Managed Accounts

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Aug 8, 2006 8:37 pm

I was speaking with a friend today whose husband has been in the broker business for 40 years.  He has refused to move to a managed accounts business model because he doesn't want to "leave the money management to someone else."


Is this just an incorrect assumption on his part, or does moving to a fee-based business mean that FAs are just becoming asset gatherers?


Yes, I am a big time newbie.


Aug 9, 2006 10:24 am

Perhaps I should restate this one:


Does building a fee-based business result in advisors/brokers having less opportunity to manage their clients money than they once did under the old commission-based structure?

Aug 9, 2006 10:45 am
opie:

Perhaps I should restate this one:


Does building a fee-based business result in advisors/brokers having less opportunity to manage their clients money than they once did under the old commission-based structure?



Yes.  That forty year veteran who is the husband of your friend is right.


What happens these days is the guys and gals who were once called stock brokers are now financial advisors and they gather assets which are turned over to money managers who actually make the decisions on what to buy and sell.


So the manager makes a fee, and the "advisor" gets some basis points too.  From the talk on this forum it seems as though they're getting 1 point for doing nothing.  The con will be if they can keep their clients like mushrooms--in the dark--about the fact that the customer can gain an instant 1% by cutting them out of the picture.


Years ago brokers might introduce a client to a money manager who would agree to run the trades that they made for that client through the broker who made the introduction.  The falacy in that is that the broker really never knew if they were getting all of the trades or not.  Additonally the money manager made themselves available to the client and eventually they converted the client to a direct customer of one of their funds.


Consequently the brokers tended to keep their clients in house--using in house research and other ideas to do things like covered call portfolios.


That, however, required that the brokers had to be bright as well as personable.


When the education system stopped generating enough bright people the industry had to develop something that personable morons could do.  Somebody came up with the idea of turning brokers into asset gatherers--the original wrap accounts showed up in the early 1980s.


Rather than paying a commission on each trade the client would pay an annual fee based on a percentage of the size of his account--this supposedly took away the incentive to churn because a broker could not increase his income by trading.


The argument against the idea was that the fee was often more dollars than an account with a reasonable turnover would pay in commissions on a trade by trade basis.


But the genie was out of the bottle--commissions were becoming something from the past, the idea of paying a percentage of your assets was being born.


Essentially today's "advisor" needs very little in the way of "smarts" because all they really do is turn their client's money over to somebody else to manage.


They're supposed to be able to explain what is happening in the economy in general and why the market did whatever it did--hold hands with the customer. But they don't have to accept the blame because all they are is middle men.


It really is an entirely different business than it was when your friend's husband was around--and he's right, if you want to make your own decisions you need today's "advisor" lke you need a dose of clap.

Aug 9, 2006 12:20 pm

Your job is to be a relationship manager.  You are leader of a team of professionals.


Your job is not to watch a ticker, 1000s of stocks, bonds, mutual funds. Nor would you ever want that job.


You profile your client's needs and help them meet their goals.  Hopefully you work for a company who has a large back office full of geeks to watch the tickers, charts, trends, ad infinitum


Fee based business means that you get paid as the client's account grows.  A majority of the business you do should be fee based.

Aug 9, 2006 12:42 pm
vbrainy:

You are leader of a team of professionals.



Lead a team of professionals?  Who is on that team--not names, just job descriptions will do.

Aug 9, 2006 2:11 pm
vbrainy:

You profile your client's needs and help them meet their goals. 



What does that mean?  It sounds like something from a generic job description that might appear in a high school "What Do You Want To Do When You Grow Up" type book.

Aug 9, 2006 2:48 pm

[/quote]


So the manager makes a fee, and the "advisor" gets some basis points too.  From the talk on this forum it seems as though they're getting 1 point for doing nothing.  The con will be if they can keep their clients like mushrooms--in the dark--about the fact that the customer can gain an instant 1% by cutting them out of the picture.



This is a very good point.


As with most goods and services you could do it less expensively by doing it yourself.   Heck, if I knew how to service my own vehicle there's no telling how much I would've saved.


I tell my prospective clients they have two choices:  


Do it themselves or hire someone to help.    The latter choice costs anywhere from 1-1.5% more per year based on your assets than doing it on your own.


Doing nothing is not an option.


scrim

Aug 9, 2006 9:02 pm

Be careful of "reverse churning".  "Reverse Churning" is putting people into fee-based accounts but not actively buying and selling.   This is a big no-no with the NASD.  Brokers who believe in a "buy and hold" philosophy won't be able to use fee based accounts.  Why?  They are more expensive for the client than paying commissions.  There are plenty of reasons to disagree with the NASD on this subject.

Aug 10, 2006 8:04 am

Opie-



Don't let all of this make it more complicated than it is.  Using
managed money is you and your client utilizing firm to make the day to
day security selections and transactions in accordance to the
investment policies of that firm.  You and your client decide what
managers will be best for their plan initially.  In addition, you
and your client will have to monitor performance and allocations as it
pertains to their particuular needs and planning initiatives, making
changes as needed. 



It really is not that much different than selecting a portfolio of
mutual funds, in fact in most cases it can be less expensive with more
tax and other benefits. 



If the client (or you) is not comfortable with turning over these day
to day security responsibilities to a money manager or mutual funds, it
can be done directly between you and the client.  The client pays
for this through commissions per transaction or by paying a fee based
on the size of the account...the selection of which should be based on
how much trading will occur and which option would be more
economical.  If you choose this option, you must also address the
overall planning issues as well as the security transactions.



NASD is right in that managed money (and mutual funds) allows you to be
paid on day to day responsibilities even though you have nothing to do
with it directly.  IS that right?  Thats another
debate.  What is important is that your clients can live
comfortably and is happy with his or her portfolio situation.  If
that costs 1.5% than so be it. 



Banks and credit cards charge a fee to use their money...a fee that
ranges from 3% to 30%...it does not seem all bad to pay a small fee to
have your own money managed for the generation of growth and
income. 

Aug 10, 2006 3:16 pm
scrim67:

So the manager makes a fee, and the "advisor" gets some basis points too.  From the talk on this forum it seems as though they're getting 1 point for doing nothing.  The con will be if they can keep their clients like mushrooms--in the dark--about the fact that the customer can gain an instant 1% by cutting them out of the picture.



This is a very good point.


As with most goods and services you could do it less expensively by doing it yourself.   Heck, if I knew how to service my own vehicle there's no telling how much I would've saved.


I tell my prospective clients they have two choices:  


Do it themselves or hire someone to help.    The latter choice costs anywhere from 1-1.5% more per year based on your assets than doing it on your own.


Doing nothing is not an option.


scrim


[/quote]


That is a good point in theory, however, it does not take into account one very important aspect.  A majority of the managers have much higher minimums for non-wrap accounts.  The Wrap programs allow regular investors with as little as 100K participate in otherwise exclusive programs. 


Chris

Aug 10, 2006 3:42 pm

Money managers will not work directly with consumers.  Frankly - they like the 'broker' to be an intermediary.  Most money managers hate being bothered by clients and questioned on their/buy sell decisions.


You can manage money - or relationships.  You cannot do both.

Aug 10, 2006 4:21 pm
apprentice:

Money managers will not work directly with consumers.  Frankly - they like the 'broker' to be an intermediary.  Most money managers hate being bothered by clients and questioned on their/buy sell decisions.


You can manage money - or relationships.  You cannot do both.



Be careful with that assumtion.  How the heck do you think brokers have done it over the last century?  Somehow they found a way to manage relationships and money (some better than others).  That is a nieve statement.