DOL Unintended Consequences?

[VolAgent]

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.

There most definitely is a cost to manage money. A fund is not going to run itself. The issue with an advisor is that they are imposing a fee above and beyond the expense fee of the fund, plus the 12b-1 fee. The question is, is that fee of value?

Remember, a commission is compensation from the company for selling its product. A fee is compensation from the consumer. Commissions are marketing expenses, money the company would otherwise spend to sell its product. It is not the same with a fee.

Maybe it is just me, but I do not see them as a straight comparison. Of course, perhaps all the agents who want to compare themselves to doctors and lawyers and CPAs have distorted our view.

 

[DHK]

There most definitely is a cost to manage money. A fund is not going to run itself. The issue with an advisor is that they are imposing a fee above and beyond the expense fee of the fund, plus the 12b-1 fee. The question is, is that fee of value?

That's not how an RIA charges fees or the share classes used.

12b-1 fees are NOT included in RIA share classes - assuming you're talking about mutual funds. American Funds, for example, uses F-class shares, if you're an RIA.

https://www.americanfunds.com/indiv...re-class-information/share-class-pricing.html

Class F-1, F-2, F-3 and 529-F-1 Shares

Class F-1, F-2, F-3 and 529-F-1 shares are designed for investors who choose to compensate their financial professional based on the total assets in their portfolios, rather than commissions or sales charges. This arrangement is often called an “asset-based” or a “fee-based” program.

Class F-1, F-2, F-3 and 529-F-1 shares do not have an up-front or a contingent deferred sales charge (CDSC). Class F-2 shares also do not carry a 12b-1 fee but may have slightly higher administrative expenses than Class F-1 shares. These expenses will vary among the funds. Class F-3 shares do not carry 12b-1 or sub-transfer agency fees.

Please note that Class F-1, F-2 and F-3 shares are not available for purchase in certain employer-sponsored retirement plans, unless they are a part of a qualifying fee-based program.

 

[VolAgent]

That's not how an RIA charges fees or the share classes used.

12b-1 fees are NOT included in RIA share classes - assuming you're talking about mutual funds. American Funds, for example, uses F-class shares, if you're an RIA.

https://www.americanfunds.com/indiv...re-class-information/share-class-pricing.html

You are absolutely right, I was referring to mutual funds and funds in general. Obviously the 12b-1 is exclusive to mutual funds. But any fund is going to have an expense and that expense will show up as a fee somehow.

Whether it is in a mutual fund, variable product, 401k, managed money account, etc. anyone actually managing money will have some level of expenses and a desire for profit. Now, could those fees be lower, almost certainly. But there is some basic cost that cannot be avoided.

 

[DHK]

Institutional money management works on a far more sophisticated platform that just charging an annual fee to manage mutual funds. That would otherwise be called a "wrap" program.

There is far more value in these platforms than just charging a mutual fund management fee.

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

What is the difference between passive and active asset management? (SPY) | Investopedia

I would recommend studying on Kitces.com and investopedia.com for various terms and understanding of what these programs really are.

This site is a recruiting site, but it can help spell it out:
Peace of Mind Planning | Home

Here's another one worth reading about:
https://www.fanria.com/

There are many others. Brookstone Capital comes to mind as well:
Strategies | Brookstone Capital Management

AssetMark was one of the first to incorporate an open-architecture, multi-manager platform:
https://www.assetmark.com/what-we-do

This goes far beyond just doing a mutual fund wrap and charging an annual fee.

----------

You are absolutely right, I was referring to mutual funds and funds in general. Obviously the 12b-1 is exclusive to mutual funds. But any fund is going to have an expense and that expense will show up as a fee somehow.

Whether it is in a mutual fund, variable product, 401k, managed money account, etc. anyone actually managing money will have some level of expenses and a desire for profit. Now, could those fees be lower, almost certainly. But there is some basic cost that cannot be avoided.

Absolutely, and those expenses are disclosed in a firm's ADV Part 2 disclosure.

Here's the link for FANRIA's ADV Part 2:
https://www.adviserinfo.sec.gov/IAPD/Content/Common/crd_iapd_Brochure.aspx?BRCHR_VRSN_ID=439916

Page 4 outlines the fees and expenses. In this one, it actually separates the advisor charge from the 3rd party asset manager charges.

The ADV Part 2 also outlines other risks and services.

A smart IAR would also have an investment policy statement that helps to manage the parameters of the relationship and investment management. This protects the IAR and assures the client that the relationship would be managed according to the policy statement. (You won't find that agreement with a broker.)

At the bottom of page 11, you'll see how the RIA outlines client account review frequency. (You won't find that agreement with a broker.)


The firm's ADV part 2 (brochure) is what is used to define the scope of the advisory engagement and allows for adjustments on an advisor/client level.

But everything is DISCLOSED in the ADV Part 2.

 

[VolAgent]

Institutional money management works on a far more sophisticated platform that just charging an annual fee to manage mutual funds. That would otherwise be called a "wrap" program.

There is far more value in these platforms than just charging a mutual fund management fee.

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

What is the difference between passive and active asset management? (SPY) | Investopedia

I would recommend studying on Kitces.com and investopedia.com for various terms and understanding of what these programs really are.

This site is a recruiting site, but it can help spell it out:
Peace of Mind Planning | Home

Here's another one worth reading about:
https://www.fanria.com/

There are many others. Brookstone Capital comes to mind as well:
Strategies | Brookstone Capital Management

AssetMark was one of the first to incorporate an open-architecture, multi-manager platform:
https://www.assetmark.com/what-we-do

This goes far beyond just doing a mutual fund wrap and charging an annual fee.

Ok, now show me a managed fund, mutual or managed money, that has consistently beaten its benchmark.

As soon as I heard tactical, I realized it is just another name for actively managing money. In theory, that sounds great. In reality, who has consistently performed better than their benchmark index?

 

[DHK]

It's not about beating a benchmark. It's about managing portfolios on a risk-adjusted basis.

----------

In post #37, I uploaded a PDF statement of returns through June, 2014 from FANRIA.

http://www.insurance-forums.net/for...intended-consequences-t88860.html#post1189123

----------

Then there's another guy I've heard about - the Coffeehouse Investor.

He uses Torrid Technologies retirement planning software to build his firm from $80m to over $550m in 10 years.

Financial Advisors – Double Your AUM – Torrid Technologies | Financial Advisors – Double Your AUM – Torrid Technologies

He uses index funds/ETFs and does little to 'manage' portfolios. He puts the portfolios together based on a risk profile, and keeps people invested in them based on the idea that "you can't beat the index, so don't try".

This is that firm's website:
Soundmark Wealth - Wealth Management

----------

 

[VolAgent]

Go to w.e Donahue's web site and go to resources and then index power dividend.

I found something for the Power Dividend Total Return and yes, it has done quite a bit better than the S&P Total Return. Assuming I am reading the chart on page 10 correctly. It looks like they called the bear market of 07 and 08 pretty well and got back in in 09 to take most of the upside.

So yes David, I did find something that has done better than its benchmark.

 

[DHK]

But now you're putting your value in the RETURNS you can achieve. There's a difference between chasing returns and managing portfolios on a risk-adjusted basis.

If I was an RIA, I would be focusing on managing volatility, making good decisions, decent returns, preserving asset values (particularly avoiding reverse-dollar-cost-averaging risk in retirement), and a long-term relationship.

That should be worth the total relationship that I would charge (up to 2.5%).

How I would deliver that advice would be a combination of experience, investment platform tools, planning tools, staying up to date on annual tax changes, keeping up to date on their lives and changes there, and additional certifications & courses to keep on top of the best ideas that I can deliver.

This would be the basis of the long-term relationship and being able to document that I would deliver on that relationship year-in and year-out.

----------

Good brokers can (and would) do exactly that, but they are paid ONLY when new commissions are generated.

Good investment advisors would do the same work, and be paid on a retainer basis for as long as the account is with the RIA.

 

[Tahoe Ray]

Many people that don't utilize a "managed money acct" (so no MM fee) pay as much or more total in fees...and they might not even know it.

Back to the unintended consequences... my RIA said they feel there is a good chance that if nothing changes with the law, you will end up having to be associated with a legal fiduciary to be able to do anything with qualified funds. Meaning BD, RIA, or Bank... and potentially a handful of IMO types that have applied for fiduciary status, assuming any get it granted. I guess we'll see how it shakes out. Fun times.

Tahoe Ray, what are your thoughts?

My thought is that I really like selling disability insurance........

Seriously, I think that if you're already w/ a b/d or you're an IAR then there won't be a lot of change outside of some new products, new disclosure, and some different procedures.

The insurance-only producer is going to have a lot more liability as is the wholesale chain. While several large IMOs have applied to be considered "financial institutions" they won't have to worry about being granted fiduciary status since the carriers are already bestowing that on them via updated selling agreements (half-joking).

I don't think anyone truly knows exactly what this will look like when complete but in talking with a number of advisors, many will not be taking smaller (<250k) accounts come 2018.

 

[DHK]

Exactly right.

In order to offer this kind of 'fiduciary' or 'planning' relationship, you need to make it profitable enough to offset the potential liability. This is why the smaller investors may be 'abandoned' in favor of larger relationships.

If I'm going to do this level of work and commitment, it MUST be worth my time. For $250,000 account at a 1% advisor fee, that's $2,500/year. (And yes, I'm worth it.)

Here's the problem: Eventually, you will reach a capacity of the total clients you can take on, because everything takes TIME, energy, and resources.

To grow, you have 1, 2, or 3 choices:
1) Replace lower-level clients with higher level ones (replace $100,000 relationships with $1m ones).
2) Hire & train staff and segment your client-base to serve their needs and thereby increase your service capacity. (Staff serves the needs of $250,000 relationships and less as an example and you manage everything above that.)
3) A combination of both

But if you don't have enough to make it worth the liability for the advisor... you may be referred for services elsewhere. The robo-advisor will certainly profit from serving the masses and limiting their own liability to just asset allocation algorithms.