C Shares in Retirement Accounts
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[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. [/quote]
One more try: Cite a source please.
[quote=rightway]
You must be kidding. A managed account where the client ownes the securities with no imbedded gains, options to quit the manager and hold the securities, ability to harvest losses, and total VISABILTY of costs? Or an investment where a new investor gets a basis on positions years before they actually "owned" it, no option to leave without complete capital gain, and fee's buried in a 40 page perspectus? No, the SEC is smarter than you. Sorry sport.
[/quote]
Leaving to the side that almost no one ever uses those features (according to the wholesalers and portfolio managers I have spoken to.) Aside from the fact that many mutal funds still have embedded LOSSES from the bear market (you're still using the spiel from the last millennium) The question is about C shares in IRA accounts where the "tax advantage" is irrelavent.
Mr. A
Heres an abstract
ROSS M. MILLER
Miller Risk Advisors; SUNY at Albany - School of Business June 2005
Abstract:
Recent years have seen a dramatic shift from mutual funds into hedge funds even though hedge funds charge management fees that have been decried as outrageous. While expectations of superior returns may be responsible for this shift, this article shows that mutual funds are more expensive than commonly believed. Mutual funds appear to provide investment services for relatively low fees because they bundle passive and active funds management together in a way that understates the true cost of active management. In particular, funds engaging in closet or shadow indexing charge their investors for active management while providing them with little more than an indexed investment. Even the average mutual fund, which ostensibly provides only active management, will have over 90% of the variance in its returns explained by its benchmark index. This article derives a method for allocating fund expenses between active and passive management and constructs a simple formula for finding the cost of active management. Computing this active expense ratio requires only a fund's published expense ratio, its R-squared relative to a benchmark index, and the expense ratio for a competitive fund that tracks that index. At the end of 2004, the mean active expense ratio for the large-cap equity mutual funds tracked by Morningstar was 7%, over six times their published expense ratio of 1.15%. More broadly, funds in the Morningstar universe had a mean active expense ratio of 5.2%, while the largest funds averaged a percent or two less.
Try checking out Personal Fund .com. They have the true total expenses of funds on there. Type in a ticker, and you will get the disclosed expense ratio, and you also get the transaction costs. Those costs, which are not public knowledge, can easily double or triple the fees on MF’s… Choose wisely young hobbit…
i have the password and have looked at it.
i just think that all the other sites cant be wrong and this one is right.
Rightway,
You're kidding me right?
First let me say that I made a lifelong enemy of the head of mutual fund sales at my old firm when I asked him back in 95(?) why we were going to charge our clients 1% to run a fund that was 50% Zero Coupon treasuries and 50% actively managed equities. As such, this abstract is nothing news to me.
Second, let me say, I don't buy mutual funds (with the exceptions of the occasional Annuity, ETFs and CEFs) so I don't have a dog in this fight.
Thirdly, let me say that what this thread is about is C shares as opposed to A's and B's in retirement accounts, not the disadvantage of mutual funds in general. IF we allow that mutual funds are appropriate investment vehicles (and, no I don't want to go down the path you seem to be so self righteously marching) then we're comparing an apple to an apple and your claim that clients are paying "Thousands of dollars in fees" a non sequitur in that the fees are there regardless of the class.
Fourthly, how is what this guy is saying is an invalid way to charge for money management any different than your wrap fee with the bonds and or ETF (which are essentially indexing also).
Fifthly, Is indexing any different from owning GE or some other benchmark "core position?"
Sixthly, He's not saying that the fund is actually charging 7%, he's saying that the fund is charging 7% on the assets it "actively trades". Therefore, to say that the client is paying "thousands of dollars" is misleading. If they have $100,000 dollars in the C shares, the client is paying the thousand dollars in management fees (1%) but less than the 100M is lss than the 1M and "thousands", while we all know that the trick is that $1,001 = Thousands, implicates whole multiples of whole thousands.
Mr. A
[quote=rightway] Heres an abstract
<font face=“Arial, Helvetica"
size=”+1">Measuring the True Cost of Active Management by Mutual
Funds
<a class="textlink"
href=“http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?
per_id=299691”>ROSS M.
MILLER Miller Risk Advisors; SUNY at Albany - School of Business [/
FONT]
June 2005</
td>
<table style=“width: 475px; height: 530px;” align="center"
cellpadding=“0” cellspacing=“0”>
Abstract:
Recent years have seen a
dramatic shift from mutual funds into hedge funds even though hedge
funds charge
management fees that have been decried as outrageous. While
expectations of
superior returns may be responsible for this shift, this article shows that
mutual funds are more expensive than commonly believed. Mutual funds
appear to
provide investment services for relatively low fees because they bundle
passive
and active funds management together in a way that understates the true
cost of
active management. In particular, funds engaging in closet or shadow
indexing
charge their investors for active management while providing them with
little
more than an indexed investment. Even the average mutual fund, which
ostensibly
provides only active management, will have over 90% of the variance in its
returns explained by its benchmark index. This article derives a method
for
allocating fund expenses between active and passive management and
constructs a
simple formula for finding the cost of active management. Computing
this active
expense ratio requires only a fund’s published expense ratio, its R-
squared
relative to a benchmark index, and the expense ratio for a competitive
fund that
tracks that index. At the end of 2004, the mean active expense ratio for
the
large-cap equity mutual funds tracked by Morningstar was 7%, over six
times
their published expense ratio of 1.15%. More broadly, funds in the
Morningstar
universe had a mean active expense ratio of 5.2%, while the largest funds
averaged a percent or two less.
[/quote]
I’ve read the whole thing, and it’s absurd.
They make the assumption that the active portion of most funds is only
10% of the total assets they manage (i.e. core and explore, with 90%
within indexed securities, and the other 10% within other non-indexed
assets). That being the case, they say that the expense ratio on the 90%
of the portfolio shoud be 18 bps. The remaining 10% of the portfolio,
considered to be ‘active’, is what qualifies the WHOLE portfolio as ‘actively
managed’.
So, he applies the total expense ratio to ONLY the active portion of the
portfolio, and that’s where you get a 5% to 7% management fee on the
actively managed portion of the portfolio.
It’s no different than selling 9 slices of bread for NOTHING, and then
selling the 10th slice for $2. Does that mean that the bread is $2 per
slice?
I put ZERO confidence in that article, and for you to conclude that actively
managed portfolios, including C-shares (yes, I’m defending them now…)
costs in excess of 5% per year, you just don’t have a clue.
I think you read the first paragraph, and went no further. That’s not what
the article is saying. He’s only applying the expense ratio of a portfolio to
the perceived ‘active’ portion of the portfolio, of which, he concludes is
less than 10%. He also thinks that most mutual funds are closet indexers,
and as a result are expensive.
I’ve seen this before, and it carries very, very little water. I can’t believe
anyone would cite this, in addition to believe it as a part of their
justification for saying ‘mutual funds cost 5% per year’ in management
fees to own.
Good times.
C
This was sort of the point I was making about self interests in another thread. We all convince ourselves that what we are doing is in the best interests of the client. We tend to look favorably on information that agrees with our self interest and less favorably on evidence that disagrees with our paradigm.
I agree with captian, this "abstract" is "absurd".
Mr. A
But I do want to thank you for citing your source.
It's much easier to get to the bottom of things when we know where the information came from.
Mr. A
[quote=mranonymous2u]
[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. [/quote]
One more try: Cite a source please.[/quote]
You mean you want the cite where the regulators have said C shares, due to their pricing structure and the fact they never convert to A shares, are a short term investment? Do you recall why the regulators weighed in to push for B shares to convert to A? It had to do with the possibility that the 12b1 lasting forever and in total, going far above what they considered fair and equitable.
[quote=mranonymous2u][quote=rightway]
You must be kidding. A managed account where the client ownes the securities with no imbedded gains, options to quit the manager and hold the securities, ability to harvest losses, and total VISABILTY of costs? Or an investment where a new investor gets a basis on positions years before they actually "owned" it, no option to leave without complete capital gain, and fee's buried in a 40 page perspectus? No, the SEC is smarter than you. Sorry sport.
[/quote]
Leaving to the side that almost no one ever uses those features (according to the wholesalers and portfolio managers I have spoken to.) [/quote]
I don't know where you get that idea, I see people use those features all the time.
[quote=mranonymous2u]Aside from the fact that many mutal funds still have embedded LOSSES from the bear market (you're still using the spiel from the last millennium) ...[/quote]
Two problems with that; 1) The client doesn't have a choice WHEN those taxable events take place. 2) When did you last see a fund distribute losses?
[quote=mranonymous2u]
The question is about C shares in IRA accounts where the "tax advantage" is irrelavent.
Mr. A
[/quote]
Good point. The concern that regulators will eventually act on C shares in IRAs and the imbalance between using what regulators see as a short term investment vehicle and the long term nature of the IRA goes back to the "logic" they used on the B share dragnet. In that, the regulators said often clients ended up paying far more in fees by having B shares when they could have used ROA to get A shares with break points and much lower total fees. It makes sense to assume that eventually they'll apply that same logic to C shares OR they'll force in a A share coinversion feature.
[quote=mranonymous2u]
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.
[/quote]
The problem with that logic, imo, is that you're mixing the pricing of a "fee product" with incidental advice (Series 7) with the SMA process where the FA is actually being paid for advice (Series 65).
[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. QUOTE]
Depends what sort of "wrap" you're talking about. If you're talking about a "fee in lieu of commission" account where you are not being paid on advice, your clients avoid all commissions and fund loads, and have access to the institutional version of many funds, it may be cheaper than C shares and it eliminates the inability of the C share buyer to cross fund families, avoid CDSCs, etc.
If you're talking about Series 65 accounts where they slap an advisory fee on top of a collection of mutual funds, C shares may be price competitive, but remember the Series 65 account isn't just avoiding sales charges (as you're doing with C shares over A shares) it's charging for that advisory service as well.
From what I can gather here at Jones the firm has been Pro A share so long for whatever reasons that they just don’t like you doing C shares. They “allow” it under certain circumstances, but their philosophy with retirement accounts is that the time horizon is so long that A shares rule!!! You always hear the old, “At jones the average mutual fund is held for 10-14 years” which sounds made up to me. Like noted above, you can use them under certain dollar amts. On a related note I tried to do a new C share fund in a Simple account for an American fund, and they (American) have completely disallowed C shares in Simple and SEP IRAs unless the fund is already owned in the account.
I called American Funds this afternoon to inquire about your statement regarding “American has completely disallowed C shares in Simple or SEP”…American Funds stated this is NOT true. They will only limit C shares when they reach $500,000 in a retirement account. Perhaps you meant to say Jones has completely disallowed C shares??
Cerberus,
Now you have me doubting my memory. About 1 months ago I put an order for a NEW fund Class C share in a Simple IRA account. Jones sent me a cancelation notice and said American no longer allows C share purchases in Simple and Sep IRA's. I believe I ended up purchasing a new C share with another fund family. However, it is possible I just changed to A shares. I will check next week, and get back.
gad12,
Maybe we’re both right. ie, maybe EJ has said to American Funds no c shares in qualified plans, hence the cancel of your order, blaming it on American. We did some c share/simple orders for new hires of an existing AF’s simple plan this week and so far they haven’t been cancelled by AF’s or RayJay. Plus (after seeing your post) we called and got the green light on C’s in qualified plans from our internal at AF’s. Sounds like Jones doesn’t want you to do C shares and is blaming it on AF’s to me. It probably won’t be the first or last time EJ or RayJay has misled their reps.
Gad and Cerberus,
Keep in mind that the sales charges in retirement plans held at at American is based upon the breakpoint achieved by the group, not the individual. It is very possible that a "C" share was not allowed in that particular plan due to the total amount of assets as opposed to all plans.
American Funds absolutely does allow "C" shares. Investors close to retirement in a small plan need the ability to invest in "C" shares. A particular B/D may not approve of "C" share in many retirement accounts due to suitability issues.
Vbrainy beat up on me for saying this earlier in the thread, but "C" share sales in retirement accounts held at fund families don't make sense for the client. (Unless someone is planning on leaving their job soon and doesn't like the fund family chosen for the plan.)
I care how the regulators and others can affect my business, my income,
my clients, and my family. For whatever reason, valid or not, the
C share issues is in there sights…and a while a deer can argure all
day long it cannot be shot in June because it is not deer season, his
ass can still get shot dead if someone pulls the trigger in June.
I took a question and expanded the issue…sorry. My point is that I do
not feel it is a good idea to build a business based on C shares if you
expect to keep getting paid the 1% trail. Cost
comparrisons, Mutual Fund vs SMA vs ETF vs whatever while fun to
debate, will be pointless to the guy who wakes up one day with a big %
cut on a business he built over 10 years…and this my felloe forum
friends is coming. In my opinion of course. (no sources cited).
[quote=mikebutler222]
[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. QUOTE]
Depends what sort of "wrap" you're talking about. If you're talking about a "fee in lieu of commission" account where you are not being paid on advice, your clients avoid all commissions and fund loads, and have access to the institutional version of many funds, it may be cheaper than C shares and it eliminates the inability of the C share buyer to cross fund families, avoid CDSCs, etc.
If you're talking about Series 65 accounts where they slap an advisory fee on top of a collection of mutual funds, C shares may be price competitive, but remember the Series 65 account isn't just avoiding sales charges (as you're doing with C shares over A shares) it's charging for that advisory service as well.
[/quote]At Merrill you open a "fee in lieu" account and buy $200,000 of Institutional class funds at NAV and charge 1% and the account performs well. In year 2 the client will get a letter saying there may be better alternatives to this account structure, you may be paying higher fee's than you need to, there has been little trading on your account, and you should talk with your advisor. Some more time goes buy with no trades and Merrill just turns the fee's off.
I am not saying it is right, but UBS is being sued, just as MS already did for charging fee's in these accounts with little or no activity.
You're AOK Rightway!
I don't agree with the guy, but I do agree with the idea that they'll go after C shares.
I just think that all the fee based products will be under fire.
Mr. A