Something that rookies or those in the business less than 6 years might want to keep in mind: we are going on 5 years now of an excellent market. Clients (should) be doing well and seeing their monthly statement increasing on a regular basis. Fees are not quite as much of an issue in times like these.

This changes dramatically when you go through an extended downturn (i.e 200--2002). The quarterly fees they see on their statement are basically adding insult to injury and many clients' will be very unhappy about it.  You will tell them that you (too) are taking a cut in pay due to the decrease in value; you are still keeping in touch and reminding them that while the market is down, they haven't lost "as much" as a comparative index; you'll try and keep them from selling out because it's not the long-term plan and (oh by the way) that will eliminate the fees they are paying you. Yes, I'm speaking from experience.

I'm not bashing fee-based accounts (I utilize them often) and not implying that mutual funds' (C share in particular) will be immune from a down market (i.e. unhappy clients).  But I will say that during the 2000-2002 period I saw the managed money focused advisors significantly affected, though not quite as much as the transactional (trading stocks) brokers.  I saw advisors whose business was geared around conservative/diversified funds fare much better, with a lot less angst from clients.  And no individual stocks blowing up on them.

As always, the key is to just keep bringing it in.  New accounts, new assets.

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



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



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



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

From my point of view, I like to keep my book very simple and competitive to clients, " bullet proof " in terms of value delivered versus cost to client and so on.

Let's use a real example, Rightway. I use ETFs, individual stocks, but mainly funds, and I use wrap, A shares, C shares, whatever. Flexibility is good and a primary benefit of broker dealer affiliation.

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

Class A in wrap at 1% with no load costs client about 2%, class C is cheaper. I get part of the trails at wrap, so maybe I get paid the same on wrap or C shares.

Point is, at C shares, client pays less and I get paid about the same.

As for raising my wrap fee to 1.5%, if I am the client, and as was pointed out in a down market, I'm paying about 2.5% instead of about 2% or 1.83%.

Rightway, I don't get your logic. I think I get about 68% on wrap, net.

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

Maybe I am taking your comment wrong, but it feels a little aggressive, given the facts.

[quote=The Judge]

Something that rookies or those in the business less than 6 years might want to keep in mind: we are going on 5 years now of an excellent market. Clients (should) be doing well and seeing their monthly statement increasing on a regular basis. Fees are not quite as much of an issue in times like these.

This changes dramatically when you go through an extended downturn (i.e 200--2002). The quarterly fees they see on their statement are basically adding insult to injury and many clients' will be very unhappy about it.  You will tell them that you (too) are taking a cut in pay due to the decrease in value; you are still keeping in touch and reminding them that while the market is down, they haven't lost "as much" as a comparative index; you'll try and keep them from selling out because it's not the long-term plan and (oh by the way) that will eliminate the fees they are paying you. Yes, I'm speaking from experience.

I'm not bashing fee-based accounts (I utilize them often) and not implying that mutual funds' (C share in particular) will be immune from a down market (i.e. unhappy clients).  But I will say that during the 2000-2002 period I saw the managed money focused advisors significantly affected, though not quite as much as the transactional (trading stocks) brokers.  I saw advisors whose business was geared around conservative/diversified funds fare much better, with a lot less angst from clients.  And no individual stocks blowing up on them.

As always, the key is to just keep bringing it in.  New accounts, new assets.

[/quote]

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

[quote=GolFA]

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

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

It sounds like you have a competitive arrangement, thanks for the perspective.

I will second Rightway's suggestion to get a subscription to personalfund.com

When you take a look at some of the internal, hidden trading costs of some of these funds oyu can see that these fees can double or TRIPLE the disclosed management fees...

I have seen some funds have trading costs of well over 3-4%, PLUS the disclosed 12B-1 and internal management fees. When presented to a client, it does make the SMA/ Managed Money argument that much more relevant.

Truth is, clients dont know about these costs, and most FA's dont either...

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

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

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

I would agree with you. That's why I use Columbia Marsico 21st or Cohen and Steers International Realty, for example. They are expensive internally but at the end of the day they beat their benchmark and peer group.

I made mention of the website because in reality most FA's arent aware of those costs....

[quote=GolFA]

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

[quote=AllREIT] [quote=GolFA]

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

[/quote]

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

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

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

I was wrong. You're not COMPLETELY stupid.

[quote=AllREIT] [quote=GolFA]

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

[/quote]

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

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

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

Index funds are only as good as the index.  If you had your money in an indexed fund from 2000 through 2003 you lost your ass.  Who gives a sh*t about the internal trading costs being low when you are losing money. 

I refuse to believe you are an actual advisor who deals with real live people.  Clients don't care about fees if you are growing their money.

[quote=blarmston]

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

I would agree with you. That's why I use Columbia Marsico 21st or Cohen and Steers International Realty, for example. They are expensive internally but at the end of the day they beat their benchmark and peer group.

I made mention of the website because in reality most FA's arent aware of those costs....

[/quote]

Yep, I appreciate the reference to the website, and I had almost forgotten about the reality behind your meaning - the CFP study was years ago, and stuff slips away even with continuing ed.

[quote=AllREIT] [quote=GolFA]

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

[/quote]

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

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

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

Yeah, turnover is not consistent with a long term investment philosophy, but you don't have to run the whole portfolio according to one strategy. Remember how Warren Buffet missed out on the technology stuff in the 90s? Some good old asset allocation and a little common sense portfolio rebalancing - just rebalancing stock gains to bonds - along with some value investing aka WB, and you had a sweet mix. We could apply those lessons today. A little active management with a passive core works really well for my clients, nothing wrong with a little sizzle along with the steak. And as Dust Bunny points out, the active managers can help protect the downside, especially, that is backed by experience. Passive core, regular rebalancing, pushed a little by active management. Works for me. ( And the reality is, a lot of times we are working around some holdings the client aquired over the years, so taking this approach to diversification and performance is pragmatic. Getting paid and staying in business is not a bad thing, either, from all points of view.)

I think its more of a way for a broker to try and take the business from another advisor (re. trading costs). But in the end I think net return is all anyone cares about. Also, take a look @ Keeley, Kinetics and PZFVX, most beat their benchmark w/less volatility. in the end isn’t that all that matters?

Big time. But advisors, like trained dogs, attack each other - too bad. The packagers ( everything from  etfs to b/ds ) all seem to be happy. Even the newest issue of RR is all about the booming biz of serving reps who " change ".  Must be the whole reality is better biz in the aggregate.

[quote=Dust Bunny][quote=AllREIT] [quote=GolFA]

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

[/quote]

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

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

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

Index funds are only as good as the index.  If you had your money in an indexed fund from 2000 through 2003 you lost your ass.  Who gives a sh*t about the internal trading costs being low when you are losing money. 

I refuse to believe you are an actual advisor who deals with real live people.  Clients don't care about fees if you are growing their money.

[quote=GolFA][quote=AllREIT] It’s very simple, look at the funds
turnover, and ask yourself if that is consistent with a long term
investment philosophy.

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

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

Yeah, turnover is not consistent with a long term investment philosophy, but you don't have to run the whole portfolio according to one strategy. Remember how Warren Buffet missed out on the technology stuff in the 90s? Some good old asset allocation and a little common sense portfolio rebalancing - just rebalancing stock gains to bonds - along with some value investing aka WB, and you had a sweet mix.[QUOTE]

GolFA, you're just repeating the same tired old cliche's about investments and investing. It's boring and sophisticated clients see right through it. What WB does is not what you are doing for clients, (putting them in C-shares).

Do you even understand why WB missed out on the tech bubble?

BRK is really three separate operation hidden in a holding company.

1) Core insurance operations of Personal lines (GEICO) and reinsurance. WB gets to time the reinsurance market vs vs monoline insurance companies who must play the market at all times.

The trick to BRK is that the insurance companies are very well capitalised at the corporate level *and* the assets at the holding company level are pledged to them.

Provided Gen Re etc do not suffer catastrophic losses, BRK gets to earn a return on the holding company assets twice. One from their intrinsic return and again from pledging them to the insurance operations.

2) The control investments. WB owns companies that he buys very cheaply and have defensible economic moats (e.g they earn economic profits) and do not face errosion of those moats..

That is the exact opposite of technology companies which face constant obsolesence of their products and have to spend huge amounts on R&D/Capex.

Whats Iomega up to these days?

3) The Outside passive minority investments are all done with the same perspective as a control investor. These arent "trading" stocks

4) Finally WB does not have a mandate to invest. So BRK is sitting on $40B in cash. You try doing that with clients, telling them that the market sucks and to hold 40% in cash.Value investing means being "off message" most of the time. If you do that with ordinary clients, you will get fired.

Klarman did that in the late 1999s and he took flack from clients.  They said  "Why are we paying you 2/20 to hold cash, you lazy bum?"

WB and deep value investors are the exact opposite of the passive EMH crowd and the diversify and try to beat the market crowd. They invest for absolute returns with limited downwards volatilty.

Something that is impossible to do if your goal is to track/beat a benchmark on a consistent basis.

Couple of points.

It's very simple and you help make my point: value is buy and hold and growth needs active management. Just because Buffet is a value investor does not make growth investing irrelevant.

In the larger scheme, companies like Iomega drive the whole economy and clever investors know when to buy and sell.

It's boring and sophisticated clients see right through it. What WB does is not what you are doing for clients, (putting them in C-shares).

Why are you insulting me? Be careful about projecting your own ideas on "sophisticated" clients. When was the last time WB helped a small investor with retirement income strategies or basic diversification? WB's holding period is forever, not the case for most folks trying to take an income off a portfolio.

WB probably eats too many hamburgers and drinks too much coke, maybe he's a geek who forgot how to spend his money - although he'll do a lot of good by giving it away. Point is, from a financial planning point of view, how much you make, or how you make it, or how much it costs - there is an important opportunity cost paid by those who focus only on such things - seriously, a lot of smart people keep it very simple for a lot of reasons, and move on to other opportunuties,  so don't assume simplicity is necessarily cliche.

You bring up some good and very basic points. If everyone followed your idea precisely, the market would beat a path around that idea, too. You are not smarter than the market, or even the collective wisdom and hands on experience of every single poster here. But I like your ideas and persistence.

( And I keep a note Warren wrote to me on my office wall - guess somewhere in his heart he appreciates what we do for the common man.)