My firm's wrap program..your thoughts?

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Jun 23, 2005 9:43 pm

Being involved in a bank program I see many clients who have much of their investments in products such as CD's, checking, and savings accounts usually not even beating inflation rates.   Many of my clients are older types who have been burned in the stock market before.


In attempting to build relationships for the long term and knowing my customer base I have been using predominantly my firm's "Preservation" model in the mutual fund wrap program.


This model is currently 55% cash (2.75% money market fund), 25% bonds and 20% stocks.   My firm's advisory board does quarterly rebalancing and has the ability to tweak the allocations slightly based on market factors.


I would like to hear some constructive feedback regarding this model as I'm still relatively new to this business.  I have run the hypos back about 20 years and this model, net of our 1.5% wrap fee, averages 5% annual total return.


I make sure to explain the 5% is not fixed every year and your prinicipal does fluctuate but very little.   I set the ceiling at 10% in a great year and the floor at a 5% loss of principal in a bad year.   I also explain that our goal is to simply beat the inflation rate by a small margin while keeping your funds liquid as opposed to CD's and FA's.


I do make sure to set my clients expectations realistically by telling them this model is for someone who is extremely conservative and wants alot of downside protection or someone who has a short time horizon (12-24 months).


Thanks in advance for any constructive feedback.


Jun 24, 2005 7:27 am

I think we seem to be in a bit of a sideways market.  What if the
stock martket only goves us 5% returns and bonds and cash float 3 to
5%.  Our fee's, 1.5% of that are taken and the clients are barely
beating inflation.  Lets be honest- your (and all of ours) mutual
fund models will, at best, beat the market by a hair net of
fee's.  Clients will tire of these fee's and fire us with 5%
returns. 



I believe there has to be something else in our briefcase, something
other that mutual fund wraps and the like, to get and maintain long
term clients.  This may be more advanced planning (no more
deterministic financial plans!), more advanced investment stratagies
(not just mutual funds), certifications (if your not now, or not
getting your CFP...), tieing portfolio returns (both robust and not)
into life goals (hence the non-determnistic planning) tot ake the focus
off of the sideways market, and finally just being different. 



Being in a bank, I believe, will make this very challenging because a
bank reps focus is less on the existing client and more on the branch
and new clients( after all-that is the big benefit of being at a
bank).  But then again- who cares when the client fires you for
the mutual fund wrap right?  The branch is sending you 10 more
prospects next week.  Its actually pretty sad and will not
last.  

Jun 24, 2005 10:59 am
scrim67:

Being involved in a bank program I see many clients who have much of their investments in products such as CD's, checking, and savings accounts usually not even beating inflation rates.   Many of my clients are older types who have been burned in the stock market before.


Thanks in advance for any constructive feedback.





"I am more concerned with the return of my principal than the return on my principal." Will Rogers


Your plan substancially increases the risk your clients are taking without sufficiently rewarding them.


Here's the problem, and understand upfront that this is not an attack on you personally. Your clients lived through a period of time when no one had any money. We can try to imagine this horror story, but honestly we can't. No money, no food, no shelter. Their parents, honest working people, lost everything in the depression. They understand what real hunger is and they have no desire to relive that part of their lives. This made them life long savers. They are strong believers in the "those who fail to learn from history are doomed to repeat it" way of thinking. They are realist. And to realist cash is king.


To that end, one day they walked into your bank, drawn by the implied guarantee of the deposit insurance offered on CDs. That day they didn't realize that the bank was sizing them up as a future revenue source. They didn't know that the people they were dealing with are paid to sell them products. They just want a safe place for their money. And here you are using the trust they've placed in the bank, trying to talk them out of it. Why? What do you know that they do not? Read the quote above and understand it's where your clients live. Then within the context of the quote deliver what your clients need.


Jun 24, 2005 11:44 am
tjc45:
scrim67:

Being involved in a bank program I see many clients who have much of their investments in products such as CD's, checking, and savings accounts usually not even beating inflation rates.   Many of my clients are older types who have been burned in the stock market before.


Thanks in advance for any constructive feedback.





"I am more concerned with the return of my principal than the return on my principal." Will Rogers


Your plan substancially increases the risk your clients are taking without sufficiently rewarding them.


Here's the problem, and understand upfront that this is not an attack on you personally. Your clients lived through a period of time when no one had any money. We can try to imagine this horror story, but honestly we can't. No money, no food, no shelter. Their parents, honest working people, lost everything in the depression. They understand what real hunger is and they have no desire to relive that part of their lives. This made them life long savers. They are strong believers in the "those who fail to learn from history are doomed to repeat it" way of thinking. They are realist. And to realist cash is king.


To that end, one day they walked into your bank, drawn by the implied guarantee of the deposit insurance offered on CDs. That day they didn't realize that the bank was sizing them up as a future revenue source. They didn't know that the people they were dealing with are paid to sell them products. They just want a safe place for their money. And here you are using the trust they've placed in the bank, trying to talk them out of it. Why? What do you know that they do not? Read the quote above and understand it's where your clients live. Then within the context of the quote deliver what your clients need.




I UNDERSTAND!!!


"return OF my principal"...AN IMMEDIATE ANNUITY!!!

Jun 24, 2005 1:01 pm

thanks for the constructive feedback.


My view is that anything I can do to help my clients minimize their chances of outliving their nest egg than I have provided a valuable service for them.


Having all of your assets in CD's and bank products obviously contains risks albeit different types of risk.


Diversification is the key at any age IMHO

Jun 24, 2005 1:14 pm

Tj -


Well said - some people just need to be in CD's. They really don't care about inflation etc, they just want to know that they are not going to lose any $$. 

Jun 24, 2005 1:20 pm

I agree too.


CD's should be a part of their overall asset allocation but not 100%.

Jun 24, 2005 6:15 pm
jamesbond:

Tj -


Well said - some people just need to be in CD's. They really don't
care about inflation etc, they just want to know that they are not
going to lose any $$. 





Man, this is a strange comment for this industry.  EVERYONE needs
to make sure they can keep their lifestyle as adjusted for
inflation.  The typical bank CD customer is the one who does not
have enough money to self insure against inflation, which is exactly
why they need an inflation hedge on their assets.  Just ask the
guy who was pulling in $1,000 per month from the CD in 1985 and today
is getting $250 per month from the same investment.  Yeah...their
not loosing money.  Educate your clients, don't sell them stuff.

Jun 24, 2005 8:04 pm

With some clients, you can educate them about the effects of inflation on the dollar, until you're blue in the face and they still won't consider equity investments. Even incorporating zeros in the equity portfolio doesn't allow them to feel at ease about the return of their principal. That's fine.


Then it's time to change direction and consider only investments which offer a return of principal.


I don't believe any broker has been ordered to arbitration because their recommended investments were too conservative for the client. However, force-feeding a reluctant client some equity investments is a surefire way to end up in arbitration.

Jun 25, 2005 12:13 am

I can't believe that no one has suggested a VA for clients who are risk adverse yet need inflation protection.  You just need to be careful about how old your clients are.


On the wrap program, I cannot fathom charging 1.5% for a 2.75% MMA.  Put the MMA funds in a bank MMA and charge 1.5% on the rest of the investments, when your really doing something constructive for the client.  The above scenario is just an underhanded way for your bank to pay MMA depositors 1.25%.


I assume that this bothers you too, based on the tone of your question...

Jun 25, 2005 5:15 am

Doesn't bother me at all.


This is a package deal.


The bank MM fund doesn't pay too much differently than 1.25% anyway.


Also, my firms advisory board can tweak that 55% level at any time based on economic conditions.


Still, the model is to "preserve" capital and return somewhere between 4-5% annually after expenses.


My most conservative clients agreed this is their goal.

Jun 25, 2005 5:25 am

Va's don't work for alot of my circumstances as my clients want liquidity and most of them are seniors.

Jun 25, 2005 9:42 am
doberman:

With some clients, you can educate them about the
effects of inflation on the dollar, until you're blue in the face and
they still won't consider equity investments. Even incorporating zeros
in the equity portfolio doesn't allow them to feel at ease about the
return of their principal. That's fine.


Then it's time to change direction and consider only investments which offer a return of principal.


I don't believe any broker has been ordered to arbitration because
their recommended investments were too conservative for the client.
However, force-feeding a reluctant client some equity investments is a
surefire way to end up in arbitration.





Wow.  Then they are not investors or potential clients, they are
purchasers.  I would politely refer them back to the bank manager
for CD's...and no, I would not do a fixed annuity or guise a return of
principal via a variable annuity income benefit.  BTW- I speak
from experience in doing all three of the above actions.



As for covering the pricipal with a Treasury Strip, one has to be
careful here.  While your principal is protected at a date in the
future, they ARE the most volatile in price movement (within a matury
set) due to the duration and maturity being the same.  PLUS the
taxes paid on income that they are NOT getting (it is the return of
their prinicpal) can be confusing and a little upsetting to the
presumabley uneducated investor...although I see the strategy in action
quite often, and it works.



I guess making sure the clients fits our model is as important as making sure we fit theirs.

Jun 25, 2005 9:53 am

Scrim. I'll save the Put-styled lecture and just point a few things out as food for thought.  While your clients may have agreed to this goal, they shouldn't have, and while I certainly don't blame you for doing your job, I don't think too highly of your advisory board for their allocation model.  According to Bankrate.com this morning, the average money market account currently pays 2.12% and if you can pass the tall hurdle of $10,000, it goes to 2.35%...a far cry from your bank's net of 1.25%.


Most VA's offer 10% liquidity each year without any penalty, and I only suggest VAs for the true market portion of your program...for their short-term liquidity, I still believe that a 2%+ money market would be preferable...and they could even write a few checks (3/month) on the account instead of coming to you to ask for money.


Getting back to the VA, several of them offer guaranteed accumulation of 5-7%, with annual rachets on your principal, so if you have a bad year and the client dies or decides to annuitize, the contract backs up to the highest market value from any previous year.  Your clients have guaranteed principal protection, which they don't have now, even at 55% in the money market.


Again, I use fee-based much more than I use VAs, but I can't help but believe that at least some of your clients would be better served by a VA and a money market, rather than the scenario you describe.


...and I'd lay odds that the more you think about it, the more bothered you'll be by your advisory board (which I'd lay odds has zero licensed investment professionals on it) taking advantage of your clients like this...

Jun 25, 2005 11:06 am
Indyone:

On the wrap program, I cannot fathom charging 1.5% for a 2.75% MMA.  Put the MMA funds in a bank MMA and charge 1.5% on the rest of the investments, when your really doing something constructive for the client.  The above scenario is just an underhanded way for your bank to pay MMA depositors 1.25%.




Troof. I have no problem with wrap fees on equity and bond portfolios, but a wrap fee on a MMA or CD is just plain greedy.


I ran across a prospect who had bought a VA with a 1.5% M&A fee. The VA was OK. What was grievous was that the cocksucker advisor put a 2% wrap fee around it! Once this was pointed out the prospect (now a client) was furious.


And I would beat the living fxck out of any advisor who pulled - or even advised - this $#!+ on my parents.

Jun 25, 2005 11:17 am

Indy,


Great feedback and yes, food for thought.


Without giving away who my employer is I will say that our advisory committee is overseen by one of the most respected economists in this entire industry.    Personally, I would love to see them drop the  money market allocation a bit to boost the return but they must stay to their objectives of Preservation of principal.   Perhaps after the FED cuts rates again they will lower to MM allocation and raise the other asset classes somewhat.   We have a conference call next week with him and it should be interesting.


That being said, I do agree with much of what you stated.  However, my clients and I usually agree that they are more comfortable with 100% liquidity our program offers as opposed to 10% per year.  


I know I will get flamed for this but I admit I have a bias against VA's and annuities in general.   My opinion is that they are mostly smoke and mirrors with all their guarantees and such.   Are they appropriate sometimes?  of course but they are way oversold and only appropriate to a very small percentage of customers IMHO.


Ok, I'm stepping off now.


Jun 25, 2005 11:20 am

Pants,


I have a feeling your post will eventually get deleted because of the language but I'm curious if your rant was mostly aimed at the VA scenario?  


I don't want to get pummelled


Remember, our allocations are not static.   It's 55% MM now but not necessarily in the future.


Jun 25, 2005 11:50 am

Let me add one more thing:


I'm still a newcomer to this field.   My goal right now is to collect assets and I feel this approach is best right now.


I'm collecting the assets; getting the client in a comfort mode to work with me going forward; letting them get a hands on feel for our program as they see how the statements, performance reports, rebalancing and newsletters look.


My clients can change their strategy at any time with no charges.   What I anticipate happening is as I meet with some of my "Preservation" clients I can see them transitioning part or all of their portfolios to our "conservative" model which is basically a 40/60 allocation of equites/bonds.    This allocation has proven over time to be the best combo of risk/return over the long term from the research I've done.   Net of expenses this model returns approx 7% annually.


That's my plan.  Will it work over the long term?  Obviously I think so.  But you know what they say about the best made plans.


Out of the 45 models i'm servicing right now about 10 our preservation.

Jun 26, 2005 10:26 am

Scrim-



Your wrap acount is an account under the ACT, therefore the fee is not
in leu of commissions, it is an advisory fee- if, within that advisory
fee, is the talent of your chief calling for large cash positions from
a tactical standpoint, then the fee may be justified.  If the
market dops 15% this year will they get what they paid for? Yes. 
They are paying for a conservative approach and that is what they are
getting.



On the other hand- YOU could allocate funds to a more aggressive model,
and leave the cash in another vehicle to accomplish a similar
allocation with less cost.  The reality here is that this is a
conservative model, and the cash allocations, while not static, will
remain high.  If it were me, I would educate the client on this
and have a discussion with them.

Jun 26, 2005 1:16 pm

I have a client right now who is a surviving spouse of a good friend of mine who died last week. Anyway he left her about $800k. $220k in a 401k program, $175k in life insurance and about $430k currently with me. She has 2 college age kids, one has 3 years to go, the other has 2 years to go. Her house is paid for, she has no job except for substitute teaching, and her health benefits from her husbands job will run out in one year.


I'm wanting to roll the 401k into an IRA using a balanced 50% stock funds/50% bond fund managed fund wrap program charging 1.35%. Take the after tax $430k and put that into the same balanced  managed fund wrap program, take the $100k put it into a liquid CD, and the 75k into her checking to cover living expenses and school.


What do you think of this plan?