Over-Aged Financial Planners?

[plex]

Most people "rail" on financial advisers because they act in a position of a fiduciary, but are not fiduciaries, not even the CFP's. They are the only profession in this position. It is the ultimate caveat emptor that people have to deal with, and as such, warrants a lot of warnings.

And since profits can be as high as the 100k's for a few hours of work (e.g., the $10M customer), the tactics employed are often on par or worse than those used by used car salesmen, and the profits are larger, so there is more incentive to do it.

I think most of the complaining would go away, even at the crazy prices FA's generally charge, if there was some sort of serious accountability involved, like other professions in positions of trust must face.

 

[jIMOh]

I don't know--how is the FA compensated by putting someone in any funds? Only by the funds? Wouldn't the percentage of portfolio apply to VG funds too?

Some firms only let certain funds or fund families get used in wrap accounts.

Other than that, it just depends.

 

[FinanceDude]

What I am confused about is why in a capitalist country otherwise fairly normal people are upset about what someone charges for a service that can be used or ignored. It's not like a toll on the only bridge between your job and your home. It isn't even like doctors' salaries or civil servant retirements. You think they aren't worth the money, you are free to bypass their door. You think you want the service, but cheaper, bargain with them, or shop around. There is no union.

I sometimes wonder if a lot of our board members wandered in here after things got too free in East Germany or Russia after 1989.

Industrial economies and large governments are built on a lot of crap that few people actually need, but quite a few want, or want to force others to provide for them. It would seem that financial planning and financial planners should not even be on one's radar as something to get upset about.

Ha

+1.......Ha makes sense yet again!

 

[FinanceDude]

Most people "rail" on financial advisers because they act in a position of a fiduciary, but are not fiduciaries, not even the CFP's. They are the only profession in this position. It is the ultimate caveat emptor that people have to deal with, and as such, warrants a lot of warnings.

And since profits can be as high as the 100k's for a few hours of work (e.g., the $10M customer), the tactics employed are often on par or worse than those used by used car salesmen, and the profits are larger, so there is more incentive to do it.

I think most of the complaining would go away, even at the crazy prices FA's generally charge, if there was some sort of serious accountability involved, like other professions in positions of trust must face.

One thing most people fil to realize is that FAs are one of the most regulated employees on earth. To say we are micromanaged by FINRA is an understatement...........

 

[saluki9]

How is the advisor compensated for putting client in VG funds?

VG does not pay the advisor, so who does?
VG is choosing not to use a salesforce. The sales people need to be compensated. Fix that problem and you have a workable solution.

I can tell you this

1. Advisors do use Vanguard funds. Our office has well over $10M in vanguard funds alone. Much more in other index funds.

2. You bet Vanguard has a salesforce. They hit the advisor market hard. We get calls, visits, invitations to conferences, mouse pads, calendars, and asset allocation guides from them all the time

 

[saluki9]

Most people "rail" on financial advisers because they act in a position of a fiduciary, but are not fiduciaries

Pretty broad statement don't you think?

Please explain how so?

 

[Texas Proud]

Wow... have ignored this thread for awhile... seems to have gotten a bit heated....

I will tell you why some people need a financial advisor... I had a BIL who was a perfect example... in most everything, he did his homework... he talked to people... he worked through the problem...


When it came to taxes and investing... he freaked out... not a simple freak out, but a complete change of personality, not thinking etc. etc. freak out... I would put together a plan and give him options... for this type of investment you can choose fund A, B or C... for this you choose M,N, or O... etc. etc.... this did not satisfy him.. in his freaked out voice he said 'just tell me where to put the money'...


Since I was able to help him, he did OK... a good FA would have been able to handle him... and would not have 'cheated' him even if his fees took a bite out of his earnings... sure, a DIY portfolio would have done better... but he never would have done it... so the fee to him would have been worth the extra earnings a good portfolio would have earned...

 

[FinanceDude]

2. You bet Vanguard has a salesforce. They hit the advisor market hard. We get calls, visits, invitations to conferences, mouse pads, calendars, and asset allocation guides from them all the time

I guess after all those years of telling folks they don't need advisors, just an 800 number, turns out they need advisors to sell their products.

Our office uses VG funds too, we have several million with them ourselves..........

 

[Independent]

You've identified the heart of my question, and the reason for the post. Why doesn't a competitive market supply enough labor and competitors to bring salaries and fees in financial services down to a level consistent with other services in the economy?
4) 6 and 7 figure institutional salesmen get commissions to sell the new issue to mutual funds, insurance companies, etc.

For example, on a new issue that spread might be $.15 per share sold, and the person might be selling a million or more shares to a few different mutual funds. Maybe that spread is only $.05/share (for same 2 million shares sold) or it could be the spread is $.25/share sold (depends on cost of the underwriter).

Generally money follows risk. Risk-reward. When underwriting a new issue, in some cases the underwriter has committed to buy 100% of the new issue, so they have risk, and charge a markup to make money. If they fail to sell 100% of the issue, they lose money (risk) so they price to sell 100% of the issue.

If you only evaluate based on money made, but not on the risk taken to make that money, you are not seeing the whole picture.
..

I can understand that the person who provided the capital to back the underwriting takes a risk and the proper return on that capital reflects the risk/reward mix.

But the question is about the employee. Why does the employee get 6 or 7 figures to make the sale? There are plenty of very bright, very hard working people who'd be happy do the work for low 6 figures. Why not hire them? In fact, why not hire two people at $250k each instead of one at $1 million?

 

[youbet]

What I am confused about is why in a capitalist country otherwise fairly normal people are upset about what someone charges for a service that can be used or ignored.

While I generally agree ha, I think the tendency to "pile on" against FA's is enhanced by the fact that FA's and their firms are sometimes pretty heavy handed salespeople for their services. And some are not particularly accurate in describing the services they provide. For example, I've noticed recently a plethora of FA commercials on TV boasting of the fact they "listen" to their clients and show scenes where an attractive woman is sitting, nodding and smiling at a fretful gentleman who, after a few moments, looks relieved, calm and free of stress and worry. It's just a little subjective for my tastes.

And our forum tends towards a "pile on" mentality. Mention someone who lives less that a pure LBYM lifestyle and watch the crowds pile on with the criticism. Etc.

Perhaps it would be like participating in a computer hobbiest forum and suggesting a call to the "Geek Squad" would get a simple computer problem solved instead of learning how to handle it yourself.

 

[jIMOh]

I can understand that the person who provided the capital to back the underwriting takes a risk and the proper return on that capital reflects the risk/reward mix.

But the question is about the employee. Why does the employee get 6 or 7 figures to make the sale? There are plenty of very bright, very hard working people who'd be happy do the work for low 6 figures. Why not hire them? In fact, why not hire two people at $250k each instead of one at $1 million?

the people are compensated based on sales volume, not based on doing a specific task.

If 20 people each sold 50,000 shares, then each of those 20 would earn 50,000 shares times the spread of $.05 or $.25 per share (whatever the spread was).

It is about who the salepeople know (finding people for a facebook or salesforce.com IPO might be easy, but other lesser known IPOs would be much harder).

 

[haha]

For example, I've noticed recently a plethora of FA commercials on TV boasting of the fact they "listen" to their clients and show scenes where an attractive woman is sitting, nodding and smiling at a fretful gentleman who, after a few moments, looks relieved, calm and free of stress and worry.

Are the woman's hands always on camera?

Ha

 

[ls99]

So is may be massaging more than his ego?

 

[Independent]

the people are compensated based on sales volume, not based on doing a specific task.

If 20 people each sold 50,000 shares, then each of those 20 would earn 50,000 shares times the spread of $.05 or $.25 per share (whatever the spread was).

It is about who the salepeople know (finding people for a facebook or salesforce.com IPO might be easy, but other lesser known IPOs would be much harder).

I understand that commission rates are often flat percents, so more volume => larger commission.

But why is the investment bank setting the commission rate so that large fractions of the sales force can make $1 million per year? Why not simply set a lower rate?

I can imagine reasons for high compensation on sales staff IF the sale is based on the buyer trusting the sales person (as in an individual trusting a financial adviser). But I'd expect the large institutional buyers should ignore any personal relationships and focus on the numbers.

I also look at the rest of the people on G4G's list and ask how they make similar money. Are they all basically sales?

 

[youbet]

Are the woman's hands always on camera?

Ha

Yes, her hands seem innocently postioned and in view. But, now that you mention it, she may have dropped off a high heel shoe and gently placed her nylon covered toes in his crotch and wiggled them around a bit. All under the table, of course.......

 

[BigNick]

Are the woman's hands always on camera?

I must be getting old. I thought that you suggested that she might be picking his pocket.

 

[Gone4Good]

It's not like a toll on the only bridge between your job and your home.

But it is exactly like that. I can't avoid the underwriter's fee, or the bid-offer spread, or the institutional sales commissions embedded in retail products, etc. etc. The small part that I can avoid, I do, by foregoing the financial advisor.

And I think it's wrong to assume that the fees and compensation produced by the financial services industry is the result of a completely free and competitive market. A lot of what's happening, particularly in high finance, looks like rent extraction rather than free market competition.

 

[Gone4Good]

The financial services industry is one which has low markup. People which make lots of money are doing high transaction volume.

I'd agree if we define "volume" as "dollar value." I think part of what is going on is that transaction values are so high, small fractions result in windfalls. A 5bp bid-offer spread ($0.0005) may seem really small, but if a trader crosses a $1B trade he pockets $500,000 for his firm with no risk. Repeat that a couple of times and we're talking real money.

My question is, why do those opportunities exist in a free market?

 

[jIMOh]

I'd agree if we define "volume" as "dollar value." I think part of what is going on is that transaction values are so high, small fractions result in windfalls. A 5bp bid-offer spread ($0.0005) may seem really small, but if a trader crosses a $1B trade he pockets $500,000 for his firm with no risk. Repeat that a couple of times and we're talking real money.

My question is, why do those opportunities exist in a free market?

because its a free market and people can charge what they want.

 

[Gone4Good]

because its a free market and people can charge what they want.

In a competitive free market, price (marginal revenue) equals marginal cost. Only under monopoly conditions do firms get to charge what they want.

 

[jIMOh]

In a competitive free market, price (marginal revenue) equals marginal cost. Only under monopoly conditions do firms get to charge what they want.

I guess you can paint the sky any color you want.

I see this as
a) the underwriter can charge a markup for their efforts
b) if people don't want to pay the markup, invest elsewhere (that is what etrade accounts are for).

 

[73ss454]

I can tell you this

1. Advisors do use Vanguard funds. Our office has well over $10M in vanguard funds alone. Much more in other index funds.

2. You bet Vanguard has a salesforce. They hit the advisor market hard. We get calls, visits, invitations to conferences, mouse pads, calendars, and asset allocation guides from them all the time

Do you charge the same ER's as Vanguard or are they marked up?

 

[Gone4Good]

the people are compensated based on sales volume, not based on doing a specific task.

If 20 people each sold 50,000 shares, then each of those 20 would earn 50,000 shares times the spread of $.05 or $.25 per share (whatever the spread was).

It is about who the salepeople know (finding people for a facebook or salesforce.com IPO might be easy, but other lesser known IPOs would be much harder).

An institutional sales person's seat at any of the major firms is worth six figures at a minimum. $250K is what you get paid if you're really junior and / or you suck. And for that, they're given clients to manage . . . "Hey Rob, you're covering FIDO . . . here is the PM's name why don't you give him a call?" These aren't brokers who need to build a book of business from scratch.

Oh, and what you sell can be as important as how much. The best, and most highly compensated, sales people will be the ones who can reliably move the crap that the firm is trying to get rid of. When the trading or syndicate desks are "long and wrong" they'll pay extra "commission" to sales people who get them out of it.

But don't worry, those friendly sales people are really looking out for their customers so you can trust them.

 

[Bestwifeever]

....Our office uses VG funds too, we have several million with them ourselves..........

So FAs do use Vanguard. Glad to see it.

 

[kumquat]

Assuming I hire a FA who charges by assets, why does he get more for managing my $10M portfolio than by doing the same for my neighbour's $1M portfolio?

If charged by "assets under management", does the FA spend 100 times as many hours on person 3's portfolio as they do on person 1's? If not, why not?

I can't speak for all FAs, but expenses drop on a percentage basis. The $100,000 guy may pay 1%, the $1 million guy 50bp, and the $10 Million guy 20-25bp............

Let me re-phrase the question then.

Why does the $10 million guy pay 25 times what the $100K does? Does he get 25 times more time/services etc.

From the tone above, maybe you should defer to FinanceChick