[quote=rightway]Joe-

I think C shares are OK if you are in fact managing the account with
them, but I fear the SEC will be looking at these as nothing more than
a compensation decsision buy the advisor, and one in which costs the
client more money in the long run.  The 1% trail forverver will
die, you watch.

The best reps I know, both Indy and wire, charge hard dollar fee’s and
don’t appologize for it.  This is because they are worth it to the
client- not a bad way to go.

[/quote]

Rightway,

Any opinions on mutual fund wrap accounts as it pertains to increased compliance?

Do you feel building a fee based book in wrap accounts could be at risk?

I would venture to say that any type of business can, and will eventually come under scrutiny.

I guess diversifying our own book is a good idea

scrim

Rightway I agree with all the things you have said, but I still use them quite a bit, it is cheaper than a wrap and basically allows me to offer the same thing at a better price. I use an investment policy statement that outlines why we use C shares and also outlines the costs, my clients won’t be suprised if they start showing up on there statements because they are aware of it.

If there comes a point in time when we can’t use C shares for some reason I will seek out another alternative (maybe dropping my NASD licenses and operating as a fee-only RIA), but as of right now I think they are the best thing for most clients. I think the most they will do is have C shares convert similar to what American Funds does.

Bankrep, your speakin’ logic, and the SEC don’t play that.  The
stark reality is that most clients DO NOT know they are paying
thousands of dollars in fee’s.  When you factor in trading costs
with C shares the fee’s often exceed 4%…yes 4%.  Take a client
that you had the conversation with 3 years ago about the fee’s, and
even you mentioning it at your quarterly reviews, and suddenly put a
$1,200 quarterly line item deduction on there statement and see what
happens. 



Its not cheaper than a wrap in all cases.  A wrap allows you to
mix in ETF’s with some funds, buy individual bonds with no mark-up
instead of bond funds, and even a nice core of high quality
stocks.  Fee’s are usually around 1.5% all in for a balanced
portfolio with total flexibility.  



This, however, is no longer the answer (to answer SCRIMS question)
because you have utilization issues (read the lates UBS article on this
sight).   What happens at Merrill Lynch right
now?   If there is not an adequete amount of trading to
warrent the wrap fee’s a letter goes out and the fee’s ar e eventually
turned off.  C Shares are next.



Tsk Tsk.  What does all of this mean?  The writing is on the
wall folks!  YOU HAVE TO EARN THE FEE’S YOU ARE CHARGING!! We have
reps in our office that are clearing over a million in C Share
production from doing NOTHING but servicing account withdrawals and
reading the paper.  Lets be honest…its not right…especially in
the eyes of the SEC.



I have addressed this in my own practice in a very very aggressive way
over the last 3 years because I believe there is sweeping change coming
about.  As a newer rep building a practice I would keep my eyes
very open to this issue.

Fees exceed 4%?  So institutional investors pay about 2% in trading fees?  Gosh, I"ll do it for 1% and pick up the ticket charges.  If there are any MF managers out there feel free to PM me.

[quote=rightway] Bankrep, your speakin’ logic, and the SEC don’t play that. The

stark reality is that most clients DO NOT know they are paying

thousands of dollars in fee’s. When you factor in trading costs

with C shares the fee’s often exceed 4%…yes 4%. Take a client

that you had the conversation with 3 years ago about the fee’s, and

even you mentioning it at your quarterly reviews, and suddenly put a

$1,200 quarterly line item deduction on there statement and see what

happens.



Its not cheaper than a wrap in all cases. A wrap allows you to

mix in ETF’s with some funds, buy individual bonds with no mark-up

instead of bond funds, and even a nice core of high quality

stocks. Fee’s are usually around 1.5% all in for a balanced

portfolio with total flexibility.



This, however, is no longer the answer (to answer SCRIMS question)

because you have utilization issues (read the lates UBS article on this

sight). What happens at Merrill Lynch right

now? If there is not an adequete amount of trading to

warrent the wrap fee’s a letter goes out and the fee’s ar e eventually

turned off. C Shares are next.



Tsk Tsk. What does all of this mean? The writing is on the

wall folks! YOU HAVE TO EARN THE FEE’S YOU ARE CHARGING!! We have

reps in our office that are clearing over a million in C Share

production from doing NOTHING but servicing account withdrawals and

reading the paper. Lets be honest…its not right…especially in

the eyes of the SEC.



I have addressed this in my own practice in a very very aggressive way

over the last 3 years because I believe there is sweeping change coming

about. As a newer rep building a practice I would keep my eyes

very open to this issue.



[/quote]

You forgot to state how you addressed this in your pracitce in a very very aggressive way.



What could happen to C shares?



–The NASD could make the rep do work on C share account such as AA to receive the 1%



–They could be converted to A shares. Since A and C have different NAV that basically means dropping the 12b-1 to 25bp. If that happens it does two things 1)eliminates options for investors and 2) gives rise to churning them to A. (Think of the rep who’s client went into C 18 months ago and the pay differential)



–Could force them into wrap accounts. Creates capital gains and a problem for investors who hold closed C share positions.



–Put the fee on the statement. They client has the choice to stay or move to a lower mgt fee A share or wrap account.



Bottom line is it won’t be simple to just eliminate C shares as ultimately the investor will get hurt.



C shares are not on the radar screen that I know of. Wraps, annuities are. Maybe after that but, in the end everything will eventually be on the radar screen at some point.

"The stark reality is that most clients DO NOT know they are paying thousands of dollars in fee's.  When you factor in trading costs with C shares the fee's often exceed 4%...yes 4%. '"

Cite a source please.

I'm not sure, rather, I'm sure I'm not following what you are saying.

If xyzcf is a C share with a 1% trail and xyzaf is the same fund in an A share format, is there a higher trading cost factor in the C share?

Maybe there is a larger cash reserve due to the "hot money" aspect of C shares, but the trading would generally be in the same ball park for the A's and the C's right?

Or are you saying that a person with a portfolio that includes C shares and other trading securities that his overall portfolio might have a 4% "fees" total?

IMHO, the next target will be "Managed Money" where the broker is taking 2 to 3% fees for "watching over the managers".  I think you'll see those fee max's trimmed to 1% before you see the SEC go after C shares.

Just to be clear, the only time I use C shares is when the CEF that I own goes to it's historical high in Premium and then I'll switch into C shares until the CEF drops back to a discount, and then I'll switch back into the CEF. 

Mr. A 

In my experience, C Shares are only about 75Bp higher than an A, so it’s not a significantly higher expense.  They may crack down on what situations they are allowed to be used in (i.e. breakpoint situations), but I can’t see them putting controls in place that would require too much ongoing monitoring by the NASD or SEC.  I can’t possibly imagine them erquireing the account to be “actively managed”.  That just seems too complicated to control.  But then again, I am no compliance expert.

" A wrap allows you to mix in ETF's with some funds, buy individual bonds with no mark-up instead of bond funds, and even a nice core of high quality stocks.  Fee's are usually around 1.5% all in for a balanced portfolio with total flexibility."

Bonds at 1.5%. That means that if you buy a 10 year bond and hold it to maturity, you got 15 points for the bond.

But you client didn't pay a commission of 1 to 2 points so that's better! Right?

Break it down to 50 beeps, you're still banging the client for 7 and a half pounds.

What now? We stop comparing Bonds in the wrap to bonds in a non wrapped and compare the strategy to a Bond Fund?  

And do you REALLY think that the firm isn't taking anything when you buy bonds in a wrap account?

Mr. A

[quote=bankrep1] Rightway I agree with all the things you have said,

but I still use them quite a bit, it is cheaper than a wrap and basically

allows me to offer the same thing at a better price.



If there comes a point in time when we can’t use C shares for some

reason I will seek out another alternative (maybe dropping my NASD

licenses and operating as a fee-only RIA), but as of right now I think they

are the best thing for most clients. I think the most they will do is have C

shares convert similar to what American Funds does.[/quote]



First, I disagree with the C-share comment as being ‘the cheaper

alternative’. I don’t think you understand that fee-based accounts offer

institutional share classes which 1.) eliminate the 25 bp trail, and do not

have the additional .75% which then embeds the share class with the 1%

that you receive through a C share. Those items eliminated, you have a

wrap platform, at the very least, on par with the funds used within a C-

share platform.



Second, NO way can someone say that a C-share investment platform is

more flexible for the advisor or for the client. You cannot pick and

choose a C-share American Funds fund, JP Morgan C-share fund, and

then expect to be able to manage the portfolio effectively, using

rebalance, tactical asset allocation, etc. You cannot move from one fund

family to another, which is a complete restriction of the movement and

management of the funds within your platform.



Also, wrap programs have the advantage of the potential for a tax

deduction. If they remit the fee to their Roth, or regular IRA, it could be

taken as a deduction. You cannot do this with a C-share. Period.



Lastly, I realize that this is a ‘C-share within a retirement account’

discussion, however, it’s morphed into something else. People who say

’I’ll just transition to an RIA when they eliminate C-shares…’, are

completely ignoring the potential tax risks to the client when you swap

from the C-share (which, by the way… in an RIA format you cannot keep

the trail) to an A-share alternative. There will be a tax consequence

which cannot be justified just so you get paid.



C-shares do not win this argument. Face the fact that most advisors may

tell their clients that they pay a fee within their mutual funds, but would

rather NOT have the reminder on the statement each quarter (i.e. the

advisory fee). Clients can be told once, but the lack of a reminder makes

them feel that it’s not expensive.



My take is this… the fee-based investment solutions are more flexible.

You can exchange among a group of 5,000 different funds. You don’t

have to limit your management to the funds within the C-share fund

family you chose, and you can offer your client the flexibility of remitting

their fee separately with the potential of tax deducting the fee.



I don’t see the benefit of using a c-share for anything.



Good discussion, however.



C

[quote=mranonymous2u]Bonds at 1.5%. That means that if you buy a 10
year bond and hold it to maturity, you got 15 points for the
bond.[/quote]



This is something the industry will wake up to in a few years.



It basicly gets to the point where for alot of clients it will make
sense to have a brokerage account for holding bonds and other income
investments that do not require managment vs a wrap account for
everything else that does need oversight.



Of course you could have a split fee policy, that charges 0.25 for bonds and 1.5 for everything else.

[quote=AllREIT] Of course you could have a split fee policy, that charges 0.25 for bonds and 1.5 for everything else.

[/quote]



With a 60/40 split your final cost is 1% of total assets anyway so why split it out?

[quote=Captain] [quote=bankrep1] Rightway I agree with all the things you have said,

but I still use them quite a bit, it is cheaper than a wrap and basically

allows me to offer the same thing at a better price.



If there comes a point in time when we can’t use C shares for some

reason I will seek out another alternative (maybe dropping my NASD

licenses and operating as a fee-only RIA), but as of right now I think they

are the best thing for most clients. I think the most they will do is have C

shares convert similar to what American Funds does.[/quote]



First, I disagree with the C-share comment as being ‘the cheaper

alternative’. I don’t think you understand that fee-based accounts offer

institutional share classes which 1.) eliminate the 25 bp trail, and do not

have the additional .75% which then embeds the share class with the 1%

that you receive through a C share. Those items eliminated, you have a

wrap platform, at the very least, on par with the funds used within a C-

share platform.C[/quote] Agree here it is basically the same



Second, NO way can someone say that a C-share investment platform is

more flexible for the advisor or for the client. You cannot pick and

choose a C-share American Funds fund, JP Morgan C-share fund, and

then expect to be able to manage the portfolio effectively, using

rebalance, tactical asset allocation, etc. You cannot move from one fund

family to another, which is a complete restriction of the movement and

management of the funds within your platform.

C[/quote] Agree here it is basically the sameYou shouldn’t be moving them that often anyhow, I find them very effective



Also, wrap programs have the advantage of the potential for a tax

deduction. If they remit the fee to their Roth, or regular IRA, it could be

taken as a deduction. You cannot do this with a C-share. Period.



How many firms allow cients to do this? How many actually do it?



Lastly, I realize that this is a ‘C-share within a retirement account’

discussion, however, it’s morphed into something else. People who say

’I’ll just transition to an RIA when they eliminate C-shares…’, are

completely ignoring the potential tax risks to the client when you swap

from the C-share (which, by the way… in an RIA format you cannot keep

the trail) to an A-share alternative. There will be a tax consequence

which cannot be justified just so you get paid.





Why would you switch from a C share to an A share? I said I might choose to work as a fee only advisor, if I do that I will convert all of my accounts to fee based advisory accounts and drop my series 7



C-shares do not win this argument. Face the fact that most advisors may

tell their clients that they pay a fee within their mutual funds, but would

rather NOT have the reminder on the statement each quarter (i.e. the

advisory fee). Clients can be told once, but the lack of a reminder makes

them feel that it’s not expensive.





Ask people would they rather see a fee or know they are paying it and not see it, you will be suprised by the answers you get





My take is this… the fee-based investment solutions are more flexible.

You can exchange among a group of 5,000 different funds. You don’t

have to limit your management to the funds within the C-share fund

family you chose, and you can offer your client the flexibility of remitting

their fee separately with the potential of tax deducting the fee.

The current wirehouse environment utilizing wrap programs use mutual funds and charge 1.5% on average. C shares are cheaper



I don’t see the benefit of using a c-share for anything.





By the way there was an article in the Journal of Financial planning that is Pro C share stating of all commission based structures it is the most fair and puts the client in the best situation



Good discussion, however.

[quote=vagabond]Fees exceed 4%?  So institutional investors pay
about 2% in trading fees?  Gosh, I"ll do it for 1% and pick up the
ticket charges.  If there are any MF managers out there feel free
to PM me.[/quote]



Do some research and you will be surprised how th fee’s break out in a
mutual fund.  Go beyond Morningstar and Mutualfund.com.  Then
you will see what the SEC see’s…then you won’t want to prospect the
MF managers anymore.

[quote=mranonymous2u]

“The stark reality is that most clients DO
NOT know they are paying thousands of dollars in fee’s.  When you
factor in trading costs with C shares the fee’s often exceed 4%…yes
4%. '”

Cite a source please.

I'm not sure, rather, I'm sure I'm not following what you are saying.

If xyzcf is a C share with a 1% trail and xyzaf is the same fund in an A share format, is there a higher trading cost factor in the C share?

Maybe there is a larger cash reserve due to the "hot money" aspect of C shares, but the trading would generally be in the same ball park for the A's and the C's right?

Or are you saying that a person with a portfolio that includes C shares and other trading securities that his overall portfolio might have a 4% "fees" total?

IMHO, the next target will be "Managed Money" where the broker is taking 2 to 3% fees for "watching over the managers".  I think you'll see those fee max's trimmed to 1% before you see the SEC go after C shares.

Just to be clear, the only time I use C shares is when the CEF that I own goes to it's historical high in Premium and then I'll switch into C shares until the CEF drops back to a discount, and then I'll switch back into the CEF. 

Mr. A 

embedded
visibility

FU  its the holidays.

[quote=rightway]FU  its the holidays.
[/quote]

roflmFao @ “FU”…rock on baby…

[quote=rightway][quote=vagabond]Fees exceed 4%?  So institutional investors pay
about 2% in trading fees?  Gosh, I"ll do it for 1% and pick up the
ticket charges.  If there are any MF managers out there feel free
to PM me.[/quote]



Do some research and you will be surprised how th fee’s break out in a
mutual fund.  Go beyond Morningstar and Mutualfund.com.  Then
you will see what the SEC see’s…then you won’t want to prospect the
MF managers anymore.

[/quote]



C’mon Interactive brokers charges, 0.015 per share for VWAP (Volume
weighted average price). VWAP orders are common for large block trades,
no one is paying anything close to 1% on orders. If you look at the
unbundled commisions, that is much closer to what MF’s actually pay for
trades.



http://www.interactivebrokers.com/en/accounts/fees/commiss ion.php



However some mutual funds with high turnovers do so much trading, that
trading costs do become a serious expense. This also happens if you
have soft-dollar arangements, whereby the MF sends orders to brokers in
exchange for research and other services (for example golf and junkets
to tropical islands)



However, the big MF companies do most of their trading directly with
market centers or at most one thin layer away from the market center.
I.e the MF doesn’t want to deal with price improvment, so they send it
to trading broker who will automatically optimise trades.

 

[quote=Incredible Hulk] [quote=AllREIT] Of course you could have a
split fee policy, that charges 0.25 for bonds and 1.5 for everything
else.
[/quote]



With a 60/40 split your final cost is 1% of total assets anyway so why split it out?[/quote]



The key point is that it makes sense to charge for where you are adding
value (managing equities) and not where you are not (holding bonds and
other passive investments).



However, untill clients wise up, you are going to see alot of wrap/fee programs that will make your eyes water.



I’ve seen %2 wrap programs. For 2% I’d better be getting hedge fund performance, and not Growth Fund of America.