[quote=dude]

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? 

[/quote]

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.

[quote=dude]

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?

[/quote]

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? 

[quote=dude]

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, ...

[/quote]

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

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.

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.

Why are we having any coversations at all Dirk?

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?

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.

[quote=dude]

.....who all LOVE the idea of getting paid to sit on the assets. 

[/quote]

"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.

[quote=dude]

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...

[/quote]

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.

[quote=dude]I think 100bps should be the absolute top, [/quote]

You do have that authority, right?

[quote=Dirk Diggler]

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.

[/quote]

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.

[quote=iconsult100][quote=Dirk Diggler]

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.

[/quote]

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.

[/quote]

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.

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.

[quote=Cowboy93]

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." 

[/quote]

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.

[quote=Cowboy93]

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.

[/quote]

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.

[quote=Cowboy93]

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.

[/quote]

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?

[quote=Cowboy93]

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.

[/quote]

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

[quote=Cowboy93]

Butlermunch--to answer your ? above....[/quote]

Ahhhh, I see the confusion. The way dude had formated his post I skipped over that he was quoting you.

[quote=Dirk Diggler][quote=iconsult100][quote=Dirk Diggler]

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.

[/quote]

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.

[/quote]

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.

[/quote]

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. 

[quote=iconsult100][quote=Dirk Diggler][quote=iconsult100][quote=Dirk Diggler]

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.

[/quote]

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.

[/quote]

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.

[/quote]

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. 

[/quote]

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

[quote=dude]

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.

[/quote]

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?

[quote=mikebutler222][quote=dude]

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.

[/quote]

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?

[/quote]

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.

[quote=mikebutler222]

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?

[/quote]

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.

[quote=Dirk Diggler][quote=mikebutler222][quote=dude]

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.

[/quote]

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?

[/quote]

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.

[/quote]

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...