Fee based accounts

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Aug 30, 2012 1:19 pm

I want to add fee-based asset management to my practice and am looking for the following rules: Passive, index-based allocation, looking at Vanguard funds or ETFs, that I can then attach a 1 percent fee. My firm allows me to do this through FTJ Fund Choice.
I have become convinced that this approach is in the best interest of the investor -- it keeps costs low and the index approach beats 99 percent of active fund managers.
Questions:
I want to build four or five sample portfolios -- growth, balanced, income, tax-free income, aggressive growth. How much allocation in necessary, in your view -- what's the proper mix of small, mid, large, value and growth, international, alternative, etc., classes would you use.
WHat are some marketing pieces that will help the client see the benefits of this approach.
...
Ideally, I would like to someday build my own portfolios using individual stocks and then attach the fee. Does anybody do this?

THank you!

Aug 31, 2012 7:33 am

Why would a client pay you one percent to drop them into a Vanguard fund especially if they knew you were coming to a board to get allocation advice?
Lots of people build portfolios with individual stocks.... they are called investment advisors or portfolio managers...

Aug 31, 2012 10:30 am

Hello, njh: Not sure the reason for the attitude. .. I'm asking because I'm interested in how others do this. I can build a lineup of funds; just want to hear what others do it.

Sep 4, 2012 12:13 pm

I create a lot of index portfolios and use Vanguard for most of the funds, but I also use Ishares and SPDR ETFs. Vanguard does not have exposure to some asset classes that investors need for proper asset allocation, so if you want Emerging Market Value then you have to go to Ishares. Also, Vanguard does not have any International Bond Funds, Ishares has some but they are not hedged against currency risk so I do use one active fund for foreign bonds through PIMCO which hedges currency risk. You can use an un-hedged international bond fund but it increases volatility.

I usually have 30%-50% of the STOCK PORTION invested internationally. I tilt almost all the stock holdings to value indices. Yes the Vanguard 500 overlaps some with the Vanguard Value Index but you want to have more weight towards Value. I do not use any mid cap funds.

I would avoid picking individual stocks as the core of an investment portfolio unless you want to pick a few hundred for each customer and constantly monitor and do research. You could turn it over to a Separate Account Manager but they are very likely to underperform their risk adjusted benchmark as well.

If you know that 90+% of fund managers underperform their risk adjusted benchmarks then why would you want to build portfolios by stock picking? That is what fund managers do and they haven't done well. Do you know something they don't? You are kind of saying two different things in your post. Active management is a losing game in the long run, you might get lucky though.

As far as marketing pieces, you could give out copies of "Wise Investing Made Simple" by Larry Swedroe. Great book on the passive investing approach. Good luck.

Sep 5, 2012 11:30 am

I appreciate the comments.

Nov 24, 2013 1:12 pm

Excellent response passiveinvesting.

njh_at_lfg...buddy you need to check the attitude at the door.