4Front---new WB Client Satisfaction Bonus

or Register to post new content in the forum

29 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 8, 2007 4:20 pm

Program---guess it's official now.


I think it's a great idea and wish other firms would consider something similar. Would have interest in hearing from WB advisors on this. What's your take? How about your clients?

Mar 9, 2007 4:35 pm

I wish <?:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />ALL firms would NEVER do a thing like this!<?:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />


The crux of the 4front plan is that If you concentrate of larger households (250M+) and you do 26 Envision Plans (which admittedly are better plans than others I've seen, but still, "plans") and you bring in new money, and....and... OH yeah 60% of those assets are in a fee based program (of which they have 16? to chose from) then they will pay you an extra 25,50 or more THOUSANDs Dollars (over 6 years)!


Yes, each piece of the 4 is an admirable goal, if they are your goal. They are most definitely any firm's goals!


They are not MY goals!


I don't like it when firms take capital and use it to promote their own agenda!


I'm sorry, I just don't think that it is a good idea for ANY firm to pay ANYBODY extra to do ANYTHING! It's not right to pay brokers extra to buy preferred mutual fund shares, it's not right for a firm to pay extra for a broker to place managed money with in house managers, I don't think that it is right to pay brokers more for revenue generated in a managed money format versus a commission based platform.


YMH_YMH_YMH,


As one who would like to be a regulator, do you really want to go on record as saying you think it's a good idea to give extra compensation to brokers who do what is essentially in the best interests of the firm, even when (if) the client's best interests run parallel?


Again, let me say. If this is the way you do business anyway, then more power to you and this program is to be lauded for you.


I just don't think that I ought to pay for it with my ticket charges and my payout %age and cetera...

Mar 10, 2007 5:33 am

What I do like about 4Front is it ties "some" of the bonus to client satisfaction.


If a client is satisfied, he/she won't move his/her account. If he or she is very happy with an advisor's services, he/she will tell all of his and her friends and that means new biz for the advisor. Unhappy clients move their accounts elsewhere. Very unhappy ones typically do that and file NASD complaints.


The hedge fund model is actually the most perfect one out there in that compensation is based upon meeting/exceeding certain gross returns. Why should an advisor collect any fees at all if the client's portfolio gains track the S&P 500? That client may as well take all of his or her money out and invest it in an ETF which does the same.


The current business model for most wirehouse advisors is to compensate strictly upon AUM and/or production. That's fine for the firm and the advisor, but what about the client? That's not in his or her best interests because the only motivation that advisor has is building his/her book or generating higher commish revenue. If client returns were part of the compensation model, advisors would focus more on what products and/or securities were going to deliver above average returns rather than spend so much time gathering new assets while neglecting the assets he/she already is supposed to be managing.


Mar 10, 2007 9:35 am

Never been a broker eh?

Mar 10, 2007 10:14 am

You must understand 4front differently than I do.


As I understand, the 4 "fronts" include:


1. Household asset size (>$249,999.99)


2. Envision plans done.


3. 60% of assets in "Fee Based" programs (Which I'm willing to point towards several "advisors" here to show the inefficacy of this paradigm.)


4. You must bring in some millions of dollars in new assets to qualify.


I don't see where there is a performance based component here. But would may know something I don't (admittedly I lost intesest when I saw the fee based aspect.


As to your assertion that the hedge fund paradigm is the only perfect paradigm.  Gee Whiz Ms! That only goes against 70 years (at least) of regulatory thinking (where brokers are not allowed to share in the client's performance, which is WHY this paradigm is being done outside the reach of the SEC/NASD regulation) not to mention about three thousand years of commercial thought. 


If we are living in the Fertile Cresent (back when it was fertile) and I sell you a plow shear, do I have a claim to the crops that you are able to grow with it? NO! I made it, I sold it I made another one. And eventually I invented the metal plow shear (which could be converted into swords in a pinch)so that I could serve my clients better. I did that without a firm or a regulator telling me I had to, I did it because it was in mine and my clients' best interests.


If I made plow shears that broke, then I'd soon be out of the plow shear business. Firms have sold far to many defective plow shears and so now you want to change the way they charge for those shears, hoping that this will incentivize them to make better shears. Oh and they want to pay for this incentivization by using money that they make from me and could be giving me, but they choose not to.


Well we brokers have ALWAYS been incentivized to sell plow shares that will increase the clients' crop of Dough Re Mi! The problems have only grown as firms have incentivized brokers to offer the "latest and greatest stone Plow Shear" (Mutual funds, Limited partnerships, Closed End Funds, Asset backed securities, "our best ten" type Unit trusts, On line trading, Checking/debit/credit accounts, POcrap "investment plans", fee based accounts, private equity deals.... the list is almost endless). Every single time, the product has eventually blown up! The brokers left standing have had the same incentive they started out with, increase the client's wealth.


The individual broker and they client have exactly the same objective. It's only when you pile on the firm's objectives that there are problems.


This argument that you are making is EXACTLY why the brokers needs an independent voice at the table advocating for THEM and THEM ALONE!


As far as the hedge fund compensation scheme is concerned. They only make more money when they outperform the Index. And when they under perform? They get their basic fees covered (including a percent or two for the managers). They aren't forced to make restitution for the losses are they? The start each year at even don't they? In other words If they underperformed the index by 20% in '06 and then in '07 their losing position came back to even and they otherwise matched the index, then they get compensated for their regresion to the mean. How is that "Perfect?"


I'm going to assume that you have thought about these points of view and can explain why they are inferior to the perfection of the hedge fund paradigm. I sit at the edge of my seat in anticipation of my new level of understanding that you will so surely provide.

Mar 10, 2007 11:52 am

Whomit-

Under most hedge fund comp structures they do NOT start each year at even.  Most of the time they are only paid when their returns cause the funds "NAV" or "unit value" (don't know the proper hedge fund term here) to exceed the prior all time high water mark.  This performance benchmark is not reset with each calendar year.  Thus the tendency, at least for good reputable managers, to focus on managing the downside as well as the upside-i.e. "absolute return" rather than "relative return".

It is also the reason why some less-respected managers shut down their funds after the bubble burst a few years ago.  Not because they were experiencing an untenable flow of redemption requests, but more because those high-water marks were so far away after the correction that it was better(for them, not investors) to shut down and then re-start a new fund in a few months or years.  This effectively "re-set" the high water bonus level for them.

Mar 10, 2007 1:29 pm

Fair enough. Thank you.


But this doesn't negate the idea that the hedge fund manager still collects a management fee for the fund even if it underperformes its benchmark. And that he does not share in the loss, only the gain of the portfolio. As a result, his vested interest is to swing for the fences every time he's up to the plate. Now, that may be fine for the hedge fund investor who wants to add that discipline to his overall portfolio. But don't tell me that it is the "perfect" compensation paradigm for the industry as a whole (not that you did, but that she did).


In the old LP world there was the sharing arrangement codicil which said  along the lines of 'You get 99cents and we get 1 cent until the your return reaches 10% annualized after which you get 75 cents and we get 25 cents!' which was supposed to say that the GP's vested interest was to get to the 75/25 split. But the manager was taking a ton of fees for running the operation anyway so even if he didn't hit that benchmark, he was still gonna be able to afford to buy his kid "the GI Joe with the Kung Fu Grip."


In YMH's "Perfect" scenario as ably explained by you. The client's interests aren't served at all. This makes it very disturbing that she would see this as a "Perfect" paradigm . Further, it goes to show why brokers NEED to have a collective bargaining unit that will advocate for the broker against thee new and improved "Perfect" plans.

Mar 10, 2007 2:44 pm

Oh my G-d, collective bargaining? Might as well install time clocks, wear uniforms, and say, "would you like a variable annuity with that house mutual fund, Mr. Client?" Actually, most wirehouses do treat their retail brokers a lot like sharecroppers so maybe there is a need for a labor union.


Why the hedge fund model is close to ideal (from an investors' perspective) has nothing to do with the 2% of the typical 2/20 fee structure. It's the "up to 20%" or in some cases as high as 35% that creates a situation where the portfolio managers' interests are aligned with the clients'. There's not an investor in the world who doesn't desire higher returns.


Since it's apparent you guys are not familiar with 4Front, here are some of the client oriented aspects of it I find appealing:


1. Broker-client direct contact 6 times per year minimum with at least 1 contact being face to face.


2. Client specific investment plans (via Envision) for each client.


3. Client satisfaction surveys. The advisor is graded from 1 to 7 in key areas by the client.


Advisors who get 6's or above in all areas get a 1 time bonus of between $25K to $100K.


No, I have never been a broker. I don't have the temperment to deal with retail clients and would get bored way too fast peddling the same thing day in and day out to mom and pop.


FD: this isn't "rah rah" hype for Wachovia

Mar 10, 2007 3:34 pm

Why should an advisor collect any fees at all if the client's portfolio gains track the S&P 500?


The job of a financial advisor is not to track or to beat some benchmark.  The job of a financial advisor is to help a client achieve their financial goals.  Don't confuse financial advisors with money managers. 

Mar 10, 2007 5:29 pm


No, I have never been a broker. I don't have the temperment to deal with retail clients and would get bored way too fast peddling the same thing day in and day out to mom and pop.


Since it is obvious you have no idea what a broker does, you have no business commenting on it. And even less business trying to be elected to a position of authority over it!


I don't want to beat up on Wachovia, but this is stupid!


1. Broker-client direct contact 6 times per year minimum with at least 1 contact being face to face.


I have clients from all across the country. I have had these clients for many years and they are more than happy with our relationship as it is, why should a broker who has built his book in this manner have to contribute to brokers who have not?


Meanwhile, I run a business that involves trading, I speak to clients before each purchase and before each sale. 6 contacts per year? I'd go broke if I only contacted my clients 6 times per year!


Maybe if firms stopped pushing these "set it and forget it" programs they wouldn't have situations where brokers don't talk to their clients.


2/20 Hedge funds.


"Why the hedge fund model is close to ideal (from an investors' perspective) has nothing to do with the 2% of the typical 2/20 fee structure. It's the "up to 20%" or in some cases as high as 35% that creates a situation where the portfolio managers' interests are aligned with the clients'. There's not an investor in the world who doesn't desire higher returns."


I could have sworn that I discredited this above! But you add further fuel to the fire with the inane statement "There's not an investor in the world who doesn't desire higher returns." as if that makes what the hedge fund manager does A-OK!


I don't know if you know this but there are only two ways to get higher returns... Longer maturities (usually) and more risk. If you are doubling the return of the S&P500, you are doing something to do so that involves more risk. Me? I buy individual stocks and bonds and that is riskier than buying a basket of 500 stocks. Others will use leverage, others will use diversification into emerging technologies and or markets wherein companies have a greater failure rate than the stocks in the S&P500. If there were not additional risk then the market would find this anomaly and file it smooth (price it such that it's risk reward was even to the benchmark) that's how it works.


I have my own "Sharing arrangement" model that I think is quite fair. "When I buy a position, I'll give you a 50% discount. When I sell it, if the position is net up 20% or more I take a full commission (generally between 1-2%) if the position is up 19% I'll give you a 2.5% discount, if it's up 15% you get a 12.5% discount..10%=25% <0% to 0% =50% discount. In this way the client only pays the equivalent of 100% of one way if the investment goes bad. The broker is incentivized to buy stocks that can show that growth but he is not disincentivized from taking losses (whereas, if he were to charge 100% going in and discount by 5% for each percentage point of sub 20% performance he'd be incentivized to hold losers hoping that they come back and he can get paid something for selling them.


How is this less perfect than your 2/20? Well one way is that when you do something like this at a wirehouse you're getting double whacked on the commish in that you have less gross and the firm takes the discount out of your pocket. Why? Because there is no one bargaining FOR the broker at the FIRM.


Those of us who have managed money and client relationships through good times and bad know that many clients want a return OF principal before they want return ON principal. The idea that they all, always want more is an immatured vision. It seems it should be right, but experience teaches you it is wrong.


I notice that you completely avoided the fact that the sharing structure that you see as "perfect" was outlawed by SEC act of '33(?) for brokers. And why was that? Because if brokerages were allowed to share in client gains, then they could make up giant investment pools and make runs at the market just like they used to do before the law was enacted!


I also noticed that you used my sharecropper analogy. Speaking out of both sides of the mouth might work when speaking, but it's much less effective in the written form. Do you agree that brokers ought to have a collective bargaining unit, or not?

Mar 10, 2007 6:56 pm
Whomitmayconcer:

Fair enough. Thank you.


But this doesn't negate the idea that the hedge fund manager still collects a management fee for the fund even if it underperformes its benchmark. And that he does not share in the loss, only the gain of the portfolio. As a result, his vested interest is to swing for the fences every time he's up to the plate. Now, that may be fine for the hedge fund investor who wants to add that discipline to his overall portfolio. But don't tell me that it is the "perfect" compensation paradigm for the industry as a whole (not that you did, but that she did).


In the old LP world there was the sharing arrangement codicil which said  along the lines of 'You get 99cents and we get 1 cent until the your return reaches 10% annualized after which you get 75 cents and we get 25 cents!' which was supposed to say that the GP's vested interest was to get to the 75/25 split. But the manager was taking a ton of fees for running the operation anyway so even if he didn't hit that benchmark, he was still gonna be able to afford to buy his kid "the GI Joe with the Kung Fu Grip."


In YMH's "Perfect" scenario as ably explained by you. The client's interests aren't served at all. This makes it very disturbing that she would see this as a "Perfect" paradigm . Further, it goes to show why brokers NEED to have a collective bargaining unit that will advocate for the broker against thee new and improved "Perfect" plans.



Not really because if they swing for the fences and miss(i.e. get crushed on a wrong trade) the high water mark ends up being much farther away.....

Mar 10, 2007 7:02 pm

BTW whomit I agree in general with your other sentiments as to the firm using our capital to incentivize other FA's.

I also think your commission strategy is pretty clever.  I like it!

Mar 10, 2007 8:08 pm

The nice thing about hedge funds is there is no need to call clients to get permission before making trades. If each client had to be contacted prior to making a trade, it would be much more difficult to catch tops/bottoms


Yes, I am of the opinion if an advisor/money manager can't beat a benchmark such as the S&P 500, he/she should collect NO fees and should pursue another career. Perhaps that's why the rookie (5 years or under in the biz) washout rate is so high.

Mar 10, 2007 9:35 pm

ymh, your last post shows a lack of understanding of what an advisor does.  First of all, you need to stop lumping advisor and money managers together.  They are very different careers despite the fact that many advisors manage money.  You are correct that a money manager that can't outperform (at least on a risk adjusted basis) doesn't belong in that field.


By "advisor", are you talking "investment advisor" or are you talking "financial advisor"?


Let's assume for a second that advisors could only collect fees for beating a benchmark.  Wouldn't the result be that clients would have their money invested in a way that was always more aggressive than their risk tolerance would deem appropriate?


Another problem with having a focus on beating a benchmark is that it puts the focus on investment performance instead of investor performance.  Not only are these vastly different, they may not even be that strongly correlated.

Mar 10, 2007 10:17 pm

I know the dif between financial advisor and money manager.


I do believe a financial advisor's compensation should somehow have a client satisfaction/performance component to it, however. I like the part of Wachovia's 4Front which recognizes that client satisfaction should and will be rewarded.


I had no intention of turning this into a advisors versus money managers discussion. I wanted feedback from Wachovia advisors on 4Front.


I had a few e-mail chats with a senior advisor (friend) who's with Smith Barney recently. Apparently he ran into a few Wachovia advisors last week at lunch and they were discussing 4Front. He knew one of them and asked him to send him some info on it which he did. My friend and I discussed 4Front a little this evening and he also likes most aspects of it.


By senior advisor I mean 20 years plus in the biz (not a child).

Mar 11, 2007 12:18 am

So, why are you lumping financial advisors with money managers when you know the difference and (hopefully) understand that they are very different careers.  


Now you are lumping satisfaction and performance together.  They don't go hand in hand.  


Ex. Market goes down 10%.  Client loses 7%.  Advisor did great job.  Client thinks advisor sucks.


Ex.  Market goes up 30%.  Client makes 23%.  Advisor did crappy job.  Client thinks advisor is great.


On the other hand if the advisor can manage expectations, the client will almost always be happy regardless of what the market does.   Performance pay also ignores the fact that financial advising is about helping clients achieve financial goals and not maximize returns.


Ex. Mr. Smith and Mr. Jones are identical in every way.  They each use a financial advisor and invest the exact same amount of money.  They are both now retired.  Mr. Smith's investments are worth $4.5 million.  Mr. Jones' investments are now worth $4 million.   It's obvious that Mr. Smith's advisor did better for him, right?  Wrong.  We have no clue. 


Mr. Smith has 4.5 million in 401(k)/IRA investments.  Mr. Jones has $2million in 401(k), $500,000 in a Roth IRA, $500,000 in a non-qualified investments, and $1,000,000 in life insurance cash value ($2 million death benefit.)


If the advisors are measured on performance, Mr. Smith's advisor did better.  However, Mr. Jones will have more after tax money, will be able to safely withdraw more money on a monthly basis, will be able to leave more money behind at death, and will be able to take a monthly pension that is double Mr. Smith because of the life insurance.  Thus, Mr. Jones' advisor did much better for him with a lower rate of return.


Performance can measure rate of return, but rate of return is just an idiotic way to measure advisors. 

Mar 11, 2007 6:43 am

Managing "expectations" is why 4Front requires advisors to have contact with their clients a minimum of 6 times per year with 1 of those contacts being face to face.


You're right about Joe and Jill Retail and their behavior in bear and bull markets. Most are not at all appreciative of an advisor who minimizes their losses in a bear market. They tend not to complain and are happy if they get a 15% percent plus return in a bull market even if that return doesn't beat SPY that year.


Many of the comments in your last post are reasons why I never had interest in being a broker. It requires a special temperment to deal with irrational/naive people and the patience of Job.


It's much easier dealing with greedy pigs whose only expectation is "outperform this or that benchmark and you get a piece of the action commensurate with how well you do."


Mar 11, 2007 1:01 pm

It's interesting.  I have clients whom I contact monthly.  Others, only get contacted annually.  Others, never get contacted at all.  The key for me is that the monthly's expect monthly contact, the annual's expect annual contact, etc.  They all know what to expect.  


Everybody deserves to be treated like an individual and not a means to a bonus. 

Mar 11, 2007 1:39 pm

I just love the idea that you shouldn't be in the business if you don't beat the SPY.


Let's see, the story goes that 805 of funds don't beat the SPY over time, so those 80% of managers shouldn't be in the business?


That's crap and it's the same sort of lazy cookie cutter "thinking" that leads to the broker getting screwed every time a bunch of people who aren't brokers get together to assign blame somewhere!


I'm sorry YMH but not only am I not impressed, I'm negatively impressed by your lack of 1. knowledge and 2. independent thought about the entire brokerage industry.


If I'm a small cap manager then that's what I am. When I'm manging small caps and they are in favor, I'm gonna be up, up up! I'm going to be killing the SPY. But then when large cap growth comes into favor, I'm out of favor AND the SPY is in favor. I'm destined to underperform if I stick to my discipline. If I'm a small cap manager my job is to buy small caps, your job as an advisor is to guide people into and out of small caps before the rise and before the fall.


BTW, if you are early by a year into small caps, you could very well put yourself behind an 8ball which says "You under performed the SPY! You should not be allowed to run money!"


Stop trying to make this job easy! It's not easy! There is no recipe for success that can be applied to every situation. 

Mar 11, 2007 4:18 pm

I never stated there's a utopian solution to every problem in the world.


There are money managers out there who do not belong in the business, however (quite a few of them). How they manage to eke out a living I don't know other than perhaps too many advisors willing to allocate their clients' funds to money managers who underperform year after year after year.


On client contact, some clients need more hand holding than others to keep them happy so 6 times minimum per year may not be enough for some and might be too much for others.