 managers who co-mingle it with the rest of dough from that particular firm, buying and selling exactly the same stocks at the same time for everyone. As I said "off the rack"

You mean they hire the same 3 or 4 managers for everyone and in the same AA mix? I agree, that would be a cookie cutter. I don't have a problem with managers buying the same stocks for everyone within their SMA account. That's exactly as it should be. BTW, the money isn't co-mingled anywhere that I know of, but it is block traded.

BTW, just how is that different than a mutual fund fee program? Do the mutual fund managers make different trades in each account, or do they trade for the entire fund?

One size fits all and cookie cutter in that everyone gets the same thing. The differences come in the amounts allocated to the various mgrs. This is exactly how it is at SB and UBS. There is nothing custom about it.

The "custom" isn't supposed to be in what the managers  buy. They were hired to run money the way they do it, with individual cost basis and position ownership for each client. The "custom" should come in the tailoring of the AA and the managers (of hundreds) selected. The only input to what individual managers are doing that should be allowed, imho, is loss harvesting, eliminating positions in an SMA that a client may hold elsewhere and perhaps a prohibition (pardon the pun) on certain "sin stocks". After all, if you didn't want that manager running money for you the way he does, why hire him?

There is no difference between an RIA portfolio and a SMA portfolio. The client gets whatever portfolio is being offered with little or no opt out ability.

If you're talking about a client at the local RIA, there is no choice. You hire what they do there, in house, or you don't hire them. With an SMA at least you choose from hundreds of managers with various styles and approaches, mix and match them as you like from in-house or out.

Fee based versus commission is a case by case decision. Fee is almost always the better way to go for me. However, it's got to be the best way for the client to go before we'll consider it.

Isn't that what every ethical advisor does? BTW, do you use any SMAs or is this in-house decretionary?

[/quote]

We were using C shares but we believe that C shares will become the next B share, causing the NASD to spotlight those accts looking for justification.

Agreed.

[quote=mikebutler222][quote=tjc45][quote=mikebutler222][quote=tjc45][quote=mikebutler222][quote=dude]

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OTOH, I don't think in my experience (all day, now) that I've seen a "down market" where every asset class is down for any real length of time, and using MPT has ensured that every portfolio has within it those elements that didn’t decline or even grew as other elements declined. My clients in balanced portfolios have seen significant gains in this period of what some people call a "down market".

[/quote]

Mike I respect that your are doing a good job for your clients however your experience is much different than what I'm finding here in the northeast. Over the 01 to mid 03 era I found zero MPT portfolios that weren't suffering.

Well, as I've said, I respect your opinion, but I'm still at a loss to understand how a real MPT portfolio with elments of intl, emrmkts, and FI (and in a retiree's port we're talking a bucketload of FI) were hurting during that time period. If nothing else 2003 was a massive up year even for domestic equities. The only thing I can assume is 1) The portfolio was in mutual funds or SMAs that weren't style-pure regardless of what the name implied, and thus didn't really fill those appropriate pie slices assigned  2) was MPT in name, but really held only domestic, probably large cap stocks, 3) was style pure, but employed the very worst managers on the planet.

03 ended as an up year, I refer to it as the end of the down market.

In reality there is no such thing as a pure MPT portfiolio. All are weighted to a goal, income, growth, aggressive growth, or weighted a risk parameter, conservative, moderate, aggressive. Few if any clients have enough assets to hit every style box in a pure allocation. The weightings and the lack of exposure to all the style boxes has shown me that noone gets optimum performance and risk protection. The numbers are all over the place, yet all were down during the down markets.

These are mostly SMA accts.

In theory there is no arguement as to whether a balanced portfolio will outperform a concentrated portfolio in a down market. The problem comes from weighting the portfolio to meet a goal.

I'm not clear on that last bit. Please explain.

Client wants more growth so advisor gives them a doulbe dip of growth at the expense of another allocation. Or, research shows X will under perform Y so let's skip X and double up on Y. Fill in the blank, there is no such thing as a pure allocation.

And the problem occurs when several portions of the allocation are splitting hairs type of allocations. Such as LCG and LCV. Both are large cap and both got whacked. And degrees of whacked doesn't matter to retirees watching their life's savings go down the drain.

I would really disagree with you there. I don't think it's splitting hairs and more importantly, when you consider the investment styles involved in selecting each (Buffett's deep value, versus, say, Marsico's momentum growth LC,) the delta in results can be massive. For example, 2001, the Russell 1000G was down 20.42%, while the R1000V was off 5.59%. When you consider there should have been part of that portfolio in R200V (+14.) LBAG (+8.44) the difference between a absolute positive return when hairs were split between the LCs is pretty obvious.

OK, if you happened to guess that one right. Most didn't and most sub $500,000k accts don't have enough in assets to cover every style box. Now that minimums are moving to $250k, this is more the case.

Secondly, even in those very rough years of 2001 and 2002 (2003 was big, big up year) when balanced MPT portfolios lost 4-5% and then 8-9%, I find it hard to call that "down the drain". Down the drain was the guy not using MPT who was in LC and lost 20.42% in 2001 and another 27.88% in 2002. Were there really retirees who were told they'd never have a down year or were positioned in such a way that down 5% and then down 9% killed their retirement?

You know as well as I do that the Drink the Cool Aid (or is it Kool Aid?) crowd is pushing equities as the only inflation hedge out there. An inflation hedge isn't suppose to lose money, it's suppose to make more of a return than the bonds/fixed income investments that the client needs, understands, and wanted in the first place. So in that sense, yes, these clients were led to believe that this portion of their portfolio would increase in value, not decrease. They listened to well meaning young men and woman who looked at the long term trend while ignoring those pesky down years and didn't bother to calculate the time it takes to recover even a small loss. Which by the way,  it takes a about a 16% gain to get back the loses you mention. So instead of the equity portion of the portfolio being an inflation hedge, it's a drain that takes time to recover. In this case, had investors invested exactly with the timing you mention that recovery time took over three years. Also we in this business talk "Wall Street" speak when discussing loses. That is we talk percentages. Try telling a conservative investor with $500k invested with you, $375K in the stock market, allocated as you've shown above, that they've lost $56k and what a good job your doing for them because everyone else lost $100k. That's the reality, it's real money. It's not 5% one year and then 9% the next. It's 50 grand! It's 50Grand that this client had to work for, and save. It's where  any advisor who tries to soft pedal that is out on their ass. And that's were MPT fails.

Most of the allocations, even though advertised as non corelating are only partially non correlating.

Someone is misrepresenting the facts if they're saying their equity components are "non-correlating". That description has to be reserved for AI and the like.

MPT balanced porfolios for those short of goal is a valid, but not foolproof strategy to attain goal.

As soon as they build a "fool-proof plan" nature makes a better fool. Having said that, unless you're dead, it's hard for me to think of a investment aim that isn't "short of a goal". Even those who have enough cash that they make make their required income out of a MM balance are using MPT.

Mike, your past performance shows are among the minority correctly using this tool.

Again, that's not been my experience. I've seen many FAs screw the pooch, but that's been their error, not MPTs. In fact, I can't think of serious money being handled anywhere that's not using MPT as an underpinning.

Is there a difference, between the advisor and the practice of MPT?

[/quote]

Again, none of this is meant to take away from your comments about the long term bond portfolio, which in specific circumstances is the right answer.

Same, I respect your position, even if we're not in agreement.

[quote=mikebutler222][quote=dude][quote=mikebutler222][quote=dude]

Damn tjc, great post.  A breath of fresh air to have someone articulately address the MPT scam that's going on (using it as an excuse to collect asset management fees).........[/quote]

tjc45, is this an even remotely accurate description of what you were saying?

[quote=dude]

Now Mikey, hold on there as I know the beast is about to be unleashed.....I'm not saying that MPT IS a scam. O.K.?  I think we all know where you and I stand on this issue so let's let a dead horse lie.

[/quote]

OK, I'll admit confusion here. Could you explain what appears to be a contradiction in your posts? Sure sounds like you're calling something a scam....

[/quote]

Use your eyes and read the above post by TJC.  I think he is being a little more articulate than I.  Maybe SCAM is a little harsh of a word but as you quoted ME, I clearly said that MPT is NOT a scam.  Just using it as an excuse to collect fees for an army of brokers who are getting paid to be asset gatherers not managers.  C'mon Mikey, we've had this conversation too many times before and like I said let's let a dead horse lie.

[/quote]

Just trying to figure you out, dude. You use words like scam and excuse and it makes me wonder just how you think MPT should be implemented (and priced) and why brokers shouldn't be asset gatherers (to completely ignore the work they do after the assets are gathered) and hand the active management (if that’s what’s being used) off to people better able to do it.<?:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

If you want to, what at least sounds like to me, impugn the integrity and business model of others and then leave the subject alone, fine.

[/quote]

If I were to tell all the clients that are in a Portfolio Architect type wrap program the actual amount of work that most (key word here, not ALL) brokers (at least the 40 I worked with at Morgan) actually do for the 1.5% fee that many of them are paying I think the clients would feel at least a little SCAMMED. 

Like I said you know my attitude about how we get paid and what constitutes a FAIR compensation for ACTUAL work done.  Most clients would not be thrilled (in my opinion) at the idea that they are in essence paying a 1.5% fee annually for the broker to GENERALLY just sit on the assets and maybe make occasional changes that end up not delivering much value.....eg: "Gee Mr. Schmuck, I see that the manager on your XYZ international fund left and some unknown is now running it, let's change over to this other fund, yeah I know it only represents 5% of your overall allocation (and therefore most likely isn't going to make much difference to you) but hey I've got to do SOMETHING to seem like I'm actually earning these fees, right?"

Anyway as we have debated this particular topic too many times to count, I am not interested in regurgitating it.  I believe MikeB that you are not the type of broker I am describing (sitting on assets not adding much value) based on your representation of your approach, O.K.?  It seems to me that you are doing a little more than most I have known to justify your cost.  It's my contention that you should be agreeing with me if you are interested in preserving the integrity of our business.  There is no reason why an asset gatherer should be compensated by his/her clients to sit on assets, which as I'm sure you would concede, a lot of brokers do.

[quote=dude]

There is no reason why an asset gatherer should be compensated by his/her clients to sit on assets, which as I'm sure you would concede, a lot of brokers do.

[/quote]

Thanks for the kind words. Refresh my memory, you're talking about a non-desc MF account, right? If the client's paying a fee and the broker's doing zero, I'm with you.

Exacto.

[quote=tjc45][quote=mikebutler222][quote=tjc45][quote=mikebutler222][quote=tjc45][quote=mikebutler222][quote=dude]

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OTOH, I don't think in my experience (all day, now) that I've seen a "down market" where every asset class is down for any real length of time, and using MPT has ensured that every portfolio has within it those elements that didn’t decline or even grew as other elements declined. My clients in balanced portfolios have seen significant gains in this period of what some people call a "down market".

[/quote]

Mike I respect that your are doing a good job for your clients however your experience is much different than what I'm finding here in the northeast. Over the 01 to mid 03 era I found zero MPT portfolios that weren't suffering.

Well, as I've said, I respect your opinion, but I'm still at a loss to understand how a real MPT portfolio with elments of intl, emrmkts, and FI (and in a retiree's port we're talking a bucketload of FI) were hurting during that time period. If nothing else 2003 was a massive up year even for domestic equities. The only thing I can assume is 1) The portfolio was in mutual funds or SMAs that weren't style-pure regardless of what the name implied, and thus didn't really fill those appropriate pie slices assigned  2) was MPT in name, but really held only domestic, probably large cap stocks, 3) was style pure, but employed the very worst managers on the planet.

03 ended as an up year, I refer to it as the end of the down market.

It was a massive up year.

In reality there is no such thing as a pure MPT portfiolio. All are weighted to a goal, income, growth, aggressive growth, or weighted a risk parameter, conservative, moderate, aggressive.

It isn't a violation of MPT to be weighted to a goal. In fact, they should be.

Few if any clients have enough assets to hit every style box in a pure allocation.

I suppose that depends what tools are available to you. I can do it for accounts north of $50k. Granted, that's thanks to a new process, but we do it regularly with accounts north of $200k. Perhaps it's accounts unable to hit every style box that you've seen that were hurting.

The weightings and the lack of exposure to all the style boxes has shown me that noone gets optimum performance and risk protection. The numbers are all over the place, yet all were down during the down markets.

I would say those weren't genuine MPT accounts since they skipped styles and classes, but I see your point.

These are mostly SMA accts.

I can see the problem now. You're looking at accounts where there's a $100k min for each style box, so MPT isn't fully or evenly employed.

In theory there is no arguement as to whether a balanced portfolio will outperform a concentrated portfolio in a down market. The problem comes from weighting the portfolio to meet a goal.

I'm not clear on that last bit. Please explain.

Client wants more growth so advisor gives them a doulbe dip of growth at the expense of another allocation. Or, research shows X will under perform Y so let's skip X and double up on Y. Fill in the blank, there is no such thing as a pure allocation.

There is pure allocation, but when FAs bastardize it as in your example you don't blame MPT, you blame the FA. That's exactly the half-assed application that causes problems.

And the problem occurs when several portions of the allocation are splitting hairs type of allocations. Such as LCG and LCV. Both are large cap and both got whacked. And degrees of whacked doesn't matter to retirees watching their life's savings go down the drain.

I would really disagree with you there. I don't think it's splitting hairs and more importantly, when you consider the investment styles involved in selecting each (Buffett's deep value, versus, say, Marsico's momentum growth LC,) the delta in results can be massive. For example, 2001, the Russell 1000G was down 20.42%, while the R1000V was off 5.59%. When you consider there should have been part of that portfolio in R200V (+14.) LBAG (+8.44) the difference between a absolute positive return when hairs were split between the LCs is pretty obvious.

OK, if you happened to guess that one right.

The point is you didn't have to guess.

Most didn't and most sub $500,000k accts don't have enough in assets to cover every style box. Now that minimums are moving to $250k, this is more the case.

See above about account mins, that's not a fault with MPT, that's a fault with the tool used. Again, however, I see your point.

Secondly, even in those very rough years of 2001 and 2002 (2003 was big, big up year) when balanced MPT portfolios lost 4-5% and then 8-9%, I find it hard to call that "down the drain". Down the drain was the guy not using MPT who was in LC and lost 20.42% in 2001 and another 27.88% in 2002. Were there really retirees who were told they'd never have a down year or were positioned in such a way that down 5% and then down 9% killed their retirement?

You know as well as I do that the Drink the Cool Aid (or is it Kool Aid?) crowd is pushing equities as the only inflation hedge out there. An inflation hedge isn't suppose to lose money, it's suppose to make more of a return than the bonds/fixed income investments that the client needs, understands, and wanted in the first place.

Inflation hedges obviously can and do lose money over some timeframes. People saying otherwise are fools are liars, or drink kool-aide by the gallon 

Try telling a conservative investor with $500k invested with you, $375K in the stock market, allocated as you've shown above, that they've lost $56k and what a good job your doing for them because everyone else lost $100k.

1) A conservative investor with 75% in the market? 2) He was so poorly prepared that with 75% of his money in the market he was shocked to see a 11% loss?  4) Who told him the market wouldn't dip and flow? 5)Ignoring that the portfolios we're talking about were above water by  2003 (from 2001),  just what's the alternative? What WILL lose nothing when "the market" goes south? Even the long bong portfolio (which I don't think is the issue here) will "lose" money, and even buying power.

 It's where  any advisor who tries to soft pedal that is out on their ass. And that's were MPT fails.

I have to say that's were a poor FA who either mislead or didn't properly prep a client failed. The FA also failed when he allowed a 30+ year investment time horizon to get cut to two years, as if anyone ever said a portfolio can't lose money because it's invested along the lines of MPT?

Most of the allocations, even though advertised as non corelating are only partially non correlating.

Someone is misrepresenting the facts if they're saying their equity components are "non-correlating". That description has to be reserved for AI and the like.

MPT balanced porfolios for those short of goal is a valid, but not foolproof strategy to attain goal.

As soon as they build a "fool-proof plan" nature makes a better fool. Having said that, unless you're dead, it's hard for me to think of a investment aim that isn't "short of a goal". Even those who have enough cash that they make make their required income out of a MM balance are using MPT.

Mike, your past performance shows are among the minority correctly using this tool.

Again, that's not been my experience. I've seen many FAs screw the pooch, but that's been their error, not MPTs. In fact, I can't think of serious money being handled anywhere that's not using MPT as an underpinning.

Is there a difference, between the advisor and the practice of MPT?

[/quote]

Again, none of this is meant to take away from your comments about the long term bond portfolio, which in specific circumstances is the right answer.

Same, I respect your position, even if we're not in agreement.

Mike, I think I'm out of colors so I reply the old fashion way.

Reading your posts has made it clear to me that you are a true student of MPT. I respect that and the way you practice it.

Having said that, our discussion has made me realize that my aruement with MPT isn't with MPT but, with the practice of MPT. Or how MPT is practiced.

One of your comments was about your ability to pick and chose from so many managers. And that's the problem. As good as you may be at this,most aren't nearly so. The problem isn't with the plane, it's with the pilot. If the pilot makes good choices the plane has an uneventful flight. If the pilot makes poor choices the plane crashes when trouble is encountered. And like the real deal plane crash, a porfolio crash, it doesn't matter much what caused it. The result is the same. In the end the two are inseperable. I was blaming the plane when all along I should have been blaming the pilot. Not that it matters. From where I sit the smoking hole is just as deep regardless of fault.

Mike, you are definately among the minority if you managed to make all the right choices to deliver positive returns during a horrible time in our stock market history. I have yet to see a comparable portfolio in my experience. Most are the butched portfolios you speak of where some goal skewed the weighting leading to disaster.

I think we've beaten this one to death.

tjc & Mike, well done on the exchange of  opinions!<!–
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And the use of so many pretty colors… Its FAN- tastic !!!