MSSB "Smoothing" Managed Fees

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Apr 9, 2010 9:57 pm

Does anyone at MSSB (or any other firm for that matter) understand this "Smoothing" crap when it comes to quarterly fees ?  Now on the surface it sounds great !  Smooth out those quarterlys to get stable monthly income.  At least that's how my Manager tried to sell me on it.    Any opinions or comments out there on this topic ?  I personally think that this was an idea cooked up by one of the bean counters to help MSSB maintain capital levels that they would have had to get elsewhere.   I have got to believe that FA quarterly fees are hundreds of millions per Q and by hijacking 2 months of fees their books look a whole lot healthier than otherwise.  Opinions...comments......thoughts.....

Apr 9, 2010 10:36 pm

It's another version of "kiting."  The firm benefits by collecting the fees from the clients and delaying the payment of the fees to the FAs.

Apr 9, 2010 11:24 pm

They make money on the float instead of you, but depending on your grid you may be better off anyway getting it monthly.

Apr 10, 2010 9:38 am

[quote=Stealth]

It's another version of "kiting."  The firm benefits by collecting the fees from the clients and delaying the payment of the fees to the FAs.

[/quote]

LPL does the same thing... it's BS... Like the other guy said, they are making money by floating the extra 2 months.

Apr 10, 2010 9:38 am

[quote=Stealth]

It's another version of "kiting."  The firm benefits by collecting the fees from the clients and delaying the payment of the fees to the FAs.

[/quote]

LPL does the same thing... it's BS... Like the other guy said, they are making money by floating the extra 2 months.

Apr 10, 2010 12:31 pm

Capturing float is only one reason they did it. There is another big reason. By the way, this is not new, they started doing it about 2-3 years ago. I left there just under a year ago.

The second reason the did it, is because with the mass exodus they were seeing, of brokers, they were losing commissions paid in advance.

Before smoothing, lets say, client account is debited $1500 on January 20th, for the JAN-FEB-MARCH Period. On Feb 10th, broker gets paid and on Feb 11th, he resigns, with the payout on the entire quarters fee in his pocket.

With Smoothing, he only got one month of fee, so the firm is not out of pocket.

I don't know why LPL would do it, they are not experiencing exodus of brokers, so i guess its just the float.

It took me forever to get used to smoothing, now its taken me a while to get used to not smoothing at RJ, but its fun to have a monster month like this one.

Apr 21, 2010 10:30 am

They may be getting the float and it may be cool to have that awesome month every quarter, but if you're going to be doing this 10 - 20 years down the road, this monthly "salary" that we've set up for ourselves, will give us the steady income we dreamed of years ago before these pay structures were available.

Apr 21, 2010 3:12 pm

I think smoothing makes all of the pay structures easier for every firm that uses it, and reduces their liability. 

Personally, I have no problem with smoothing, especially since my firm is willing to front me a full year's worth of fees when establishing any new fee-based account. 

Dec 19, 2010 4:06 pm

First, firms are doing this primarily because of an SEC interpretation that makes prepaying wrap fees a double hit to net capital (firms have to set up a payable and also have paid out an unsecured advance to the FA).  The hit is equal to 2/3 (2 months out of 3) X 2 = 4/3 the amount of wrap fees collected.  See interp 15c3-1/24 at http:[email protected][email protected][email protected]/documents/interpretationsfor/p037763.pdf.

Second, how much float do you really think firms are earning with zero interest rates? 

Dec 20, 2010 12:10 pm

I've heard that Chase is rolling this out too. It's a real win/win. The company wins, and the CEO wins.

Former firm I was at, there did come a point where everyone became quite cynical, every change seemed to put the firm first. Endlessly playing little games...

This looks like another good reason for me to stay away from fee based, wrap biz. My clients and I seem to have no problems, just being transactional.  

Dec 20, 2010 8:04 pm

When smoothing was rolled out, interest rates were a whole lot higher than they are now, so it was a substantial float. At some point, that will be the case again.

I have a monster month followed by two months of famine, but thats ok. I pay myself a salary, and so i bank the large part of the monster month. I get the money in my own pocket, then i do my own smoothing.

Jan 23, 2011 9:12 pm

It does affect capital ratios, though.  When the client has his account debited in advance, it creates a liability for the firm.  If they pay it out to the FA, the firm itself has to make a journal entry and debit capital until it's depleted.

At MSSB, though, TRAK fees bill in arrears, but the FA still is "smoothed".  I had a big problem with that:  the liability to the firm was zero, but they smoothed anyway.