Commission to Fee Based

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Jan 22, 2010 4:17 pm

How do you guys handle this situation?


Client has an amount that justifies C shares or commission based UIT's, so he's invested $100,000 and funds/UIT's have different surrender periods.

Now same client rolls in an amount that would warrant fee based, say $300,000 more.  So it probably makes sense to start a fee based account, but it may cost more to the client than a the C share or UIT standing alone.
 
I understand some of you will say, "Well the fee is for my service".  Ok, but the client is going to get serviced in either account. 
 
I'm all for keeping expenses low for the client, but we have to get paid too...at least 1% before grid on these amounts.

So how do you approach this?
Jan 22, 2010 4:59 pm

Why do you have to do fee based? Just because he's adding $300K? I have large accounts with C shares.



Many times C-shares are less expensive than fee based. Get paid 1% upfront and a 1% trail with the C shares....nothing wrong as long as the client understands.

Jan 22, 2010 5:12 pm

Give him a choice.


 
#1 More C shares and here's the cost.
#2 Advisory account, it will cost more but you are able to provide a better options.
Jan 22, 2010 9:49 pm

i have been in the process of converted many assets into fee based accounts as well.  the justification to myself and the client is that i plan on being more active in the clients accounts. due to this fact a fee structure would not only make it easier for me to effectively manage the clients assets,  but i also believe save the clients on costs as well.  i have let my clients know that given the market conditions a more hands and active advisory based approach will work better moving forward.  and then let them know they have a choice to maintain the account is or set up the fee based account.

Jan 22, 2010 11:09 pm

C shares are probably gonna get more scrutiny- like it or not- I think advisory is cleaner and safer for the FA. Prospects love to hear about "transparency" in fees as opposed to C share which is just "in there somewhere". Tell him it's time to transition to a more institutional style (pension funds don't pay loads/comm) even though comm style was fine as we built this up  

Jan 22, 2010 11:36 pm

250k limit on c share per fund family might be a valid issue to raise as well

Jan 23, 2010 9:00 am

I only use C shares for small amounts. Keep in mind if you are using some index funds and ETF's, the all-in cost of a fee-based account may be less (or fairly close) than C share mutual funds. I guess the question would be...if you can justify 1% in a C share, but can't justify 1.25 or 1.5 in a fee-based account, then why are you charging what you charge? You should charge what you think you deserve. If it's 1%, then it's 1%. But if it's 1.5%, then don't try to squirm around it with C shares. Honestly, even though I tell clients I get paid 1% on C shares, it is still an easier sale because they aren't seeing it. But this is really not totally honest. That's why C shares will eventually have to be changed somehow.



Can you discount to 1% on the fee-based account?

Jan 23, 2010 1:40 pm

When it comes to fee based accounts, the fee isn't only for "service".  When you're comparing FA's like us balancing portfolios to institutional money managers handling the assets, it's no comparison.  Let's just say that the C share pfolio has an average ER of 1.75 and there's a couple of different funds to try and diversify the client.  That portfolio isn't actively managed on a regular basis.   Doing a quarterly rebalance is ridiculous b/c how the hell do you know that the end of a quarter is the best time to rebalance?

In most decent wrap programs, there's a trigger rebalance when the asset classes are off by 5% or more to put it back into the proper allocation.  So I tell my clients that no matter what, their money is being watched around the clock.  So when I'm on vacation for two weeks, your money is being watched.  When your C share broker is on vacation, who's watching your money? Plus the fee in a fee based pfolio is potentially tax deductible.  The difference in fees is maybe .25 basis points but the level of sophistication is on a whole different platform. 

I do use C shares when they're appropriate; I don't use them as an alternative to a "fee based" account b/c they pay a fee. 

Jan 23, 2010 3:47 pm

Since Jones only has one fee based account, I'm looking at things like the Frank/Temp Moderate Target Fund, C share. Customers prefer the 1% commission, I prefer the 40bp trail over the 10bp on A shares. The fund rebalances itself. What do you all think? And what other similar funds are available?

Jan 23, 2010 5:11 pm

Sell him some A-shares then put him in at 2% in 6 months. I learned that at a regional meeting...

Jan 23, 2010 8:16 pm
SometimesNowhere:

Sell him some A-shares then put him in at 2% in 6 months. I learned that at a regional meeting...





Say what? What does that even mean?

Jan 23, 2010 8:37 pm

I think he means, take the upfront A share commission, then roll the assets over to a wrap account and charge 2%. 

 
It's an advance move.  You wouldn't understand it.  b
Jan 23, 2010 9:14 pm
deekay:

I think he means, take the upfront A share commission, then roll the assets over to a wrap account and charge 2%. 

 
It's an advance move.  You wouldn't understand it.  b




Jan 24, 2010 10:27 pm

It's so advanced compliance will never figure it out. One of the guys I trained with had an FA suspended for this: Client had a mutual fund account of A-shares and an annuity that they were dumping a couple $k into for retirement every month. FA was putting the money that was supposed to go into the annuity into the A-shares, taking the same amount out of the A-shares and putting it in the annuity. Had a couple of good months of rip... Good luck explaining your reasoning on that one to compliance. "You see, um..um.... I, um... Pappa needs a new pair o' shoes, dang it!!!"

Jan 25, 2010 11:18 am
deekay:

I think he means, take the upfront A share commission, then roll the assets over to a wrap account and charge 2%. 

 
It's an advance move.  You wouldn't understand it.  b
 
My point was, how the he!! do you get away with it?  (or why would you do it??)
Jan 25, 2010 11:33 am
B24:
deekay:

I think he means, take the upfront A share commission, then roll the assets over to a wrap account and charge 2%. 

 
It's an advance move.  You wouldn't understand it.  b
 
My point was, how the he!! do you get away with it?  (or why would you do it??)



I overexaggerate for effect, but am critical of some of our peer's approach toward using AS. Despite regular compliance warning about not using it as a way to "annuitize your book" there is a wink-wink, nudge-nudge sort of attitude about it with some (a lot) of FA's I've been around seeming to insinuate that it is "good for everyone" (sound familiar?), especially the broker.

I have had people suggest to me that anyone in A-share mutual funds over 2 years needs to be put in AS, and not because they believe it would be good for the client. Now, I happen to believe that there is a lot of value in AS or AS type solution for a lot of clients, but that's for them to decide after knowing the costs associated with it. In spite of what my colleagues believe, it is not right for everyone.

To answer your question, I don't know (and don't want to know) how to get away with it. But it is obvious that people do it to make some quick money and then be lazy when they don't want to go find some more.

Jan 25, 2010 12:13 pm

A firm I worked with flagged A shares so that if they transferred into a fee-based account, they wouldn't be billed on for something like 2 years.  I wouldn't be suprised if EJ did this as well (with their enormous compliance dungeon).

 
You really have to watch out for those (greedy) FAs. 
Jan 25, 2010 2:42 pm
B24:
deekay:

I think he means, take the upfront A share commission, then roll the assets over to a wrap account and charge 2%. 

 
It's an advance move.  You wouldn't understand it.  b
 
My point was, how the he!! do you get away with it?  (or why would you do it??)

Tons of FAs in my area are doing it, sell A shares, convert to fee in 2-3 years..
Jan 28, 2010 3:57 pm

I've spoken to a number of associates, seg 3's, who say that they can't afford to sell Adv Sol. They would starve to death. Yet, in the long run they're stuck with a 10bp trail, which also doesn't cover the bills. Fee based may be the future, but we sure aren't rewarded enough to sell them when we're new.

Jan 28, 2010 5:07 pm
52new:

I've spoken to a number of associates, seg 3's, who say that they can't afford to sell Adv Sol. They would starve to death. Yet, in the long run they're stuck with a 10bp trail, which also doesn't cover the bills. Fee based may be the future, but we sure aren't rewarded enough to sell them when we're new.




That's the case everywhere.  The answer?  Sell more.

You should be happy that you have a fee-based platform.  When I was there it was "a-shares are the best.  fee-based sucks". 

Wow.  Weddle is taking care of you guys.

Don't you get new account bonuses?  Milestone bonuses?  A salary for the first year?

Btw - I would bet $100k that those Seg 3's you talk to are the same ones who complained about not having a fee-based platform.  It's just an excuse not to produce.