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Old 08-03-2007, 12:54 PM   #101
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That amazes me. The typical rube I run across is paying 1.5% in fees just for the FA and then they are put into high fee mutual funds that charge another nominal 1.5%. For a $1MM portfolio that works out to $30,000 per year. Yet these people that need the help won't pay $1,000 once or twice per year to have someone look over their portfolio allocations, insurance coverage, etc?

I can't help but think that if your assets are under about $5MM you fall into the cookie cutter approach. There would be slight shifts based on size of expected pensions, inheritances, business, real property holdings but overall the adjustments are pretty obvious and minor.

I guess that business model doesn't work because so much money can be made from the clueless. Once they realize they aren't getting much value for their $30,000, they realize they can usually do it themselves.

I will agree that when the amount of money becomes substantial -- $20MM+ or so -- the complexity grows when other family members, commitments and goal are factored in. If I ever find myself in that area, I'll let you know.
Ever hear the phrase "don't hate the player, hate the game" (OMG, I can't believe I actually used that in adult discourse" but in this case it's true.

Using your hypothetical $1M portfolio generating $30,000 in investment fees. Did you know that in a typical wirehouse (ML, Morgan Stanley, etc) that the broker would only see about $4,500 of that 30K? the whole system is just set up wrong.

You are correct about many people using some strange mental accounting when it comes to fees. I'm in the process of helping a friend get established in the fee based business. He way trying to set up a pricing model for his new clients and he came up with the idea of charging 85bps as his starting fee. He then said he thought about using a reduced charge of 40bps for people who would pay cash for a financial plan of $1,000. For most people it would be a huge savings.

people went NUTS! They would rather pay several times the price just so they don't have to write a check.
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Old 08-03-2007, 01:52 PM   #102
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Originally Posted by saluki9 View Post
Using your hypothetical $1M portfolio generating $30,000 in investment fees. Did you know that in a typical wirehouse (ML, Morgan Stanley, etc) that the broker would only see about $4,500 of that 30K? the whole system is just set up wrong.
The fact that the actual person dealing with the customer doesn't make a large % of the money doesn't matter. Most of the profit goes to the dealership when I buy a car. That doesn't mean I'll feel sorry for the salesman.

The person using the typical wirehouse is being ripped off. I don't think it would be worth the price if the only cost was the $4,500 that goes to the broker.

Quote:
You are correct about many people using some strange mental accounting when it comes to fees. I'm in the process of helping a friend get established in the fee based business. He way trying to set up a pricing model for his new clients and he came up with the idea of charging 85bps as his starting fee. He then said he thought about using a reduced charge of 40bps for people who would pay cash for a financial plan of $1,000. For most people it would be a huge savings.

people went NUTS! They would rather pay several times the price just so they don't have to write a check
That reinforces my "rube" comment. They are willing "marks" for the perfectly legal con. Is it better that they do that than nothing? I answer "yes." Could they do immensely better on their own? I also answer "yes." This forum is to encourage the learning so people can and will.
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Old 08-03-2007, 02:07 PM   #103
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That amazes me. The typical rube I run across is paying 1.5% in fees just for the FA and then they are put into high fee mutual funds that charge another nominal 1.5%. For a $1MM portfolio that works out to $30,000 per year. Yet these people that need the help won't pay $1,000 once or twice per year to have someone look over their portfolio allocations, insurance coverage, etc?
How are you coming up with those numbers? Unless everyone you know is in VA's, the client is NOT paying 3% a year...........
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Old 08-03-2007, 03:27 PM   #104
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How are you coming up with those numbers? Unless everyone you know is in VA's, the client is NOT paying 3% a year...........
Let me say this very slowly since it is obvious you aren't making any attempt to read my posts......
  1. The "typical" wrap account fee that I have seen has 1.5% going to the brokerage house of which the FA is paid out of.
  2. The "typical" mutual funds the FA puts in the account have management fees of 1.5% or more. I've seen as high as 2.25% and occasionally they have put in load funds.
  3. When you add them up, the client/rube sees a net impact of around 3% in fees they are paying that could have been avoided by using Vanguard or Fidelity index funds.
I have never said the FA or the firm directly gets 3%. I am, however, very suspicious that these FAs never seem to want their clients in lower cost funds. Does the FA or their firm get a kick-back from the high fee funds? :confused:
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Old 08-03-2007, 03:37 PM   #105
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A broader, more important question is this: do you feel more comfortable having a financial advisor/money manager handle your investments? Lots of folks do. There is nothing wrong with that, assuming you don't mind the annual fees -- 1.25% in your case.... Many people here are DIY types, who can manage their own investments as costly or as cheaply as they want.
I agree. A salesman financial advisor would not add value to my portfolio, but not everyone is sufficiently confident or wants to spend the time required to handle their own investments.

I suggest that you not think in terms of "firing" anyone. The question is whether you are now in a position to move beyond using a broker, not whether the broker is a bad 'employee'.
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Old 08-03-2007, 03:46 PM   #106
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Let me say this very slowly since it is obvious you aren't making any attempt to read my posts......
  1. The "typical" wrap account fee that I have seen has 1.5% going to the brokerage house of which the FA is paid out of.
  2. The "typical" mutual funds the FA puts in the account have management fees of 1.5% or more. I've seen as high as 2.25% and occasionally they have put in load funds.
  3. When you add them up, the client/rube sees a net impact of around 3% in fees they are paying that could have been avoided by using Vanguard or Fidelity index funds.
I have never said the FA or the firm directly gets 3%. I am, however, very suspicious that these FAs never seem to want their clients in lower cost funds. Does the FA or their firm get a kick-back from the high fee funds? :confused:
What you are speaking of are mutual fund wrap accounts, which are pushed VERY HARD by banks, and also some big name brokerage firms. I personally have never used them.

Using breakpoints and low-cost fund families like American and Franklin Templeton, clients can closer to 1% than 3%........

If you are talking about compensation, the bank broker is getting up to 35% of the 1.5%, and is not paid on the ER of the underlying mutual fund.

So, in the end, the client and the advisor are getting screwed, and the brokerage houses make all the money...........
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More info for 2B.........
Old 08-03-2007, 03:52 PM   #107
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More info for 2B.........

Here's an info of how a broker gets paid on a mutual find sale...........


I almost forgot, here's a little snippet of a typical mutual fund sale, and how the FA gets paid. One disclaimer, people have to quit thinking ALL fund sales are at 5.75%, there are breakpoints on sales above $25K for most companies. However, for the sake of realism, I'll use $10K.

A client gives the FA a check for $10K. The FA buys a mutual fund. The sales charge is $575, or 5.75%. American funds holdsback .75% from the 5.75%, and sends the FA's Broker-Dealer 5% or $500. Most FA's work on a grid system unless they are an independent advisor.

Most wirehouse guys get 40% or so on mutual fund sales. So, the FA's Broker Dealer keeps $300, and the rep gets a $200 commission as W-2 income before taxes. If the investment stays on the books, the rep gets 40% of the .25% 12B-1 fees (a whole different discussion) every quarter, or $25 a year on that investment.

Bottom line, the investment firms that hire brokers and the fund companies make the big bucks, which is little surprise...........
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Old 08-03-2007, 03:54 PM   #108
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Eh, you're not talking me into it. I've given up on becoming a financial advisor.

I'm going to be a health insurance broker.
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Old 08-03-2007, 03:57 PM   #109
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So, in the end, the client and the advisor are getting screwed, and the brokerage houses make all the money...........
You outline ways a person can use a FA and not pay a total set of fees of 3%. That's not what I have typically seen. Of the nominal 15 or so people I've had serious money discussions with, they have all had some form of wrap account and the direct fee is between 1 and 2%. They are then put into high fee investments and mutual funds seem to be the favorite. I even saw a variable annuity in someone's rollover IRA. Their FA was a "good family friend."

I don't worry about the broker or the brokerage company. I am just wanting to help the client free themselves.
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Old 08-03-2007, 04:09 PM   #110
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You outline ways a person can use a FA and not pay a total set of fees of 3%. That's not what I have typically seen. Of the nominal 15 or so people I've had serious money discussions with, they have all had some form of wrap account and the direct fee is between 1 and 2%. They are then put into high fee investments and mutual funds seem to be the favorite. I even saw a variable annuity in someone's rollover IRA. Their FA was a "good family friend."

I don't worry about the broker or the brokerage company. I am just wanting to help the client free themselves.
Wrapping mutual funds is stupid.............

I would never buy them myself, so I can't see the value for clients..............

An little aside:

When I was at a large national bank, and they "rolled out" their wrap accounts with a big dog and pony show, I sat next to a newer advisor that was a CFP. When the Q&A session started, he asked the following question:

"I've been an advisor for 15 years, and a CFP for 10. Are you saying this is the ONLY fee account we have available? Because personally, I have a big problem with it".

He didn't last long..........
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Old 08-03-2007, 04:10 PM   #111
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Eh, you're not talking me into it. I've given up on becoming a financial advisor.

I'm going to be a health insurance broker.
I heard mykidslovedog is looking for salespeople she can override...........
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Old 08-03-2007, 04:11 PM   #112
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Eh, you're not talking me into it. I've given up on becoming a financial advisor.

I'm going to be a health insurance broker.
Ughhh what a terrible job! They hardly make any cash, why would you want to do that?


After meeting hundreds of high income folks, and seeing their lifestyle, work hours, etc I have decided that in my next life I'm going to be an anesthesiologist.
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Old 08-03-2007, 04:18 PM   #113
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In my next life, I want to be Paris Hilton's brother. First you get to meet her hot friends, then when Grandpa gets POed at her and cuts her out of the will you get her money!
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Old 08-03-2007, 04:37 PM   #114
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Ughhh what a terrible job! They hardly make any cash, why would you want to do that?
Piece of cake. Fill out a form and mail it in, make a 20% commission. Do almost nothing for years after that and still suck in 5% every year. Something bad happens, make a phone call or two. Customer thanks you. Vendor thanks you. Anything bad happens, tell the customer its the vendors fault or the vendor that its the customers fault. Still make 5%. Spend the other 7 hours a day pestering people on the internet in the wrong assumption that you're creating job security. Get interviewed by Costco every now and then.

How can you go wrong with that?
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