Question on Fees

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Mar 7, 2008 6:36 am

I understand the difference between different share classes and how you are paid on those.  I am not sure if I have a good understanding of how fees are charged to accounts.


When people talk about annuitizing their business, setting up a separately managed accounts, etc., is this the same concept as charging a fee for financial advice and planning or are these setups just a different way to earn commissions without having to make trades?  Do these require a series 65/66?   Are all these concepts considered fee based plans similar to what a RIA would offer?


Do these accounts require an insurance license because they are being wrapped in an annuity contract?  If you wrap someone's account in an insurance contract, do they still have the ability to follow the NAV version of the fund tickers or do they transform into units that are more difficult to track using public market information?


Do most wirehouses allow you to charge a fee for advice on assets even if the assets are external to the comany.  For instance, could you charge and advisory fee on a 401k if your company doesn't have a commission selling agreement with the 401k vendor if you simply charged a fee to the client for investment advice even though the money is at the vendor without and agreement with your firm?   

Mar 7, 2008 8:20 am
Akkula:

I understand the difference between different share classes and how you are paid on those.  I am not sure if I have a good understanding of how fees are charged to accounts.


When people talk about annuitizing their business, setting up a separately managed accounts, etc., is this the same concept as charging a fee for financial advice and planning or are these setups just a different way to earn commissions without having to make trades?  Do these require a series 65/66?   Are all these concepts considered fee based plans similar to what a RIA would offer?


Do these accounts require an insurance license because they are being wrapped in an annuity contract?  If you wrap someone's account in an insurance contract, do they still have the ability to follow the NAV version of the fund tickers or do they transform into units that are more difficult to track using public market information?


Do most wirehouses allow you to charge a fee for advice on assets even if the assets are external to the comany.  For instance, could you charge and advisory fee on a 401k if your company doesn't have a commission selling agreement with the 401k vendor if you simply charged a fee to the client for investment advice even though the money is at the vendor without and agreement with your firm?   

 
Great questions.. Though I am surprised someone at your B/D can't answer this for you.
 
There are several ways to annuitizing your business. The two most common ways are either through a fee based platform, where the client pays a percentage of the account balance to the FA no matter what the market does to the portfolio.. Ideally, the advisor will ALWAYS be making money for the client.. (this just doesn't happen) or through fees associated with the mutual funds you mentioned. The fees are known as 12b 1 fees. This is a expense that the mutual fund family pays the advisor for holding the funds. This 12b 1 is deducted for the 'annual expense ratio" commonly known as the ratio of expenses. - Check a prospectus for more information. Different share classes pay different 12b 1 percentages.. Most that want to annuitize sell C shares.... in almost all cases this pays the Advisor 1% annually. Most A shares pay .25%.
 
Hope that helps.
 
To the question on being insurance licensed to sell an annuity.. Well, of course you have to be licensed.
 
Miss J
Mar 7, 2008 8:42 am

Akkula - fee-based acct's(wrap accts) aren't annuities/insurance products, and don't require an insurance license to sell. They do require the 65/66, though. You are buying mutual funds still(or ETF's/SMA's/etc.), and they are publicly trackable by their symbol. I think that you're confusing the term 'wrap acct' with the analogy 'wrapped in insurance.'



Here is the Investopedia definition:



Wrap Account



An account in which a brokerage manages an investor's portfolio for a flat quarterly or annual fee. This fee covers all administrative, commission, and management expenses. Sometimes this also includes funds of funds.



The advantage of a wrap is that it protects you from overtrading. This is when your broker trades your account excessively to make more commission. Furthermore, because the broker gets a flat annual fee, then he or she only trades when it is advantageous to you. A traditional wrap typically requires an initial investment of at least $50,000 to $100,000.



---------------

The advice we can give on 401k's is VERY limited & I imagine the arrangement that you asked about would be frowned upon. Fees for wrap accts are negotiable at most b/d's.

Mar 7, 2008 10:30 am

Nice to see you ASKING now, Akkula.  You'll get more helpful responses that way.


Most of your questions can be answered simply, but that doesn't mean
they have simple answers.  The issue of fees is at the heart of a huge
regulatory change that you should really take the time to read up on to
begin to understand the important distinctions.  Research the
broker/dealer exemption rule or the so-called Merrill Rule for more
info,  But here are some short answers.


Akkula:

I understand the difference between different share classes and how you are paid on those.  I am not sure if I have a good understanding of how fees are charged to accounts.


When people talk about annuitizing their business, setting up a separately managed accounts, etc., is this the same concept as charging a fee for financial advice and planning or are these setups just a different way to earn commissions without having to make trades?  Do these require a series 65/66?   Are all these concepts considered fee based plans similar to what a RIA would offer?

Generally they are different.  Either you are operating a brokerage account or an advisory account.  These are not simply different names for the same things - they have important legal differences.  The former charges clients a commission for brokering securities TRANSACTIONS and comes with a suitability standard, the latter charges a fee for ADVICE and carries with it a fiduciary standard. To collect an advisory fee you need a S 65/66; to collect commissions you need S6/7.  The CONCEPT is similar to what an RIA would offer, but there are also additional important distinctions and differences in what an RIA MAY do. 

Do these accounts require an insurance license because they are being wrapped in an annuity contract?  If you wrap someone's account in an insurance contract, do they still have the ability to follow the NAV version of the fund tickers or do they transform into units that are more difficult to track using public market information?

No, you're confusing insurance with 'wrap' accounts. They're very different.  Annuities have sub accounts instead of mutual funds, although they are often almost identical to MF counterparts.


Do most wirehouses allow you to charge a fee for advice on assets even if the assets are external to the comany.  For instance, could you charge and advisory fee on a 401k if your company doesn't have a commission selling agreement with the 401k vendor if you simply charged a fee to the client for investment advice even though the money is at the vendor without and agreement with your firm?  

No way, Jose.  Wirehouses would never allow you to charge an advisory fee for assets held away, especially on 401K assets, regardless of 'selling agreements.'  That's a triple whammy - first you have the advice issue mentioned above, then you have the firm prohibition against "trading away" (where your B/D is unable to supervise you) or OBA (Outside Business Activities), and third with 401Ks you now have an entirely new layer of laws (and potential liability) which come into play (ERISA).  This is simply a non-starter at wirehouses. 



There is a fair amount of confusion about fees, even among many RRs.  Part of it stems from terminology - people tend to talk broadly about fees or annuitizing while meaning different things.  To one it may mean selling C shares, to another it's a wrap program, to another it's fee-in-lieu accounts, to another it's fees for financial planning.  These are all very different from a regulatory standpoint, yet to hear some people speak one might think they are all simply types of fee business.  Therein lies the root of so much confusion.

Basically, though, the distinction is this: for WHAT specifically are you paid, and HOW?  Are you being paid to broker a securities TRANSACTION or for ADVICE?  And I'm not simply talking in sales or general terms - most FAs will say I provide advice - but legally, according to the terms of the agreement the client signs. 

As I said, it is beyond the scope of one post to do this topic justice.  Hope this clarifies and addresses your main questions though.

Mar 7, 2008 4:03 pm
Morphius:
Akkula:

Do most wirehouses allow you to charge a fee for advice on assets even if the assets are external to the comany.  For instance, could you charge and advisory fee on a 401k if your company doesn't have a commission selling agreement with the 401k vendor if you simply charged a fee to the client for investment advice even though the money is at the vendor without and agreement with your firm?  

No way, Jose.  Wirehouses would never allow you to charge an advisory fee for assets held away, especially on 401K assets, regardless of 'selling agreements.'  That's a triple whammy - first you have the advice issue mentioned above, then you have the firm prohibition against "trading away" (where your B/D is unable to supervise you) or OBA (Outside Business Activities), and third with 401Ks you now have an entirely new layer of laws (and potential liability) which come into play (ERISA).  This is simply a non-starter at wirehouses. 


Thanks for your time educating us newbies!
Are there any issues for advising someone on their 401K allocations? Although, there is no fee for me, the future Broker.   This service will help in the future.

Mar 7, 2008 9:08 pm

Another way: C-shares, wraps, and fee-in-lieu are from "brokers" (FINRA/suitability) and advisory fees are from RIAs (SEC/fiduciary).

Mar 8, 2008 10:39 pm

I can swear I heard of some advisors charging annual fees for managing smaller 401k plans. I could see this being fair for small plans that might be less then a million.

Mar 9, 2008 7:27 pm

they definitely do it. some do it even though it is custodied somewhere else!

Mar 9, 2008 7:34 pm
Insideman:

I can swear I heard of zome advisors charging annual fees for managing smaller 401k plans. I could see this being fair for small plans that might be less then a million.


There is an important difference between being paid for a 401K PLAN and being paid to advise on an INDIVIDUAL PARTICIPANT's fund allocations in a 401K plan.  The question posed pertained to an individual participant, not the plan.

Mar 9, 2008 7:41 pm
FireUp:


Thanks for your time educating us newbies!
Are there any issues for advising someone on their 401K allocations? Although, there is no fee for me, the future Broker.   This service will help in the future.


Yes there is an issue.  That doesn't mean what you suggest isn't often DONE verbally, but if you try to do that formally and in writing you can expect to hear from your B/D's compliance department due to regulatory/liability concerns.  For some reason they aren't too thrilled about the idea of accepting liability, ESPECIALLY when they receive zero compensation for it.

Mar 9, 2008 8:19 pm

unless you HAVE no B/D

Mar 10, 2008 6:38 am
newnew:

unless you HAVE no B/D



Obviously, but since the original question asked was specifically about wirehouses (see excerpt below), we are by definition talking about having a B/D.  Is there a wirehouse you are aware of that is NOT a B/D?

Do most wirehouses allow you to charge a fee for advice on assets even
if the assets are external to the comany.  For instance, could you
charge and advisory fee on a 401k if your company doesn't have a
commission selling agreement with the 401k vendor if you simply charged
a fee to the client for investment advice even though the money is at
the vendor without and agreement with your firm?

Mar 10, 2008 7:39 am

"Are there any issues for advising someone on their 401K allocations? Although, there is no fee for me, the future Broker.   This service will help in the future."







 
 
Yes, there are issues.  Your B/D isn't going to allow you to give advise without an advisory agreement.  They also aren't going to let you have an advisory agreement that doesn't allow them to be compensated.  Liability without compensation is a pretty bad combination.