DOL Unintended Consequences?

[Golfnut2112]

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.

You are completely misinformed, I would read DHK's post again and Google tactical management.

What would you recommend? Let me guess an indexed annuity with surrender charges, ordinary tax rates upon distribution and no stepped up basis upon death.

I have nothing against indexed annuities I just sold a nice one Wednesday to a 62 year old but I also put 40% in a managed account. One product is not better than the other they just do different things.

One last point, you do realize mutual funds have fees besides the initial sales load on A shares and around 1.6%- 1.8% on C shares which the client does not even see?

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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.

You are completely misinformed, I would read DHK's post again and Google tactical management.

What would you recommend? Let me guess an indexed annuity with surrender charges, ordinary tax rates upon distribution and no stepped up basis upon death.

I have nothing against indexed annuities I just sold a nice one Wednesday to a 62 year old but I also put 40% in a managed account. One product is not better than the other they just do different things.

 

[DHK]

nylife11023 is in some form of corporate asset management/investment position and travels around the country for this position. He doesn't sell insurance anymore and largely posts here for the entertainment of the non-insurance forum. lol

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

I just saw this. No wonder you have such a skewed view of this business.

Advisors CANNOT predict the future! There is only a very elementary portion of securities licenses that talks about economics. Even then, EVERYTHING CHANGES.

Back in the 60's and 70's was the beginning of the 'financial planning movement'. Why? Because salespeople wanted to make sales REGARDLESS of the economic environment. So Loren Dunton (a NON-financial sales person) was a sales trainer who met with a few people to discuss their industry.

The Birth of a Profession: Financial Planning - The Dunton Homesite

The meeting began with 13 men gathered on a Saturday morning, December 12, 1969, in a room at the O'Hare Inn in Chicago. In December 1969, the economic climate was not good. Why had they gathered in Chicago at the dawn of a recession, right before Christmas? They were not looking to sell their products or transact business agreements. They had spent money out of pocket just to be there. They were tired of leaving their financial fate to the roller coaster economy and sitting idly by without a prayer.

All the financial product and service salesmen of the United States were experiencing the same worries. However, it was these few that were driven to find a solution. It had to be done. They did not know one another, they were in different businesses with vastly different backgrounds and their ideas about how to overcome this mounting problem were miles apart. Someone had to bring them together. Something had to be done and needed to be instigated immediately.

[...]

Loren Dunton was a conceptual salesman, one who believed the key to the sale was sales training. He had been an extremely successful salesman of tangible products, such as silverware and books. He had recruited and trained sales representatives, learning how to replicate his efforts. He created manuals, books, films, training programs all in the interest of the salesman. He advocated the much needed lesson: Forget your product's 'new' improved' features and sell benefits addressed to the specific customer's needs. But Dunton had never sold a financial product. What he had done was trained others on the process of professional sales techniques.

If you knew much about the financial advisory profession, you'd learn that there are other factors, such as "behavioral finance" and "managing wealth to goals" and other stuff out there. The value of the advisor is NOT in predicting the markets, but in constructing portfolios that help to limit volatility and maximize returns according to a specific risk tolerance and time horizon. Then, it's to help clients to STAY THE COURSE if things get rocky.

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And that's why performance-based compensation is often not allowed by many firms.

However, THINK about this: there is a firm that offers to refund FEES if their investments don't perform well for two quarters in a row. That's what TD AmeriTrade offers.

http://www.thinkadvisor.com/2014/08/25/td-ameritrade-fee-rebates-a-win-or-a-loss-for-inve

Let's see: If I have a $1 million portfolio, and I lose 30%, I have $700,000 remaining. Assuming a 2% annual fee or $20,000 per year to manage the portfolio, would I rather have $10,000 back (2 quarters of fees)? Or $300,000 back? I'd rather have the $300,000 instead of the $10,000 in fees.

If anything, this is to discourage complaints by "paying people to shut up about lack of performance" - although while it would be entered into a complaint, wouldn't necessarily stop a complaint from happening.

 

[nylife11023]

nylife11023 is in some form of corporate asset management/investment position and travels around the country for this position. He doesn't sell insurance anymore and largely posts here for the entertainment of the non-insurance forum. lol

No, I don't work in the management or investment sector per se. I work for a Wall Street company in the M & A sector.

I don't write insurance contracts but I used to be an active producer of key-employee and ILIT and business succession premium after disengagement from the military and while in school. Working in the business area of life insurance was a good prep for where I am now.

The M & A field consists of long hours with computer stats, days and nights in many airports and hotels, presentation prep and anxiety, and the depression from the many disappointments in deals that either don't pencil out or which go 'south' or which are lost to competition. Finally there is the constant pressure by senior management to 'win.'

The compensation package makes it all worthwhile for select men and women (often ex-military) who are cut out for this kind of high-pressure, physically taxing, team-oriented "larger than yourself," competitive environment.

Wall Street Bonuses: Bankers Make 5 Times Average Worker | Fortune.com

I post here trying to present the POV of a consumer, a POV that I believe so many in the retail side of the industry either don't understand or could care less about.

While I believe that DHK and others here are an exception, I find that the rule is that there is a huge number of brokers and advisors who only work for their own best interests and not that of the client and the idea of a fiduciary rule is an anathema to them.

I truly believe that being able to collect between $8,000 to $16,000 a year on a client's mostly dormant $800K account without having to provide a penny of value to them will result in a massive screwing of the investing public.

The legal and ethical bar was never very high to begin with and now it is even lower.

I don't know if "greed is good" but I'm now certain that it has been institutionalized.

 

[DHK]

The M & A field consists of long hours with computer stats, days and nights in many airports and hotels, presentation prep and anxiety, and the depression from the many disappointments in deals that either don't pencil out or which go 'south' or which are lost to competition. Finally there is the constant pressure by senior management to 'win.'

Might I suggest: https://www.amazon.com/Trump-Art-De...497855178&sr=8-1&keywords=The+art+of+the+deal

(Sorry, couldn't resist!)

The compensation package makes it all worthwhile for select men and women (often ex-military) who are cut out for this kind of high-pressure, physically taxing, team-oriented "larger than yourself," competitive environment.

Wall Street Bonuses: Bankers Make 5 Times Average Worker | Fortune.com

I post here trying to present the POV of a consumer, a POV that I believe so many in the retail side of the industry either don't understand or could care less about.

While I believe that DHK and others here are an exception, I find that the rule is that there is a huge number of brokers and advisors who only work for their own best interests and not that of the client and the idea of a fiduciary rule is an anathema to them.

I truly believe that being able to collect between $8,000 to $16,000 a year on a client's mostly dormant $800K account without having to provide a penny of value to them will result in a massive screwing of the investing public.

The legal and ethical bar was never very high to begin with and now it is even lower.

I don't know if "greed is good" but I'm now certain that it has been institutionalized.

https://www.kitces.com/blog/fiducia...cense-general-securities-representative-exam/

Just as you have a duty to 'perform', so also do most brokers have a duty to generate commissions (or GDC) to keep their jobs. Having a commission quota of any kind ENSURES that you cannot have a fiduciary duty to clients, but to your employer. Remember that even FINRA requires certain production in order to keep your licenses active (rather than 'parking' them).

When broker/dealers are used to a commission model for their revenue, and then to CHANGE the compensation requirements, firms will be creative - within the rules - to continue to do more and more GDC.

So I wouldn't necessarily blame the individual advisor/broker... but the business model in which they operate. It's also why firms are more afraid of the fiduciary ruling than their advisors are... and they are "over-reacting" to this news like nothing else. Just ask an Edward Jones rep.

 

[Golfnut2112]

No, I don't work in the management or investment sector per se. I work for a Wall Street company in the M & A sector.

I don't write insurance contracts but I used to be an active producer of key-employee and ILIT and business succession premium after disengagement from the military and while in school. Working in the business area of life insurance was a good prep for where I am now.

The M & A field consists of long hours with computer stats, days and nights in many airports and hotels, presentation prep and anxiety, and the depression from the many disappointments in deals that either don't pencil out or which go 'south' or which are lost to competition. Finally there is the constant pressure by senior management to 'win.'

The compensation package makes it all worthwhile for select men and women (often ex-military) who are cut out for this kind of high-pressure, physically taxing, team-oriented "larger than yourself," competitive environment.

Wall Street Bonuses: Bankers Make 5 Times Average Worker | Fortune.com

I post here trying to present the POV of a consumer, a POV that I believe so many in the retail side of the industry either don't understand or could care less about.

While I believe that DHK and others here are an exception, I find that the rule is that there is a huge number of brokers and advisors who only work for their own best interests and not that of the client and the idea of a fiduciary rule is an anathema to them.

I truly believe that being able to collect between $8,000 to $16,000 a year on a client's mostly dormant $800K account without having to provide a penny of value to them will result in a massive screwing of the investing public.

The legal and ethical bar was never very high to begin with and now it is even lower.

I don't know if "greed is good" but I'm now certain that it has been institutionalized.

Very simple question, what product type would you recommend and how would you get paid?

In your example with the $800,000 if someone feels they know what they are doing they can do it themselves and avoid a fee also if someone does not like the fee they can move the money out. No one is making a client pay a fee, they do it because they need help.

You seem like some loser that failed in the business now you have some ax to grind. If you are as busy as you say why are you even on this forum??

 

[VolAgent]

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.

How is that different than timing the market? How does the advisor, or really the fund manager, have a crystal ball to know when the market will drop and when it will recover? This could easily turn a 20% loss into a 50% by getting out late and getting back in late.

 

[DHK]

How is that different than timing the market? How does the advisor, or really the fund manager, have a crystal ball to know when the market will drop and when it will recover? This could easily turn a 20% loss into a 50% by getting out late and getting back in late.

Not necessarily. I don't know EXACTLY how it works (or I'd have a crystal ball of my own).

In short, there are two schools of thought behind asset management:
1) Strategic: Keep to a given allocation, ride it through the ups and downs. Don't sell out, or you'll miss the market rebounds. In short: Don't miss the highest highs.

2) Tactical: More tactical (meaning more market trading) to avoid losses. When the market begins to rebound, then rebalance back into the market. In short: Avoiding the losses is more important than chasing gains because you'll have more money working for you as markets rebound. To me, this is the most compatible with blending portfolios with annuities for lifetime income and managing portfolio expectations. The worst with this, is if the market is doing 20% and clients are only getting 12% or something like that. You have to remind them that by avoiding the lowest lows, you still won't get the highest highs.

Michael Kitces goes into even more detail comparing active vs passive vs managed vs indexed, etc.

https://www.kitces.com/blog/active-...tical-whats-your-investment-management-style/

Now, that's all nice and all, but what about real numbers? I posted these numbers from FAN Advisors before regarding their "in house" portfolio (made up of various managers and risk tolerances) as well as various asset managers through June, 2014. In this attachment, I highlighted 2008.

On the first page, at the top, it is comparing a client's EXISTING portfolio to the performance numbers of FAN Advisor's portfolio. You'll notice that there were slight losses by a couple of managers, but not 30% - 50%. At most, the moderate aggressive lost up to 5% in 2008. Later in the document, there are some 'strategic' managers that DID lose up to 38% and more.

I believe these returns are NET of advisor/firm fees, but I don't see that indicated on this attachment.

Is it market timing? Yes, but it's DISCIPLINED in some way - rather than being far more emotional as most clients (and advisors) may do.


FAN Advisors (www.fanria.com) would be the RIA I would join, but there are others that are "insurance-friendly" such as Peace of Mind Planning (Peace of Mind Planning | Home) and others that have advertised in insurance publications.

 

[scagnt83]

The idea of TPAM & TAM is great. The real life results are so-so in my opinion.

The layering of fees is a big issue for me. I looked at going this route and doing comprehensive individual planning using TPAMs.

The problem is that you are lucky to be at 2% for expenses. Most clients wind up with at least 2.5% in expenses.

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Im going to play the devils advocate on the justification for this model. Mostly because I would never put my own money into it. (which is why I decided against the business model)


1. Fiduciary Duty:

This is VERY subjective.

You are recommending 2.5% - 3% in total fees.

A VC ETF gives you the same type of risk control, and costs just 0.20%

Courts have ruled that limiting or eliminating unnecessary expenses is a major component of an Adviser's Fiduciary Duty.

Taking away the Advisors 1% comp for a sec, is the extra 1.3% really in the clients best interest?

As an IAR, you should be able to put them in most any Fund out there. And if you cant... are you really capable of working in the clients best interest???


2. Ongoing Financial Advice:

This is very subjective as well. As we all know, some "Advisers" are nothing more than money managers and give little guidance when it comes to the overall financial plan.

Others do give very comprehensive advice and ongoing guidance. But the "value" of that is being quickly negated by technology. There are computer algorithms that can guide people through life stages surprisingly well. That tech will only get better and cheaper.

And as we all know, a lot of the Financial Plans being created are nothing but a computer print out anyway.

There has to be a very high level of service to justify $8k - $10k per year for a retiree.
Lets look at it for a sec as a % of income...

$1mm account=
$10k per year to advisor
$40k per year in retirement income to client

So the fees are 25% of what the client gets from that account in Income. Try justifying that in a court of law in front of a jury....


3. Active Management vs. a Mutual Fund

Traditional Mutual Funds are actively manged.

Mutual Funds fall into 2 categories: Actively Managed and Indexed

Now they have "Tactical Asset Management" which is most often based on computer algorithms that measure the VIX and other indicators. These funds like to call themselves all kinds of fancy names. But they are technically just another mutual fund (& regulated under the exact same laws), its just managed differently and they often charge a higher fee for that privilege.

VC (volatility control) ETFs work in very similar ways to most TAM Funds. And the cost is a fraction of what the TAMs charge.

As an RIA/IAR, you SHOULD have access to most any Fund on the market. How one can justify TAMs over VC ETFs I do not understand. (especially since most TAMs invest in ETFs, but not VC ETFs)

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Fee compression is happening big time on the 401k side. The Fiduciary issue has been in the forefront for 8 years in that industry.

An Adviser charging 1% on a $1mm 401k Plan is risking litigation.... especially if they have front loaded A shares in the Plan and no index funds.

(And I can find a whole lot of reasons that it takes a higher level of expertise AND creates a higher level of litigious risk for an Adviser to work a $1mm 401k plan vs. a $1mm IRA.)


The same will happen to Advisers of IRA accounts over the next decade. Look for 50bps to 75bps in the next 8 years for accounts in the $1mm range. If not less.

Advisers and investment companies will not do this on their own. A combination of technology and litigation will force the change. Just like it did in the 401k industry.

 

[VolAgent]

The same will happen to Advisers of IRA accounts over the next decade. Look for 50bps to 75bps in the next 8 years for accounts in the $1mm range. If not less.

Advisers will not do this on their own. A combination of technology and litigation will force the change.

There are two big issues I have.

1. 50bps on 1 MM is only 5,000 a year. Depending on overhead costs and desired income level, an advisor is going to need 40 MM AUM to pay the bills and make a living. Most clients will be left to their own devices and annuity salesmen/agents. Which may or may not be a bad thing. And even then, the pressure is still on annuity commissions and thus what an agent is willing to write.

While 40 clients doesn't sound like a lot, what percentage of households in a typical city have portfolios of 1 MM+? And will advisors be able to charge a higher fee for smaller portfolios and how much smaller will they be willing to go?

2. Even at $5,000 a year, what is the client actually getting? I inherited a portfolio that is held by a Ed Jones broker. I have spoken with a long time family friend about possibly taking over the portfolio. But I still find myself scratching my head. What am I getting for 1%, how is this better than just parking it in some index funds?

 

[scagnt83]

I have spoken with a long time family friend about possibly taking over the portfolio. But I still find myself scratching my head. What am I getting for 1%, how is this better than just parking it in some index funds?

It depends.

- Are you getting a full-fledged financial plan that includes projections for retirement and your estate?

- Are they managing the portfolio themselves or using TPAMs (Third Party Asset Managers)?

If the Adviser is actually actively managing the portfolio, what are those decisions based on?
Personal experience/opinion?
Computer Models?
Model Portfolios provided by the RIA or BD?

What are the investments in? Stocks/MFs/ETFs?


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Assuming you dont get the full fledged financial/retirement/estate plan and they just manage the assets:

If managing a portfolio of Stocks. Then 1% is more than worth it assuming they know their stuff.

If managing (themselves) a diversified portfolio of ETFs. And I dont mean just the major 5 or 6 indexes. Then 1% is probably about right.

If they use model portfolios or computer generated allocations. And they use ETFs and not traditional mutual funds. Then I wouldnt pay more than 0.5%.

If they use a TPAM, then I wouldnt pay more than 0.25% (assuming the tpam has a great track record)


Now if they are providing very comprehensive planning. And especially if they use Emoney or some other type of account aggregation system thats made available to me. Then higher levels of comp are warranted.

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Depending on risk, an etrade account with:

40%-75% in major index ETFs
25%-60% in Treasury ETFs (or a mix of UST and AAA etfs)

Is going to be very similar in both look and results of most Model Portfolios/TPAMs/etc. At least generally speaking.

If you want to limit risk, look at Volatility Control Index ETFs. Which actively allocate between the index and cash based on VIX and other factors.

* This is not investment advice in any way shape or form!! Opinion only. LOL