I thought I might add a little data here:

The portfolio I proposed on the first page collectively averaged in the top 19% over the last 5 years, top 17% over the last 10 years, top 20% over the last 15 years, top 21% over the last 20 years, and top 19% since inception (by Thompson). So it has been a consistently pretty good portfolio (I could easily have given an example with higher average rankings). And by the way all of the funds in the portfolio are team managed. But looking at an individual fund year by year shows much inconsistency: AMCAP, for example, has had individual year rankings going back from 2004 of top 51, 41, 23, 21, 20, 60, 30, 30, 82, and 69% (I see this kind of annual rankings inconsistency for about all of the funds). On which of those years does the advisor decide to move money out of AMCAP because the 'next' time period may give below average performance? Doing so could easily miss out of a good period for the fund. Hence the philosophy of buying quality and holding it for the long term without trying to time performance. I'm asserting that the ability to move the investments without incurring additional sales charges is of questionable value.

But what is the cost of the wrap account versus the front load? I picked the three funds AMCAP, Templeton Foreign, and Van Kampen Comstock for a 20 year hypothetical. Their 20 year rankings average top 19%. I used a 5% year withdrawal on the initial investment of $300k, with $100k in each of the three funds. The A share illustration gave a return of 13.32%, withdrawals of $711k, ending value of $1.12M, and charges of $10.9k. The same funds in a wrap account had a return of 12.38%, withdrawls of $646k, an ending value of $917k, and charges of $150k. The performance difference was $272k. Even allowing for an occasional 'Putnam blow up' and movement from that family into another with extra sales charges still leaves the A shares far ahead.

The nice thing about mutual funds is that the performance is there to be quantified and compared. One can claim that moving money within a wrap account enhances performance above the fees charged, but is there data to support the claim? Do clients understand the long-term costs and potential effect on performance? I'm not comfortable thinking I could do it, and especially not comfortable with the thought of costing my clients so much.

QUOTE=Butkus]

I thought I might add a little data here:

The portfolio I proposed on the first page collectively averaged in the top 19% over the last 5 years, top 17% over the last 10 years, top 20% over the last 15 years, top 21% over the last 20 years, and top 19% since inception (by Thompson).

[/quote]

I'm not condemning your mutual fund approach, but I have a couple of questions for you

Instead of evaluating performance based on "top x%", could we use absolute numbers, like "annualized 15%"?

[quote=Butkus]

I'm asserting that the ability to move the investments without incurring additional sales charges is of questionable value.

[/quote]

Well, it's just as easy to assert, and probably far easier to prove, that the ability to move between funds and fund families without repeated sales charges does have a value.

[quote=Butkus]

But what is the cost of the wrap account versus the front load?

[/quote]

It depends on the size of the account and what was paid in front load charges. If you're pinging the client for 4% upfront, and he's therefore starting with 4% less invested, and the best defense you have for that 4% ping is he's saving 50bps a year, all in, including management fees on the part of the fund managers, well, that's going to take a long time to overcome.

Additionally, what’s the justification for using multiple families, if overall fees is you single focus, and not performance? Why not then use a single family and minimize the biggest fee the client will ever pay, that massive upfront charge? After all, you’re saying in the case of a fee account that using the best managers doesn’t matter, so why does using several families matter? By that theory it seems you should go as cheaply as possible and muddle through.

Better still, if fees are te single focus, why not use ETFs, pay a commission that’s far smaller than the upfront sales charge on a load fund and no on going fee, just the minimal management fee in the ETF?

[quote=Butkus]

The performance difference was $272k. Even allowing for an occasional 'Putnam blow up' and movement from that family into another with extra sales charges still leaves the A shares far ahead.

[/quote]

You're going to have to show us the math for the fees you assumed and the front load you paid. Personally I think you'll have a hard time ever justifying having the client repeatedly pay front load sales charges. How many front loads sales charges did you assume the client might encounter?

[quote=Butkus]

The nice thing about mutual funds is that the performance is there to be quantified and compared. One can claim that moving money within a wrap account enhances performance above the fees charged, but is there data to support the claim?

[/quote]

Yes, there is.

[quote=Butkus]

Do clients understand the long-term costs and potential effect on performance? I'm not comfortable thinking I could do it, and especially not comfortable with the thought of costing my clients so much.

[/quote]

You're comfortable hitting them for a sales charge who knows how many times, plus the fund management fees, but you're uncomfortable charging them a flat fee with unlimited movement?

Again, personally, I can't find a justification for a front load sales charge these days. There are too many better controlled, better priced alternatives.

I don’t know where everyone got the idea that cheaper is better. Annual fees are not for me because I like to get paid upfront. It’s not hard to prove that adding a fee is more expensive, but if tha’t how someone likes to get paid, more power to them. We should get paid as much as we want, in the manner that we want.

Butkus, you are very much on target.  If someone is going be a buy and hold investor, "A" shares will give the person a much higher return.  The total expenses will be much lower.

Wrap accounts make the most sense for the client when they will be investing in multiple fund families and doing a lot of buying and selling.

IMO, the person who employs a buy and hold strategy with "A" shares will come out ahead in most scenarios.

However, as an advisor, there is a major downfall with "A" shares.  In future years, the payout is only .25% which then goes through your grid.  With this payout, brokers can't afford to properly service their clientele.   

[quote=anonymous]

Butkus, you are very much on target.  If someone is going be a buy and hold investor, "A" shares will give the person a much higher return.  The total expenses will be much lower.

Wrap accounts make the most sense for the client when they will be investing in multiple fund families and doing a lot of buying and selling.

IMO, the person who employs a buy and hold strategy with "A" shares will come out ahead in most scenarios.

However, as an advisor, there is a major downfall with "A" shares.  In future years, the payout is only .25% which then goes through your grid.  With this payout, brokers can't afford to properly service their clientele.   

[/quote]

You sound like someone who has only used A-shares and has no first hand experience with real world money in a wrap program.

Hypothetical returns are just that Hypothetical.  Rare that you pick the perfect selection of funds right from the start, or that the client actually sticks with them for that long......

Did you not read my post?  I seldom use A shares. 

....and you're comparing it to  picking the perfect wrap account from the beginning?

I've been doing this for a long time and I have NEVER had a client move money out of an A share.  If someone has an A share and their annual expenses are well under 1%, it's awfully hard to justify doing anything else with the money.

The typical wrap account would have to outperform an "A" share by 1% a year to have the same result.

[quote=anonymous]

Did you not read my post?  I seldom use A shares. 

....and you're comparing it to  picking the perfect wrap account from the beginning?

I've been doing this for a long time and I have NEVER had a client move money out of an A share.  If someone has an A share and their annual expenses are well under 1%, it's awfully hard to justify doing anything else with the money.

The typical wrap account would have to outperform an "A" share by 1% a year to have the same result.

[/quote]

And Dirk is saying that that is not hard to do

"The typical wrap account would have to outperform an "A" share by 1% a year to have the same result."

No, not really--wrap account doesn't have the A-share upfront cost, plus the A share still has .25%/yr to the broker...so really it's only a .75% difference in the out years (if we're talking 1% wrap fee).  But, don't let the facts get in the way of the discussion.

Also, as joeda mentions, it aint hard to look BACK twenty years and pick the best funds, but it is impossible to predict some group will be as superior the next twenty years.  I think having some flexibility is worth something, even if you end up never using it.

The flexibility can work against you just as easily as it can work for you.  

I think that there are plenty of reasons to put clients into wrap accounts.  In most cases, I'd rather put a client into a wrap account than an A share mutual fund. 

Keep in mind that depending on the size of the investment, the A share may not have an upfront fee.

We'll only know in hindsight, what will perform the best.  The point is that the wrap account must outperform the A share by a significant amount for the long term investor to get the same return because of the fee difference.

Keep in mind that my argument in favor of A shares deals with INVESTMENT performance, but the only thing that really matters is INVESTMOR performance.

[quote=Cowboy93]“The typical wrap account would have to outperform an “A” share by 1% a year to have the same result.”

No, not really--wrap account doesn't have the A-share upfront cost, plus the A share still has .25%/yr to the broker...so really it's only a .75% difference in the out years (if we're talking 1% wrap fee).  But, don't let the facts get in the way of the discussion.

Also, as joeda mentions, it aint hard to look BACK twenty years and pick the best funds, but it is impossible to predict some group will be as superior the next twenty years.  I think having some flexibility is worth something, even if you end up never using it.[/quote]

Agree on the upfront charges hurdle, and if things don't go as planned, the client has that hurdle again and again, when the advisor recommends moving on (and face it, if the fund turns to sh*t, that's what you'll be doing...some advisors don't even wait for that to happen).

Disagree about there only being a 75 bp differential.  This is true with qualified money where I have to rebare the 12b-1s against fees, but I don't rebate 12b-1s in non-retirement accounts.  Some may, but I'll bet that most advisors don't.

Agree on flexibility being worth something.  top-performing funds get big and top tier performance gets tougher and tougher (see Magellan and ICA).  Fund managers change.  Some stay but lose their touch.  For many reasons, what is good now, may be a piece of crap in five or ten years.  It sure is nice to recommend a change without having to explain another 3-5% hit to the position.

[quote=anonymous]

Keep in mind that depending on the size of the investment, the A share may not have an upfront fee.[/quote]

Now you're assuming a multi-million dollar asset pool so that you can use several fund families w/o a sales charge. At that doller level the lack of tax controls in a mutual fund, ths cash balances every fund manager will be holding, the "herd" mentality of the others invested with you in those funds and the management fees, for which you get no break-points, becomes a cost issue well beyond most SMA programs.

Does anyone know which firms have a fee-based platform that allows clients to trade through their advisor or online by themselves at their discretion?  For folks that like to do a little online trading but still rely on their advisor for the big decisions, this seems like a good way to go.  Also a good way to leverage my time and avoid dealing with tiny trades by allowing them do DIY.

Thanks !!!!!

Dr J.

Do most independent brokers heavily use wrap accounts?

[quote=DrJoey]

Does anyone know which firms have a fee-based platform that allows clients to trade through their advisor or online by themselves at their discretion?  For folks that like to do a little online trading but still rely on their advisor for the big decisions, this seems like a good way to go.  Also a good way to leverage my time and avoid dealing with tiny trades by allowing them do DIY.

Thanks !!!!!

Dr J.

[/quote]

I would think that they all do.

[quote=Butkus]Do most independent brokers heavily use wrap accounts?[/quote]

I definately do.  It's an easy sell. 

I wonder what the avg gross production is for independents who do not use wrap accounts?

[quote=iconsult100]

[quote=Butkus]Do most independent brokers heavily use wrap accounts?[/quote]

I definately do.  It's an easy sell. 

[/quote]

Oh...so you go for the easy sell, instead of what's best for the client?