DOL Unintended Consequences?

[DHK]

The value for the $8k will be (rationalized as):
- Fiduciary duty
- Ongoing financial advice per the ADV Part 2
- Active management of account (versus mutual funds) which *may* help to reduce market volatility
- Ongoing beneficiary update & review
- Whatever else the advisor and their team can do to serve this client.

In essence, as long as the advisor can justify the fees charged AND document their services, the advisor will be fine, and it MAY mean an increase of service for the investor.

https://www.kitces.com/blog/craftin...ancial-planners-value-to-prospective-clients/

Remember that a portfolio of retail mutual funds has no DUTY to do any of the above, but the smart ones do it anyway.

 

[nylife11023]

Do you think there would be $8,000 of value to a 75 year old widow's portfolio of $700K in muni, state, and federal bonds bought years and years go... and $300k in American Funds or something similar?

Sure I can see a fee, but not $8k. It is just a money-grab by your sector of the financial industry. Spin it however you wish, but that is what it is.

My guess is it will set off a price-war among the major discount services like TD and Schwab and TRowe, etc., to grab clients from each other... the ones with at least $500K of assets.

Those with less will have robo-advisors.

 

[scagnt83]

My guess is it will set off a price-war among the major discount services like TD and Schwab and TRowe, etc., to grab clients from each other... the ones with at least $500K of assets.

Those with less will have robo-advisors.

Try $1mm. I forget who it was, but one of the big name firms just recently threw all clients with less than $1mm to their RoboAdivsor.

Some will take less, others will want more.

There is big time price compression in the investment world. It will only increase as robo-advice becomes better and more tailored.

I dont think robo-advice will kill off all advisors. But it will make a very big dent over time imo. Heck, there are a lot of guys who are simply just telling the client what the computer is telling them... the salespeople will die, the true advisors who's technical knowledge brings value will mostly survive.

 

[nylife11023]

There is an upside to the managed account 1% fee program that so many houses will be looking to move people into. If you have $800K in the account and if you are looking at paying $8000 a year as a fee, people will expect (demand) that the advisor make you at least double that, and if he or she doesn't it will be evident... and probably time to change houses.

With the 'free ride' AUM and commission paradigm out of the picture, it will mean a lot more work for advisors and they will have to be right more often than wrong since the client will 'feel' the cash leaving his pocket, vs. the 'hidden' fee structure that has been the paradigm for so long.

I'd hate to be the advisor during a major market crash where the client loses 20% of the value of his portfolio but the advisor still makes a pile of money. If my portfolio dropped from $800K to $650K and you made $5,000 that year... I'd be looking for a new advisor.

Advisors should be paid to be RIGHT. I've always believed that if the clients don't make money, neither should the advisor.

https://www.amazon.com/Where-Are-Customers-Yachts-Street/dp/0471770892

 

[Golfnut2112]

Many customers will be 'taken advantage of' (I could have used different wording!) by the new rule. Take the 75 year old widow who has $800,000 in an IRA account. She has solid mutual funds and maybe a few stocks and bonds. She never (or hardly ever) trades. She will probably be put into a managed account costing 1% per year since the commission model is being taken away from her. That is $8,000.

What value is she getting for her $8K?

That 1% is very generous, that is usually only the investment advisors fee. When you add in the custodial and money managers fee you may be a little under or a little over 2%.

 

[Tahoe Ray]

That 1% is very generous, that is usually only the investment advisors fee. When you add in the custodial and money managers fee you may be a little under or a little over 2%.

Thumbs up from the app.......

 

[VolAgent]

The value for the $8k will be (rationalized as):
- Fiduciary duty
- Ongoing financial advice per the ADV Part 2
- Active management of account (versus mutual funds) which *may* help to reduce market volatility
- Ongoing beneficiary update & review
- Whatever else the advisor and their team can do to serve this client.

In essence, as long as the advisor can justify the fees charged AND document their services, the advisor will be fine, and it MAY mean an increase of service for the investor.

https://www.kitces.com/blog/craftin...ancial-planners-value-to-prospective-clients/

Remember that a portfolio of retail mutual funds has no DUTY to do any of the above, but the smart ones do it anyway.

You can rationalize all you want, is that of any real value, is that worth 8k a year for an account that has little to no activity and thus was not incurring commissions?

 

[DHK]

Ask the account holder how well their account did in 2008 and then determine if institutional money management allocation may be a fit, even for $8k (1% advisor fee). Instead of losing 30% - 50%, why not limit losses to about -5% (as an example) and have more money working to recapture market gains as the market rebounds?

Here's another GLARING thing that is often overlooked in threads like these:
1) For a large account, such as $800k, there is often the predisposition of advisors to STEER these kinds of accounts over to an AUM model for the long-term compensation. At $800k, there is very little commission charged on A-shares anyway - perhaps 1.5% up front?

Here's American Funds A-share breakpoint schedule:
https://www.americanfunds.com/indiv...class-information/reducing-sales-charges.html

2) Because the A-share breakpoints are so small, it's very easy to RATIONALIZE moving the client from one mutual fund institution to another perhaps every 5-7 years. Frequent enough to make the advisor profitable, but not so frequent enough to be accused of 'churning' the account to generate commissions.

3) If the client doesn't change mutual fund providers with their CURRENT advisor, if they move to another one, it is almost GUARANTEED that the NEW advisor would recommend either a new mutual fund company, or institutional money management so the NEW advisor can be compensated. (12b1 fees simply aren't enough ongoing incentive.)

So we can talk all day long "in theory" about the $800,000 client paying 1% (really it's 2-2.5%) in AUM, or we can look at the REAL WORLD of A-shares and breakpoints, and moving clients from one mutual fund family to another. I'm not saying it's right. I'm saying it's what happens.

Either way, they're paying. Why not be in an open-architecture multiple-money manager platform with level AUM compensation for the advisor and you can work with strategic/tactical managers, instead of moving around from one mutual fund company to another every few years?

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4) Let's remember that when markets tank, and if brokers are making calls to their clients... WHO is going to be called FIRST? Who is going to be called LAST? If you have 300 clients, it's going to take a while to reach them all.

With brokerage clients that are managed on a non-discretionary basis (meaning you must call clients every time for approval to place trades), it's a tedious and manual task. Why not have a 3rd party manage assets on a discretionary basis and let advisors manage client relationships?

 

[nylife11023]

So we can talk all day long "in theory" about the $800,000 client paying 1% (really it's 2-2.5%) in AUM, or we can look at the REAL WORLD of A-shares and breakpoints, and moving clients from one mutual fund family to another. I'm not saying it's right. I'm saying it's what happens.

I'm not sure DHK has made a reasoned argument or if he has just given us a lot of industry spin.

In his world, he says of the 70 year old widow with $800K of funds and bonds.. who does not trade much... and who is happy with her portfolio and who is risk adverse... that he (or his industry) can provide her with $8,000+ worth of value per year.

In my world, it simply won't happen and 'grandma' is going to be ripped by the vast majority of advisors and wire houses and banks she does biz with.

In a down market year or cycle, the only one who will make any money will be the house... and I guess DHK is OK with that.

I have not done the math, but given these high fees, maybe grandma is better off methodologically liquidating her IRA into a standard margin account. Perhaps the tax consequences are more favorable than paying DHK $8K each year for the next fifteen years

It is ironic that an idea/concept that was designed to protect consumers (especially seniors) from the financial industry screwing them morphs into a vehicle where customers will be screwed even worse!

I always thought that lawyers were the best at rogering their clients but institutionally they don't hold a candle to the financial industry.

 

[DHK]

You didn't read my post, or you don't know what tactical asset management is.

1) If you could avoid a 50% loss in exchange for only a 2-2.5% annual AUM fee, would that be worth it? I would say so and would gladly say so in court.

2) Due to the client engagement agreement that would outline the standard of care, that spells out the duties of the advisor to the client, it should be worth the %'s being charged. Otherwise, it could be done in a client retainer model.

You are comparing the broker model to the advisor model under the same conditions and it's a false comparison.

The hardest part of this whole discussion is assuming that the same advisor will change all their clients from brokerage to advisor managed accounts. What would justify that change?

However, if you bought mutual funds from a broker a year ago, and moved your accounts to me (assuming I was an IAR with an RIA), I would be charging my advisory fees regardless of what you did before we commenced our relationship together. Why? Because it's a new relationship and I will be paid according to my ADV Part 2.

3) Having BEEN in the broker world, I can tell you that re-selling an existing customer is easier than attracting a new one. (Obvious, right?) Don't different mutual funds have changing MPT statistics that can warrant a change from one mutual fund family to another - even and especially under a fiduciary duty?

I switched a couple in their 80's from their income fund from one fund family to another when they moved their assets to me. How did I justify it? With the past performance metrics of modern portfolio theory AND lower management expenses (if I remember correctly). I think the portfolio value was around $400,000 or so.

Was it compliant? Yes.

Was it a good thing for the client? Yes.

Did I make more money as the advisor? Yes.

Would it ever hold up in court? No.


Time changes everything. What was once suitable in the past doesn't mean it's the most suitable today.