DOL Unintended Consequences?

[scagnt83]

they really have a hard time explaining in English under what circumstances and when they will go back into market.

Many of them that were around pre 08 dramatically underperformed their benchmarks after the crisis hit. And were quickly surpassed by the benchmark and still lag to this day (Stadion got very popular around 2009/2010, then got very unpopular by 2014/15)

 

[DHK]

So I will ask you the question I have posed in general, what do you do to earn your 1%?

What does an insurance agent have to do to earn their 5% commission on an annuity?

What does a Series 6/7 broker have to do to earn their 5.75% - 2.5% A-share commission for selling mutual funds?


While the standard of care has been different, you're putting far more scrutiny on the RIA side of the business. At least with an RIA, I would be PAID to return your calls, have a vested interest in meeting with you regularly, and ensuring that your plan is really working for you.

Yes, I do that anyway, but the RIA compensation favors long-term relationship building, not initial sales commissions.

 

[scagnt83]

Me personally I send out monthly newsletters

That you write personally? Or is the generic white-labeled one offered by the RIA/BD.

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What does an insurance agent have to do to earn their 5% commission on an annuity?

What does a Series 6/7 broker have to do to earn their 5.75% - 2.5% A-share commission for selling mutual funds?


While the standard of care has been different, you're putting far more scrutiny on the RIA side of the business. At least with an RIA, I would be PAID to return your calls, have a vested interest in meeting with you regularly, and ensuring that your plan is really working for you.

Yes, I do that anyway, but the RIA compensation favors long-term relationship building, not initial sales commissions.

There is a big difference between your comparison.

Asset Allocation in a retirement portfolio is now a commodity. And the price of that commodity has plummeted with the onslaught of technology.

The going rate for Volatility based Dynamic Asset Allocation is around 30bps.

Hell, Schwab is now giving it away for free as long as you agree with being exclusive to their ETFs.


There is no online robo-advisor that tells consumers which FIAs have the highest caps or the best Participation Rates or the highest Rider Payout.

There are many different systems to analyze Mutual Funds... which is why Mutual Fund comp has been compressed so much over the past decade. But there is still often some human element (and opinion) in the comparison.


When the Adviser types in some info, reads your asset allocation off of a screen, and maybe places each individual trade (that is often automated for them too). They have to be able to provide some type of value that the consumer cant receive for 1/3 of the price online (or for free).


When consumers have a robo-advisor to tell them the most competitive annuity. You will see annuity comp start to be scrutinized in the same manner. And reduce accordingly.

 

[nylife11023]

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

I'd pay you on performance. I'll give you 15% of every dollar you earn for me. You pick a stock or a fund and if I decide to buy it and if it makes a dollar I'll give you 15 pennies. If I lose, you get nothing.

What does the agent who represents a pop singer, actor, or athlete get? Same concept.

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??

(I think you want to use a comma or semicolon or a conjunction between "business" and "now.")


You told me what I seem to you, so I'll tell you what you seem to me.

You seem to be another angry guy on the internet who will say things through his keyboard that he'd never say F2F. This board is full of guys like you and the best thing to do is simply not engage

So I'll tell you what. You don't have to respond. I'll just say "Bless your little heart" and leave you to live and enjoy what I'm sure is your wonderful life.

 

[scagnt83]

I'd pay you on performance. I'll give you 15% of every dollar you earn for me. You pick a stock or a fund and if I decide to buy it and if it makes a dollar I'll give you 15 pennies. If I lose, you get nothing.

What does the agent who represents a pop singer, actor, or athlete get? Same concept.

"Pay for performance" is not the model we want for most consumers. Regulations actually do not allow it in many states. NY & CT being the main exceptions... which is why so many hedge funds operate out of those states.

The reason for this is risk. To increase returns, you must increase risk. If Adviser comp increases as returns increase, the Adviser is incentivized to take more and more risk. Which is not a good thing for the average consumer who is saving for retirement.

Generally speaking, Retirement Funds should not be invested in a super aggressive manner. At least the portion funding your "basic needs" during retirement. For that portion, the risk/return goal should be in the 6%-9% range depending on age. To get any higher than that (on an annualized basis) you must take on excessive risk that would not be appropriate for a retirement saver.

Regulators see this and that is why being paid a % of returns has been banned in most states. It was common back in the 30s - 50s (if I remember my market history correctly) until the abuses got so bad that Regulators had to step in.

 

[walthamny]

nylife11023,

Try hiring a criminal defense attorney for the formula you mentioned. There is a reason why it is not allowed. Imagine if you only owed your lawyer if you walked out. Or lets pay the heart surgeon per heart attack recovery.

Or if the regulations in my state allowed such a promise for fees, I would put everyone into private equity/microcap stocks regardless of my clients risk profile. It would work out 80% of the time. So out of my 300 households, 240 would be very happy and 60 would be on welfare for the rest of their life. Generally pay for performance has incentive for advisor to take more risk than what is normally necessary.

Pay for performance is allowed if you invest in hedge funds but you have to meet certain criteria to invest in them.

 

[VolAgent]

What does an insurance agent have to do to earn their 5% commission on an annuity?

What does a Series 6/7 broker have to do to earn their 5.75% - 2.5% A-share commission for selling mutual funds?


While the standard of care has been different, you're putting far more scrutiny on the RIA side of the business. At least with an RIA, I would be PAID to return your calls, have a vested interest in meeting with you regularly, and ensuring that your plan is really working for you.

Yes, I do that anyway, but the RIA compensation favors long-term relationship building, not initial sales commissions.

As you are very fond of pointing out, a commission on an annuity is a soft cost and not a hard cost. It is simply part of the cost of marketing for the insurance company.

Also, how am I putting more scrutiny? I would put the same scrutiny on an attorney or CPA who wants to charge a fee. When you charge a fee versus selling an item, you invite more scrutiny upon yourself.

Finally, it may simply be that asset allocation is not for me. Based upon what you have said both here and in an email as well as Tyler, it appears it may be something I do not need.

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Something I will add and I am sure has been driving my thought process.

There is a fundamental difference between a commission and a fee.

With a commission, you are purchasing something, a good or service and the seller is compensating the salesperson on a flat rate or percentage basis. Rarely is the commission broken out and shown separately from the purchase price, it is usually baked in. The salesperson may or may not be able to adjust his or her commission, although many consumers think they can regardless of reality.

With a fee, it is a payment directly to the salesperson for the service. You are in affect buying the person's time, it is not merely a part of the larger service you are receiving.

With a commission, the consumer is evaluating the product or service they will receive and while they may be considering the commission the person will receive, generally the larger decision is do I want the product and is this a price I'm willing to pay?

With a fee, it is all about the service you are getting directly from the salesperson and is do you feel the service justifies the fee?

To borrow the example of a CPA, why am I paying this fee to the CPA and does the CPA deserve it? If all the CPA is doing is plugging some numbers into a software and telling me to write a check to the IRS, then they probably aren't worth it. But if they are evaluating my situation, helping me find deductions I was not aware of, helping me plan for taxes in the future, etc. then they may well be worth the fee.

And automation is coming for the CPA as well. Turbotax is getting pretty good at preparing handling complex deductions for 1040s and the self-employed.

Automation has already arrived for the attorney. The computer has replaced teams of associates to do research. Even simple wills, divorces and other legal matters have been taken over by Legal Zoom. Even divorces that might better be handled by an attorney are being done by software.

 

[pfg1]

So with all the opinions and banter, what would you guys say is reasonable and fair comp for an RIA based advisor to charge? I know it can be all over the place... but outside of that structure many folks are paying north of 2% per year all in for typical mutual funds etc. Just curious your thoughts.

Keep in mind... the risk is now compounded for advisors as a fiduciary. The client with the $50k IRA that you would take in and manage, if the advisor fee is 1% (industry std from what I've seen) the advisor earns $500/yr paid quarterly. Alot of risk for not alot of reward. Granted, on the other end there is more reward ($) for associated risk when the account is large.

Thoughts?

 

[VolAgent]

So with all the opinions and banter, what would you guys say is reasonable and fair comp for an RIA based advisor to charge? I know it can be all over the place... but outside of that structure many folks are paying north of 2% per year all in for typical mutual funds etc. Just curious your thoughts.

Keep in mind... the risk is now compounded for advisors as a fiduciary. The client with the $50k IRA that you would take in and manage, if the advisor fee is 1% (industry std from what I've seen) the advisor earns $500/yr paid quarterly. Alot of risk for not alot of reward. Granted, on the other end there is more reward ($) for associated risk when the account is large.

Thoughts?

That is a great question and one to which I have no easy answer.

I guess the question is, asking as an investor, what am I getting for my management fee, say 1%? I believe someone mentioned earlier they send out a quarterly newsletter and make phone calls. Granted, I haven't seen the newsletter in question, but I have yet to see a newsletter worth 125 a quarter. Also, are the phone calls worth that? I don't know, hopefully. I'm not naming names here, because the point isn't to pick on an individual but the industry as a whole. As the account value goes up, the cost only rises, but does the newsletter and phone calls increase in value accordingly? My natural suspicion is to doubt it, but maybe they do.

It appears that many advisors are charging 1% and basically giving a computer printout for asset allocation, sending out some rebranded newsletters and maybe making some phone calls. If that is all they are really doing, then I question if they are worth 1%.

I do not envy anyone building a book at this point. The traditional asset allocation seems of such limited value now. Instead, it would seem the insurance or other areas would have much more value.

Also, we always talk about liability, and that is a big issue. Of course, what liability does the advisor have. There defense is basically going to be, "I put it into the computer model and did what it said." Not much to screw up, of course it probably won't make them seem very valuable at that point.

 

[pfg1]

That is a great question and one to which I have no easy answer.

I guess the question is, asking as an investor, what am I getting for my management fee, say 1%? I believe someone mentioned earlier they send out a quarterly newsletter and make phone calls. Granted, I haven't seen the newsletter in question, but I have yet to see a newsletter worth 125 a quarter. Also, are the phone calls worth that? I don't know, hopefully. I'm not naming names here, because the point isn't to pick on an individual but the industry as a whole. As the account value goes up, the cost only rises, but does the newsletter and phone calls increase in value accordingly? My natural suspicion is to doubt it, but maybe they do.

It appears that many advisors are charging 1% and basically giving a computer printout for asset allocation, sending out some rebranded newsletters and maybe making some phone calls. If that is all they are really doing, then I question if they are worth 1%.

I do not envy anyone building a book at this point. The traditional asset allocation seems of such limited value now. Instead, it would seem the insurance or other areas would have much more value.

Also, we always talk about liability, and that is a big issue. Of course, what liability does the advisor have. There defense is basically going to be, "I put it into the computer model and did what it said." Not much to screw up, of course it probably won't make them seem very valuable at that point.

With the DOL law the liability for advisors has changed alot. I guess we'll have to see where it eventually ends up.

There is no free lunch with anything in life. We have to pay to play in everything. So my understanding is the avg fees/costs for a employer based 401k plan is around 2%, sometimes more... yet you don't really hear people complain about that. They gladly contribute and hope it grows, and often praise how great it is when we're in a bull market.

People could complain about insurance commissions... why should we get paid for something they could go online and buy? Real Estate...mortgage... etc. We could play this game with everything we do really. Even if the fees/costs are not directly paid to someome, we pay dearly for everything. Many times the fees/costs are completely hidden/built in...yet quite high. Just a thought.