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Reader Comment on My Asset Management Post

By JLP | April 20, 2009

AFM reader, Chris, left this comment on my post from last week:

What is the profit margin on a bag of cheetos, 50%?? The margin on the gel for my hair is over 100%. Why do we quibble over 1%? Do we expect money managers to work for free? I know it sounds like a lot of money (and it is), but 1% is less than grocery store margins.

The definition of Profit margin (“margin of profit”) according to the Barron’s Finance & Investment Handbook:

The relationship of gross profits to net sales. Returns and allowances are subtracted from gorss sales to arrive at net sales. Cost of good sold (sometimes including depreciation) is subtracted from net sales to arrive at gross profit. Gross profit is divided by net sales to get the profit margin, which is sometimes called gross margin. The result is a ratio, and the term is also written as margin of profit ratio.

In other words, the 1% management expense ratio should not be confused with gross margin. It is simply the fee charged to manage money and is not a margin.

For instance, let’s say I manage a $200 million portfolio for a 1% fee. Not including any other fees, my income for managing this $200 million portfolio would be $2 million per year (not counting any growth in the value of the portfolio). For simplicity’s sake, we’ll assume that the $2 million per year is my net sales. Now lets say my cost of goods sold is $1.5 million per year (seems a bit high to me but I like round numbers), making my gross profit $500,000 per year. Dividing $500,000 by $2 million, makes my profit margin 25%. Not a bad margin, if you ask me.

Topics: Investing, Mutual Funds | 43 Comments »


43 Responses to “Reader Comment on My Asset Management Post”

  1. TedSteven's Says:
    April 20th, 2009 at 10:28 am

    I still don’t see why this is a problem. If enough people think management fees are too high, then that means market space has been created for a new company to come in and charge lower fees.

  2. ObliviousInvestor Says:
    April 20th, 2009 at 10:44 am

    Doesn’t the grand total dollar amount make a difference? A 100% markup on bags of cheetos will cost me approximately $50 over my lifetime I’d guess.

    An additional 1% of investment costs will cost me literally hundreds of thousands of dollars.

  3. Dylan Says:
    April 20th, 2009 at 10:51 am

    The “1% profit margin” is sales rhetoric that has been around retail mutual fund distribution for at least a decade.

    Let’s turn that 1% around and look at it another way. If a generally safe and sustainable annual investment portfolio distribution is 4% (to allow for inflation), then 1% in investment related expensed is 25% of your investment funded budget in retirement. That only leaves 75% for taxes, housing, cheetos, and hair gel.

    There are plenty of low cost, managed investment options available. The expensive crap will continue to sell as long as there is a market willing to be suckered in by highly polished sales rhetoric.

  4. RA Says:
    April 20th, 2009 at 10:53 am

    Chris is probably in the asset management business and trying to sell funds to people with those expense ratios.

  5. Chris Says:
    April 20th, 2009 at 2:59 pm

    All,

    I actually am (for the moment) in the financial sales business. I agree that if you have the know-how and inclination you would be best served to invest for yourself and avoid the 1-2% asset management fee. I 100% agree.

    I just find it amusing that nobody seems to balk at paying the markup for any other service, be it an oil change (which most of us could do ourselves), a haircut (I’m pretty good with clippers), a psychologist(perhaps I could talkt o God?).., etc..

    There is NOTHING wrong with financial sales. That is my argument. Please allow me to show an example.

    Say you have a $100,000 IRA.. I’m sure all of you have that much, right? For arguments sake, you don’t know the difference between a stock and your elbow. I charge you 1% per year to manage your money. That’s $1,000 a year. Wait, my firm takes half of that (minimum) so I get $500 a year.. After taxes you are talking around $365.

    Odds are I did a comprehensive financial plan for you that took a couple hours, established an investment allocation, paperwork, probably took you to lunch, and meet with you in person at least once a year.. What is that as an hourly wage, I wonder? Perhaps I used “profit margin” in the wrong sense, but the principle is the same.

  6. Chris Says:
    April 20th, 2009 at 3:09 pm

    @ JLP:

    Are you a broker? How much do you charge? Perhaps you are a back office person? I wouldn’t be demonizing financial advisors if you are still with UBS.

    From your “about JLP”

    “I then interviewed and took a position with PaineWebber (now UBS).”

  7. JLP Says:
    April 20th, 2009 at 3:22 pm

    Chris,

    I updated my “About” section. Sorry for the confusion.

    I am not a broker and haven’t been for quite some time.

    I’m not putting down brokers. I was merely addressing your comment.

  8. JLP Says:
    April 20th, 2009 at 3:30 pm

    My original post was more about passive vs. active management of mutual funds…not investing with the help of an advisor.

    If we include your 1% “wrap” fee, we’re looking at 2%+ per year in fees…not 1%.

  9. Chris Says:
    April 20th, 2009 at 5:59 pm

    JLP,

    Fair enough… And when I see some brokers with a 16% ROA it does make me cringe, hence why I’m getting out of the business.

  10. Rich Says:
    April 20th, 2009 at 6:03 pm

    The problem with 1% fee on any investment is that it is non-refundable. If my bag of cheetos taste bad, I can return it for my money back. The same with hair gel, my car, and almost anything else I buy.

    But if my mutual fund drops 20% in value I’m still obligated to pay that crappy fee.

    This is why I don’t invest in mutual funds unless I have to (i.e. 401k).

  11. Bobby Says:
    April 20th, 2009 at 6:46 pm

    JLP,

    One thing you are missing from your margin example is the margin (really the profit) is what is used to pay wages, rent, insurance, distribution costs, etc., etc.

    So while 25% may seem like a lot, it isn’t when you factor in everything else unless you have extremely low overhead.

  12. Chris Says:
    April 21st, 2009 at 7:28 am

    @ Rich:

    True, but 1% of $800 is less than 1% of $1,000. Most brokers I know have had at least a 30% drop in their salary (not including the clients who have taken their money elsewhere).

    If you pay a flat fee, which many tout, you are paying that flat fee regardless. The system isn’t perfect, but I feel a % of AUM is the best in aligning the client’s interests with the advisor. I would welcome any other suggestions.

  13. Rich Says:
    April 21st, 2009 at 8:40 am

    Chris,

    I think you’re wrong, the wall street magicians, I’m sure, conjure up ways to make sure they get their fee at $1,000 rather than $800 but in any event there have been numerous stories about these guys making money on the other side of the equation.

    If mutual fund manager *knows* he’s going to buy 500k shares of IBM next week for his fund don’t you think he tells his Wall Street buddies about it? Yeah, it’s illegal but we’ve see how compliant Wall Street has been with a stack of laws recently.

    We’ve also seen how incompetent SEC is investigating anything these days too.

    Honestly and in my opinion there isn’t a mutual fund manager worth their pay because if there were we’d have heard about him/her right now using their vast wisdom and skills to have avoided the market collapse. There were a few gloom and doomers that got lucky and made a few bucks but the vast majority of people if not all, have lost a great deal.

  14. Wealth Pilgrim Says:
    April 21st, 2009 at 8:42 am

    DISCLAIMER – I am in the asset management business.

    Having said that, I think the discussion around cost misses the point – with all due respect.

    It’s a cost/benefit issue – as it is with every business. If the consumer can save or make 1.1% by investing 1% -it’s worth it.

    The problem is that it’s very hard to KNOW how you would do with an adviser vs. without an adviser.

    I have found that if you are able to stick to your investment strategy you probably don’t need an adviser.

  15. RA Says:
    April 21st, 2009 at 9:28 am

    There is nothing wrong with being in financial sales. It is a perfectly good way to make a living. The issue is not whether it is a good way to make a living or not. It is a question of what those expenses are worth.

    An oil change and a haircut are typically worth the money. Buying load and high expense funds definitely are not. That’s the issue.

    I understand your perspective from the advisor side as I’ve been in the biz myself. That being said, if I had followed the belief of my employer and the direction I was required to provide customers, I’d have half as much money as I have today.

    The reality is that financial advisors just aren’t worth the money they cost.

  16. Chris Says:
    April 21st, 2009 at 12:08 pm

    Like Wealth Pilgrim said.. If you pay 1% to save (or not lose) 1.1%, it is a good deal.

  17. RA Says:
    April 21st, 2009 at 1:23 pm

    The problem is they can’t make the 1.1% because they start off at least 2% in the hole. The investment advisor that can provide an outperformance of 3.1% per year ain’t working to sell load funds and annuities to customers for a living.

    An investment book costs about $15. That’s all the financial advice the average investor needs to do better than a financial advisor.

    This is an issue that financial advisors have a hard time with because they view everything through how they are supposed to make a living. The reality is that you cannot make a living and provide the best investment advice to customers.

  18. Lucas Says:
    April 21st, 2009 at 1:36 pm

    JLP,
    Don’t you love how these finance guys base their fee on the value of the asset and not the return (cap gains, dividends, interest)if any?

    How about saying it like it really is; they take 20-50% of the profits over any length of time, with zero capital risk. Look at today’s portfolios that are barely above their initial asset value of say five years ago, ten years? Those “managers” hit those accounts every quarter or more. One percent my a**. I challenge ANY finance pro to post a sample portfolio of their choosing and I’ll prove how ONE PERCENT is a drop in the bucket. Why not just say “I take 50% of the profits we earn with YOUR money” Oh yeah, they’d never make a sale.

  19. Steve Braun Says:
    April 21st, 2009 at 2:27 pm

    Full disclosure — I’m a Michigan RIA who works by the hour or flat fee.

    @ Lucas — Many states, such as mine, do not allow investment advisers to base their fees on the profits earned for a very good reason. Essentially, the adviser would have a distorted incentive to take extremely high risks (in the hopes of a huge payoff) without any downside worries (no penalty for losing all the money.) That’s bad public policy from a regulatory standpoint and I agree with it.

    On the other hand, the reason investors should “quibble over 1%” for asset management fees is precisely because of what Lucas points out. After you subtract inflation, taxes, etc. from investment returns, that 1% fee takes up a substantial portion of the remaining gain — if there is even a gain to worry about!

    As others have said, an adviser who demonstrates that he/she adds more than 1% of value is certainly worth the 1% fee. Otherwise, no. By that definition, my experience is that there are far too many advisers who do not earn their fee by adding value. (I know because I take business away from them all the time.) For many such firms (but not all), the emphasis is on bringing more assets into the firm, not managing what they already have.

  20. JLP Says:
    April 21st, 2009 at 2:41 pm

    Steve Braun said:

    “For many such firms (but not all), the emphasis is on bringing more assets into the firm, not managing what they already have.”

    EXACTLY! I couldn’t agree with you more. I wonder how many clients who purchased an A-share mutual fund (a load paid up-front) received attention AFTER the deal was made? The paltry 25 basis-points paid annually to the broker is not enough for them to worry about servicing current clients unless there is more business to be had from that client. Sad but true.

  21. Moneymonk Says:
    April 21st, 2009 at 5:48 pm

    Wow this post make you want to avoid mutual funds altogether.

    I invest in mutual funds via 401k, actually most of my 401k is in cash. I love my 401k for one thing–tax shelter

    Like Rich said you cannot get your money back. You lose, you live with it.

  22. Lucas Says:
    April 21st, 2009 at 10:03 pm

    Steve,
    You perpetuate the myth. It’s not one percent, it’s just not. An “advisor” may well charge a one percent annual fee, but that is rarely the total cost. Just like your hourly fee is hardly the “cost” of implementing your investment advice. What about the use of funds of funds, managed variable annuities, or retail hedge funds (of funds) inside managed accounts? Explicit transaction costs (i.e. brokerage commissions)can erase an additional 1-2% of an investor’s assets per year.

    A simple example of our broken system is that advisors almost always charge a higher fee on equities held in a managed account than bonds. Say 1% on equities and .40% on bonds. Any wonder many accounts are far, far out of balance? Re-balancing reduces the advisors cash flow! Course it’s easy to use a bond fund and let the client pay you and the actual asset manager. Just shameful.

  23. Lucas Says:
    April 22nd, 2009 at 6:47 am

    Chris,
    The problem with your market driven approach is that the costs are hidden from the investor. It is incredibly difficult to determine how much return is lost to the firm.

    As an example: the management fee ratios of mutual funds do not include trading costs (brokerage commissions or spreads). So investors cannot accurately compare the expenses of as fund to choose the one with lower expenses.

    Performance is what matters you say? Well take that $5 billion XYZ fund with the stellar 5 year performance record. Investors don’t know that it was created from a tiny $20 million fund that posted big returns and a $1 billion dog that had negative returns. Roll them up together and you have a large, top performing fund. Of course, it’s then sold widely to investors chasing past performance and bingo, it now has $5 billion in net assets. Completely legal, widely done.

    This game is complicated for investors because the financial product manufacturers don’t provide accurate information. Frankly sir, most “advisors” are long out of the business when their clients realize what crap they’ve been sold.

  24. Steve Braun Says:
    April 22nd, 2009 at 7:27 am

    @ Lucas

    I’m not perpetuating any myths. I used the 1% as an example because that was the number Chris used in his comment that was the basis for JLP’s post.

    I agree with you 100% that there are many other investment costs that need to be included to get the full picture. Many of those costs are well-hidden. The financial services industry goes to great lengths to ensure the general public cannot determine the full cost. I spend time educating my clients about the total cost of investing, including how my hourly fees fit into the picture. It provides part of the context and rationale for the investment recommendations I make.

    Frankly, the financial services industry makes my job very easy. There’s so much fat in the total cost equation that I can easily reduce client total investment costs even with my fees included — without sacrificing portfolio performance and many times improving it. And since I’m not out chasing more assets to throw on the pile, my clients get better support and service. The hourly or flat fee model isn’t the route to riches in this business, but it does provide me with a good living and a loyal client base. I love my job.

  25. Chris Says:
    April 22nd, 2009 at 7:39 am

    @ #19 Steve Braun:

    How are your interests aligned with your client’s charging an hourly fee? What real incentive do you have to GROW your client’s money if your getting paid $100/hour (or whatever) regardless. The world works by incentives, tying the advisor’s pay to the value of the client’s portfolio makes sense to me.

    @ JLP #20: VERY true. But how is that different from any other business in the world? All business wants/needs to grow. The only way to do that is to get new clients by providing value. If you do not provide value and “pay no attention” to your current clients they will leave and go to Steve. You will be hard pressed to find a successful advisor who only brings in new assets, get’s his fee, and ignores the client afterwards. I am sure they are out there, but they will likely not be terribly successful or in business for that long.

    Lucas #23: Very true, the fees are pretty opaque. I’ll be honest, I don’t even know the totality of what it costs to run a mutual fund. Let’s say you buy a hammer.. Do you know how much it cost to pull the iron out of the ground for the top part? Do you know how much it cost to cut the tree down to make the handle? Do you know how much it cost to ship, fabricate, package, etc., etc.? Do you have a CLUE what the suggested retail markup on that hammer is when you buy it?

    No, you don’t..

  26. Lucas Says:
    April 22nd, 2009 at 8:45 am

    Chris #25: You’ve provided a very poor rebuttal. The price of the hammer is my total cost. Period. I can choose to buy or not buy based on a fully disclosed price. A mutual fund, and most other financial products, are completely different. I may never know what the actual cost will be. The fund may state a 1% management fee and a .25% 12b-1 fee in the prospectus, but that’s really just a portion of the real “price”.

    I have read sales piece after sales piece promoting so called asset allocation funds. The management fee? A lowly .10% or even zero; completely ignoring the fees of the underlying funds.

    Frankly sir, if you don’t understand these products I suggest you read up on the topic so your clients aren’t harmed by your inexperience. There are plenty of blogs, books, articles, and documentaries that expose how the biz really works. You seem to have no clue.

    Steve #19: you said — “As others have said, an adviser who demonstrates that he/she adds more than 1% of value is certainly worth the 1% fee. Otherwise, no.”

    This is the myth. The above pitch is taught to every new “advisor” in the business. Reality: you cannot determine value if you cannot determine cost. As you’ve said the advisory fee is only one piece.

    Maybe you’re recommending a portfolio of low cost Index ETFs and charging an hourly fee to help a client set it up. That seems reasonable. But if they have the impression you’re “monitoring” or “managing” it’s a fallacy. Of course dubious “asset allocation” has been a sales tool of the industry since the early 90’s, pre tech bubble.

    You may well be one of the few good guys in a horrible industry. I hope so.

  27. Lucas Says:
    April 22nd, 2009 at 9:01 am

    Chris #25: you said– You will be hard pressed to find a successful advisor who only brings in new assets, get’s his fee, and ignores the client afterwards. I am sure they are out there, but they will likely not be terribly successful or in business for that long.

    –Actually Chris, this is EXACTLY the way it works. The vast majority of retail investors are sold loaded funds, variable or fixed annuities, and variable life insurance. The “advisor” is paid up front and then has little motivation to provide ongoing service. When the “advisor” (with some type of moral compass) realizes the true nature of the game they quit. Then the orphan accounts are picked up by the “advisors” who remain. It’s a very effective marketing strategy for the big producers.

    Look deep, be skeptical, and use both eyes and ears. You’ll be shocked and disappointed.

  28. Steve Braun Says:
    April 22nd, 2009 at 10:06 am

    @ Chris #25

    You wrongly assume that just because I don’t make more/less money as my clients’ portfolios go up/down, that somehow my interests aren’t aligned with theirs.

    Do you think I can succeed in this business by delivering mediocre performance/service or being indifferent to my clients’ fates? Hardly. If my clients aren’t happy, then my life is miserable. I have every incentive on earth to keep clients happy and their investments doing well. If I don’t, then they’ll walk away and I lose that business to someone else. Plus I’d lose out on the steady flow of referrals that I enjoy from my hard work.

    On the other hand, it is not necessarily true that AUM fees align the adviser’s interests with the clients’ interests. There is a small connection but it is hardly the driving force behind the adviser’s behavior. The real (and easy) money in the AUM business is made when assets come into the fold.

    For example, if your AUM fees total $300,000/year, it is much easier to increase your revenue by 10% simply by picking up a few new clients, rather than by growing your existing clients’ assets by 10%. The AUM business is all about ACCUMULATING assets, not managing investments.

    With that said, any adviser with a conscience wants their clients to do well with investment performance no matter how they are paid (commission, AUM, hourly, etc). Yeah, there are bad apples out there but most advisers really do care about their clients. None of us wants to deal with the headache of unhappy clients.

    And to reiterate my earlier point, you simply DO NOT want to pay advisers only for performance. You would be out of your mind to turn your money over to someone and say, “I’ll give you 10% (or whatever) of the profit you make on my money. If I don’t make money, then you don’t make money.” You will either be fabulously wealthy or utterly broke in short order. Most likely the latter. But you won’t be an “investor” in any sense of the word because I guarantee that adviser’s only incentive is to SPECULATE with your money. That’s precisely why regulators do not permit that type of compensation structure.

    There may be no “perfect” compensation structure but I believe the hourly/flat fee model at least removes all of the damaging conflicts of interest and puts the adviser closest to the client’s interests.

  29. Steve Braun Says:
    April 22nd, 2009 at 10:15 am

    @ Lucas #26

    The 1% fee is relevant if you are considering hiring an adviser at 1% and you’re wondering if they will deliver 1% or better with their advice. All else being equal, if the advice nets you greater performance than the cost of the 1% fee, then that adviser worth the fee. That’s all I’m saying. This can be objectively measured by the amount of money in your account — which is the only pure “after cost” measure.

    I think we’re on the same page but maybe splitting hairs over this 1% thing.

    It’s good to be skeptical but don’t by cynical. There are good advisers out there doing good work for people. And remember, there’s much more to financial planning than just setting up investment portfolios.

  30. Chris Says:
    April 22nd, 2009 at 10:37 am

    @ Lucas (and this is the last time): My rebuttal was perfectly fine, actually. The “total cost” of the hammer, the hair gel, or the mutual fund is what it is. Why the mutual fund is so much different to you I do not understand, nor care to argue about it anymore.

    You are partly right. Advisors who have made it in the business DO gobble up the scraps left by those who did not make it. Those who did not make it mostly didn’t leave the business because of moral reasons, they left because they need to eat, pay the mortgage, etc., and most of us aren’t blessed with a 10 million dollar book when we first start. It amazes me how advisors are demonized and we sell one of the few products that is intended to GROW and PROTECT your wealth as opposed to buying a “thing” or something consumed.

    Like I said before, if you can invest better yourself, do it. If thinking about the market hurts your head, then a financial advisor is a perfectly legitimate route and a perfectly legitimate business. There is a TON of competition and the industry is basically commoditized. Competetion within the market determines the appropriate fees to be paid for the service.

    You obviously have no concept of how business works in general. It is not illegal nor immoral for someone to use their talents and knowledge to sell a product or service for a PROFIT. Why you think this business is the only one who should offer its products and services for free is beyond me.

  31. Chris Says:
    April 22nd, 2009 at 10:49 am

    @ Steve:

    Your hourly fee is no different than a front load, C-share, B-share, any share.. Fact of the matter is we don’t give away our service for free.. That’s what gives everyone heartburn.

    You know as well as I do about breakpoints, etc., so I won’t get into it with you.

    I like the idea of fee-only or fee-based compensation. I think that is the way the industry is going and that’s fine. The idea, again, is to align the advisor’s interests with the client. I happen to feel an AUM fee makes sense, and there are plenty of clients who would feel the same. Different strokes for different folks.

    I use C-shares for full disclosure so I don’t get paid any more than you do when the client’s assets “come into the fold”.

    “None of us wants to deal with the headache of unhappy clients.” – Absolutely agree.

    I feel your pay structure is inefficient, but that is my opinion. There are many ways to skin this cat, just like there are many different flavors of investors. Either way, I know how hard it is to get new clients (though you claim you don’t care about “gathering assets”), and I know how hard it is to succeed in this business. Best of luck to you.

  32. Lucas Says:
    April 22nd, 2009 at 12:11 pm

    Steve,
    We’ll have to agree to disagree. Of course financial planning is about much more than investments, but you said you were an RIA so my comments are in that context. That said, it’s important for readers to know that many investors (accredited not retail) agree to a compensation schedule where the firm keeps 20% or more of the return, in addition to the fee. It’s perfectly legal and quite common. If as a retail investor they own a retail hedge fund (of funds)they will easily participate in that scheme.

    One man’s skeptic is another man’s cynic. Best regards to you.

    Chris:
    You have no moral right to earn a living selling financial products or advice. Keep posting comments though because you only help my case. C-Shares? Come on! Most broker-dealers clamped down on those long ago. Good grief. They are the worst performing junk offered by the industry.

    I really laughed at your “You obviously have no concept of how business works in general.” Ha!!I’ve been around a long time my friend and know more about the inside of the biz than you’d ever guess. Cheers!

  33. Steve Braun Says:
    April 22nd, 2009 at 1:06 pm

    @ Chris #31

    You’re right, none of us works for free. Those who want me to work for free can find another adviser or do it themselves. I have no problem with that. (The only exception is that I do quite a bit of pro bono work for folks having a hard time.)

    I never said AUM didn’t make sense. I just happen to think it makes more sense for advisers than it does for clients. Yes, many clients like it. No doubt about that. If they’re happy, so be it.

    I don’t agree that my hourly fee is the same as A/B/C shares, etc. It is, in fact, quite different. Those A/B/C shares generally all come with much higher expense ratios than the comparable (and in many case identical) “no-load” shares available. While I am free to recommend those lower-cost no-load shares, many other advisers simply cannot do so. Their compensation structure elminates the possiblity of recommending investments that are better for the client. I do not face such restrictions or conflicts of interest.

    What I meant about bringing assets into the fold, is that it is easier for an AUM adviser to grow the business by acquiring assets rather than relying on investment performance which is largely out of his control and variable.

    You know as well as I do that the AUM industry faces two major problems:

    1. Older clients who are at the stage of life where they are withdrawing assets, instead of accumulating them, are looking for more hand holding and advice. That is a bad situation for an AUM adviser because it means he must spend more time on those clients for a declining revenue stream. The trade pubs are full of articles expounding on how to deal with this growing trend.

    2. Relying on the whim of market performance for revenue is a two-edged sword. In good times revenue can grow rapidly without expending any additional effort because the market is way up. Who wouldn’t want that? On the other hand, a down year (like last year) means the adviser gets whacked on the revenue side but still has the same level of expenses to serve clients. It’s bad news to see revenue fall, say 30%, with flat expenses. Ouch!

    Therefore, the best way for an AUM adviser to prosper in all seasons is to constantly acquire new assets to add to the revenue base. This generally works against the interests of existing clients.

    To an hourly/flat fee adviser it doesn’t matter whether his work comes from new or existing clients. There’s no reason to ignore the needs of current clients in pursuit of new ones.

  34. Chris Says:
    April 22nd, 2009 at 2:22 pm

    Steve:

    #1. Very true.. But like I said, we are in business to grow. My partners developed a very large book and to better serve their clients, they brought me on the team to help. Their AUM grow, their business grows, they hire more people, wash, rinse, repeat. Just like any other business.

    JLP: Are we officially the longest thread yet? Good, lively debate!

  35. Kirk Kinder Says:
    April 22nd, 2009 at 7:11 pm

    I think the asset management world is in for a hurt. People are paying 1% to their advisor and then 1% or more to funds. Both entities fail to even match the markets over time. The problem with the current Wall Street structure, outside the lack of performance, is the lack of service and objectivity. Most brokers have hundreds of clients. They sell their clients funds and then move to the next client. They only contact their client when the client calls them. And, when you add commissions to advice, the client’s best interest is the thing of the past.

    I am a fee-only planner, like Steve, who charges hourly, but I also do an AUM fee. I keep it to 0.5%. I think people are being ripped for being charged 1% for an asset allocation model. And, I was shocked when Chris said he does full financial plan in a couple hours. I can’t imagine getting to understand and recommend ideas to clients in a couple hours…unless my idea of planning is throwing the client in some annuities and loaded mutual funds.

  36. Chris Says:
    April 23rd, 2009 at 7:57 am

    @ Kirk #35

    I’d be curious what your hourly rate is and average fee / client. What is your “flat fee” for a plan? 2k? 3K? My guess is there is VERY little difference, if any, between your fee structure and mine. Fee + 50 bps + mutual fund expense = roughly 1.25-1.5%… Same as mine, we just go about it in different ways. You can slice it and dice it all you want, but IT ALL COMES OUT ROUGHLY THE SAME. I like the conviction of your story, though. I’m sure you get clients that way.

    As far as the financial plan. If it takes you that long to identify your client’s needs, enter their current resources, and fill in the gaps, I’m not sure what you are spending all your time on. I know the line we tell all our clients is, “You are special, your situation is unique, and your plan is customized”.. Whatever. You know as well as I do the vast majority of clients (of course there is always outliers) fit into roughly the same situation. The need this much, want to retire this date, have this much in assets.. How hard is it to run a Monte Carlo simulation? I spent a few more hours on a 10 mil client, but those are few and far between.

  37. Kirk Kinder Says:
    April 24th, 2009 at 8:04 am

    @ Chris

    Since I am fee-only, I use vehicles that save clients fees as the underlying investment. I use ETFs and can build a portfolio with internal expenses of 17bps or below. Add my 50bps and you get 67bps total. It is tough for folks to do this on their own since so many folks end up with mutual funds charging 1% or more. Most people don’t know about ETFs or understand index mutual funds. Those that do typically don’t need our advice.

    My flat fee ranges from $2K to $5K depending on the complexity. However, I meet quarterly with those folks. I help all these people set up Quicken or Mint.com accounts so we review spending each quarter along with investment results. We also review estate planning, taxes, insurances at scheduled times during the year. I also deal with the client’s other professionals and coordinate everything for them to get the plan in place. Lots of time.

    Also, the actual monte carlo or discounted cash flow models don’t take long to figure out. But, each client is different. Each has a different view of money as well as goals that they want to achieve. I work to get folks to talk about what they really want. Most people initially say to llive as they are now in retirement. But, when you use the right tools, you can find other goals that they just assumed they could never do (but often I show them how they can). Imagine how happy they are when you uncover and help them realize those goals. Look up George Kinder’s works to get a better idea of what I am talking about.

  38. Chris Says:
    April 24th, 2009 at 8:49 am

    Kirk,

    Thanks for sharing that. I am always interested to hear how people run their business. Like I said before, different ways to skin the same cat.

    Now.. And I hope LUCAS is watching this still.

    Say you have a $100,000 client.

    $100,000 x .0067 = $670

    $670 plus your MINIMUM flat fee of $2,000 = $2,670

    $2,670 / $100,000 = 2.67% at a MINIMUM

    I am not pointing fingers; I am simply making the point that “fee only” is hip, but is NOT necessarily saving the client any money. I repeat, GOOD LUCK TO YOU! Much to Lucas’s (and many others out there) chagrin, financial professionals DO have a right to make a living.

    Suddenly I am feeling really good about my awful, evil C-shares.

  39. Lucas Says:
    April 24th, 2009 at 11:36 am

    Chris,
    Your statements reveal the shallow, naive view you have of the industry. You can call yourself an “advisor” or wealth manager” or whatever else you want, but by your own admission you are simply a retailer of mutual funds. There is no advisory relationship, no fiduciary responsibility, and no escape valve for clients to pursue any misconduct since they must agree to binding arbitration in order to work with your firm.

    Read this next part closely:

    Most mutual funds do not report all of their expenses. Some disclose additional data in the SAI, the vast majority do not. The published expense ratio is usually false, and even if true can be changed the moment AFTER a client invests. There is simply no way for anyone to calculate the cost benefit of the “advisory” relationship, because they can almost certainly never figure out how much they paid in expenses.

    Oh, I know you’ll point me to net cash flow. $100,000 in on Jan 1 and five years later the account is worth $134,000. Say 6% net of fees and expenses. You will NEVER be able to tell me the actual GROSS return and how much I paid in fees and expenses. Ignoring the underlying cost of the investment is futile and misleading.

    In your case there is NO ADVISORY fee to evaluate because you don’t charge one. The Class C share simply has a one percent 12b-1 fee that is paid to your broker-dealer, of which you get a portion. Are you saying we should evaluate that fee but ignore the rest? What about the hidden transaction expenses? How do propose that a customer do a cost-benefit on your “advice” when they don’t know what it costs?

    Finally, you have been afforded a license, by FINRA, in accordance with policies designed to protect consumers, that ALLOWS you to sell financial products. There is no right, sir.

    On another note, not all but most financial planners who hold themselves out as fee-only on the investment side, sell insurance on commission.

  40. Chris Says:
    April 24th, 2009 at 12:08 pm

    Lucas:

    I am curious what you do for a living. I am guessing you do something you feel is of value that there is a market for which you make a living on.

    I truly believe your rants against the entire financial advising vocation are irrational and childish. Are there bad eggs? Of course. Are there advisors who sell inappropriate products to people to swing a quick buck? Absolutely. Are those people in the majority? I honestly don’t believe so. You paint with a pretty broad brush, sir.

    Any advisor (myself included) who has any ethics wants to do the best we can for our clients while making a living doing what we do. The same can be said for most any profession.

  41. Lucas Says:
    April 24th, 2009 at 12:20 pm

    Chris,
    I used to think like you as well. I thought that maybe it was just a few bad actors, giving the industry a black eye. I was wrong. I will assure you that the more you dig, the more you view products and firms with a skeptical view, the more you’ll find that even those with those in the business with best reputations will disappoint you.

    This post started with a lousy defense of the profit margins of the MF industry. I don’t know how much they generate for sure, but it’s billions more than you can fathom.

    “Smile and dial” and “keep on sellin” !! I don’t predict the demise of your industry anytime soon. Oh, and I worked behind the curtain in the biz for twelve years. I know first hand how the industry works. Maybe you’ll figure it out too.

  42. Lucas Says:
    April 24th, 2009 at 12:56 pm

    Chris,
    I think advisors and advisory can well serve the wealthy and affluent, those with say $50 million or more. I think that retail investors are poorly served do to the cost benefit. Paying and hourly or flat fee would just as easily pay for a basic course in financial planning. The CFP classes are fairly inexpensive. When the industry starts to disclose the actual, total costs of these products and services (or is forced to do so by legislation) their ship will sink. I won’t hold my breath.

  43. Chris Says:
    April 24th, 2009 at 1:08 pm

    Lucas,

    I hope you’re wrong.

    “Smile and dial”.. Ugh.

    “Sellin”.. Double ugh.

    I have a degree in finance, am working on my MBA, and mid-way through my CFP. I am finding none of that makes a damn bit of difference if you can’t bang on doors, cold call, and sell. I am with you on that point for sure.. This business does NOT reward competency, this business rewards salesmanship. If you can do both, you’re golden.

    I, for one, am not much of a salesman… That is why I will likely not be in this business much longer. It’s sad, because I really do feel I am competent and could do well by my clients. Oh, well. Maybe I’ll work at Starbucks and peddle 300% marked-up lattes…

    Keep swingin’ and thanks for the lively debate.

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