I am in the wrong line of work and am going to make a change. I had this epiphany while watching Wealth Track with Consuelo Mack.
One of the guests was Verne Hayden. Mr. Hayden has been making the rounds on TV for years. I know from past interviews he puts people in actively managed OEFs. I felt like his comments on Wealth Track gave more insight into what he does than what I have seen from him before. I don't know what the reality is but I do know how I interpret what he said.
He made comments about his not being good at knowing when to favor growth over value, he wants to hire managers that are good at that and other matters of portfolio construction and management. He has a lot of faith in the fund managers he "hires." He related an anecdote about his clients complaining about the returns of one of the FPA funds run by Bob Rodriguez. His comment was long the lines of you'll be glad you own it when the market goes down. This is perfectly valid logic for staying with a portfolio holding.
I'm not sure, however, what value Mr. Hayden adds. It is reasonable to wonder whether someone with a basic entry level understanding could, over a long weekend assemble a truly diversified portfolio of mutual funds using funds with great long term track records.
I have no idea what Mr. Hayden, or other planners doing the same type investment plan, charges for this type of service but someone in Mr. Hayden's position probably has several hundred million in client assets. Assuming they don't work for free but do not charge the full 1%-1.5%, perhaps 30 basis points is right? On $300 million that would be $900,000 in revenue for a couple of fund swaps per year and some just be patient phone calls.
A client with a $500,000 portfolio that pays 30 basis points for 15 years is paying out $22,500 (simplified math, it would be more if the portfolio grows). You can decide for yourself whether its worth the money or not.
I may have this wrong but I would want a little more effort if I needed help managing my portfolio.
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11 comments:
I've thought that myself at times, the wrong line of work I mean. My mother in law has a significant amount of money in a wrap account with a well known brokerage. The wrap can go as high as 1.5% of assets under management (and of course there is no requirement that this be reported as a separate line on her statements - just love the clout the sell-side has with congress). Basically all the broker does is reallocate into various of the firm's funds based on the recommended percentages of the parent firm's consulting group; they're 'Y' shares too of course.
Man oh man, what a business. Where are the customer's yachts indeed.
RW
The scary thing is the mass market really needs this kind of service. The vast majority of people simply do not put the time into managing their assets. There was an article out recently about how only about 10% of people ever make any changes to their 401k subsequent to the initial allocation.
"We make money the old fashioned way: We take yours."
I am thinking the best advisor for most people is the teller at their local credit union who can show them the rate chart for the various CDs and money market accounts they offer. As additional benefits there are free pens, calendars, and a nice buffet at the annual meeting.
Roger your comments suprise me. You deal with individuals...and you should know how emotions play into this. You think the average investor has the discipline to sit home over a long weekend...find a good mix of funds...and stick with them? Look a little deeper here and find that funds with great track records go through long periods of underperformance. You think an individual who spent a weekend on morningstar's website are going to buy those funds and hold them for 10 years. On top of that are they going to watch the managers? See when key persons leave? Firms bought/sold? No. Not at all. What about rebalancing? Would they addd to the managers that were out of favor? Buy value in 99 and perhaps growth today? I don't have the answers. I'm in the business and think that truly independent advice can be invaluable...not the broker just selling what Merrill has on the shelf...but true unbiased advice.
MF
I believe MF has misunderstood my point.
Portfolio's like what Mr Hayden deploys don't go anywhere far enough to take advantiage of what it out there. He professed not to know much about pick stocks or market cycles.
For the life of me I don't know how someone with that business model gets hired by any clients.
I'm in the business and I mostly agree with Roger. But an advisor with $300 million in assets is a very good salesman first and foremost. You don't accumulate that type of asset base and not be a great salesman.
If he's a great salesman then he's sold his clients on the value of his service whether it is reality or not.
There are many products in our field that don't make sense to me. 1% fee for mutual fund wrap accounts, 1.5% fee for managed asset accounts are just a few.
I would not disagree that the mass market requires a service but I'm assuming no one other than a brokerage sales manager - excuse me, I think they call themselves chief investment advisors - would argue that anyone needs "this kind of service:" 1 - 1.5% wrap fee on top of expense ratio for the privilege of being allocated into the parent firm's mutual funds (most of which are low rated), based on the parent firm's allocation advice, using "Y" shares as additional broker incentive (direct payment by the fund to the selling broker). None of this is exposed to the client on any statement; I assume the information could be assembled by close examination of prospectii, brokerage agreement, and wrap contract documents.
There are good people in the industry and many investors need assistance, no doubt about it, but with conflict of interest and lack of transparency built into the very structure of business models such as this it seems to me that it would be incredibly difficult to advance career and continue to provide quality advice, to say nothing of remaining 'good' (at least as long as one worked in places operating w/ models like that).
RW
great chatter, thank you.
One point that I did not get to in the post and no one has mentioned in the comments is the long term benefit for the client.
In my brief time at MWD, I can't recall any discussion about the long term benefit for clients.
Roger & RW...
Great points both of you. Ones that I seek to take advanatage of on a daily basis. Wirehouses are obligated to their shareholders...not their clients. Which is why I stress independence and objectivity (absolutely no conflicts of interest). The clients pay a fee for the advice and that is clear and transparent. Product cost is what it is.
MF
"You guys can decide if it's worth the money or NOT"
You gotta be kidding?
Any time you value an investment by the fees you pay you fail the test.
Value the investment ( in this case, the whatever it is he does...) by the
RETURNS.
You guys missed the boat.
If I charge you 5% annualized, but you average 50% returns per year, are you going to be chatting it up in a blog about how high the fees are? Don't think so.
A little exaggeration in this example, but you SEE what I mean. Say he does charge 100 bps. Ok, but he makes money each year for his clients. When the "market" tanks, his accounts are up. Let's say he doesn't just use a Markowitz model and makes his own up...what's that worth?
Bottom line---if your are making money, more than the market, consistantly, both up and down markets. Beta < 1.00, Sharpe Ratio 75+, are you complaining?
Point taken although I would have thought it was a given. Case contra point I'm not aware of any management firm available to the general retail public posting consistent results like that but I sure know a lot of folks who would like to find one even half as good: Got a name or two?
RW
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