Fee Based vs. Mutual Funds

or Register to post new content in the forum

13 RepliesJump to last post

 

Comments

  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
Mar 1, 2007 8:52 am

There seems to be an emphasis on producing fee based business. Has something changed in the industry over the past five/ten years? Back in the 90's we were told to sell mutual funds, annuities, and insurance. Why all the emphasis on fee based sales? Plus, the payout sucks.

Mar 1, 2007 12:18 pm

If you think the payout sucks for fee-based, you're being incredibly short-sighted.  Consider this...


$100K mutual funds - $3,500 up front, $250/year thereafter.  You get 40% of both these numbers


$100K fee-based - $1,000 each year.  Again, you get 40%.  If your firm pays a lower percentage for fee-based than for straight brokerage, THEY are incredibly short-sighted.


After ten years, you've grossed $5,750 in mutual funds and $10,000 in fee-based, assuming zero investment growth (in which case you're probably fired well before you hit ten years, but let's put that aside for the sake of simplicity).  As time goes on and the investments grow, that pay gap gets larger and larger in favor of the fee-based account.  Better yet, you start each month or quarter (depending upon how your firm pays out fee-based commissions) at a number above zero.  If you get a nice chunk of assets under your fee-based programs, you can make a good living without making any new sales at some point in your career.


That being said, it's not what pays the most, it's what the client needs.  If the client is a long-term buy and hold type and no changes are needed, using a fee-based account is not ethical.  I happen to believe that for many clients, periodic shifts in asset allocation is very beneficial and if one is good at going the right direction, the client makes more money even though the advisor is paid more for doing the work.


Did that answer the question, or is there more to your particular story?

Mar 1, 2007 12:37 pm

I like using my fee based mutual fund asset allocation platform in many cases mainly because it somewhat lessens the conflict of interest inherent in our business at times.


Clients realize we collect more in fees if/when their account balances rise so they enjoy the fee based arrangement as opposed to transactional.


scrim

Mar 1, 2007 1:00 pm

Nicely told, Indyone.

Mar 1, 2007 1:13 pm

Indyone, thanks for the breakdown. What's the typical fee-based goal per year for FA's, in $mil?

Mar 1, 2007 1:31 pm
successmagnet:

Indyone, thanks for the breakdown. What's the typical fee-based goal per year for FA's, in $mil?




If you're getting 1% of AUM, you're doing good, and the client is getting a fair deal too.

Mar 1, 2007 1:37 pm

What's AUM? It's so fun posting so many stupid questions...



Is there such a thing as a stupid question?

Mar 1, 2007 1:44 pm

Assets Under Management.


There's no typical goal.  for someone new to the business, I'd say anywhere from 2-5 mil/year in fee-based is a reasonable goal.  The best advice you'll get is to offer the path that suits the client and build both sides of your book - commission (pay me now) and fee-based (pay me later).  All fee-based will make it tough to survive long enough to make it and all commission-based will cause you to feel like a hamster in a wheel at some point.


...and yes...there is such a thing as a stupid question...but stupid questions are good for building a thick hide...

Mar 1, 2007 1:53 pm

I like using my fee based mutual fund asset allocation platform in many cases mainly because it somewhat lessens the conflict of interest inherent in our business at times.


Clients realize we collect more in fees if/when their account balances rise so they enjoy the fee based arrangement as opposed to transactional.



So the general goal of an FA who is in production is to build both sides of the book, fee-based and commission...


With fee-based, what does scrim67 mean when he says 'conflict of interest'?

Mar 1, 2007 2:20 pm
successmagnet:

I like using my fee based mutual fund asset allocation platform in many cases mainly because it somewhat lessens the conflict of interest inherent in our business at times.


Clients realize we collect more in fees if/when their account balances rise so they enjoy the fee based arrangement as opposed to transactional.



So the general goal of an FA who is in production is to build both sides of the book, fee-based and commission...


With fee-based, what does scrim67 mean when he says 'conflict of interest'?



He meant that fee based eliminates the conflict of interest that exists in transactional business.

Mar 1, 2007 2:24 pm

I would say it lessens the conflict of interest as opposed to eliminates.


There will always be some in our business.


scrim

Mar 1, 2007 3:58 pm

Conflict of interest - what is best for the client vs. earning $$$?


Mar 2, 2007 9:57 pm
scrim67:

I like using my fee based mutual fund asset allocation platform in many cases mainly because it somewhat lessens the conflict of interest inherent in our business at times.


Clients realize we collect more in fees if/when their account balances rise so they enjoy the fee based arrangement as opposed to transactional.


scrim



The other thing that is great about it is when you come across something new, you don't have to use it just for new clients, or if a fund family is a one trick poney, you can still use the investment with all of the appropriate clients and there is no conflict of interest in avoiding breakpoints. 


I once held a seminar for clients on a topic that affected a certain group of my clients and a couple of them started talking about the investments I had recommended.  The next week one of them came in and questioned why I would put an investment into the other guy's portfolio with most everything else being the same (suitability) and not use the investment with him.  I knew they both should own it however the Jones heads would make me answer fspends for days for missing a breakpoint.  Now they both own the investment thanks to wrap accts.