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Jun 25, 2008 3:50 pm

I just spent a entire hour explaining to the field supervision guy why I sold someone out of AF. They had held them for ten years.



I had to tell him that I wasn't comfortable with index funds. He asked me what I meant, and I told him that AF were loaded indexes. He flipped out and told me I sold a client out of a perfectly good product so I could make a commission. It was like a 10k ticket on a 22k net month.



If they took a look at my rank funds over the last few years, they could see that I never sell American Funds. Yeah, we get to run our offices our way. What a joke!



Had to vent. Please tell me this is not something I would experience as an indy. BSpears, anybody?

Jun 25, 2008 3:57 pm

No, but I have to ask, you booked a 10K ticket on it?  I would probably scratch my head at that too, but I guess it depends on what you did with the funds.  If your best explanation was that AF are "closet index funds", I would have b!tch slapped you too.  You would (rightly so) need a good explanation for moving someone out of any good funds (not just American) just to put them in some others.  I assume that was at least 500K of funds.  You had to move all of it??  I find that a tough one to swallow.

Jun 25, 2008 4:04 pm

Go RIA, and you've got no compliance officer PERIOD. 


But if you could justify your decision to sell the American Funds, you wouldn't be having to justify your decision.  Seems to me you didn't do your homework for the compliance folks.  Remember:  document document DOCUMENT!
Jun 25, 2008 4:11 pm

You'll have to complete a switch letter as an indy also, although I've never received call one about my justification for making a change as a result of what I put on the switch letter.  The only dings (no phone calls...just a field auditor comment) I've gotten is when I forgot to do the stinkin' switch letter...

Jun 25, 2008 4:12 pm

To properly respond to this, I would have to know what they had and what you moved them into.  At first blush, this does not pass the smell test.  AF have done very well for the last 10 years, closet indexing or not.  Was this your idea, or did the client start the conversation?

Jun 25, 2008 4:47 pm

First, you should expect compliance anywhere to want to know why you are switching $500k from a client's funds to another investment.  I have client sign a switch letter before I move any assets around. Why would I ever want to deal with arbitration?

Second, I'm no apologist for AF, but a quick X-Ray shows that a AGTHX v SP500 comparison does not show AF to be an Index with load:

Asset Allocation
                                Net %                           Net %
Cash                         7.68                             0.00
US Stocks                69.53                          100.00
Non-US Stocks        18.07                             0.00
Bonds                       4.46                             0.00
Other                        0.25                             0.00


Short term and long term performance numbers also show a great difference, to AF's favor:
Trailing Returns                    3Mo             1Yr          3Yr           5Yr             10Yr
Pre-Tax Portfolio Return       6.83           1.21        11.90       13.09          10.43
Benchmark Return                5.77          -6.70        7.57         9.77             4.21
+/- Benchmark Return          1.06           7.91        4.33         3.32             6.22

The Top Holdings overlap is only MSFT and GE.

Schlumberger, Ltd. SLB 2.41
Google, Inc. GOOG 2.31
Cisco Systems, Inc. CSCO 2.14
Microsoft Corporation MSFT 2.04
Oracle Corporation ORCL 2.01
Roche Holding Ltd _ 2.00
Berkshire Hathaway Inc. A BRK.A 1.50
General Electric Company GE 1.40
Target Corporation TGT 1.34
Yahoo, Inc. YHOO 1.34

vs.


Finally, what did you tell this client to convince them to move? Cause whatever it was it was a hard sell, and "Index with load/Closet Indexer" is a concept that only makes sense in the rarefied world of the personal finance magazines where retired rock critics are sent to write about "8 great investments you need today"

Jun 25, 2008 4:55 pm

If you believe you did the right thing, and the client agreed, do the switch letter and move on.  Opportunity costs may or may not play in your favor.  I doubt I would have dumped it all, simply because an index fund is OK as a portion of a portfolio.  If it was in an IRA and there were no tax consequences, it makes it even more likely I would have diversified it.  If you just dumped it into another fund, I doubt I would have done it at all.  To really know what to say, I would have to know what you did with the assets.

 
As to all of that, even indy's have compliance.  You still need to do what is right for the client.  You don't have to argue over anything as an indy, you just have to prove what you did was in your clients interest first and yours second, not the other way around.
Jun 25, 2008 6:45 pm

B24 - It was a 10k TICKET, not 10k net.



I had more than enough reasons. Different strategy - the fact that the asset mix inside the funds was nearly identical.



I got paid $200 NET. That's why I said it was a small part.

Jun 25, 2008 6:50 pm

The rest of the funds were in Oppenheimer, Franklin - this all transferred in. I worked within those fund families.



C'mon - I'm not going to reposition 200k.



And I take that back - I only got 3% on the trade. As for past performance - if you're selling on past performance - you've got a problem.

Jun 25, 2008 7:00 pm

Then go indy, it sounds like you did the right thing based on the info provided.  As an indy, you just have to justify that it is in the clients interests and that you explained everything.  Indy firms aren't ogres and don't really care what fund family you are working with.  Plus it might have made more sense to put the client into a completely different asset class that you may not even have access to where you are at.

Jun 25, 2008 8:23 pm

OK, now it doesn't sound quite as bad. Your original post appeared as if you dumped around 500K into another fund family, with the justification that AF is all closet index funds. I guess it's still hard to believe that you had to move from AF into FT and Oppy (I don't really see the benefit of one over the other, just as I would likely not move from either of those into AF if I had them in a portfolio), but if it somehow matched your "process", then I guess you just need a switch letter. Doesn't sound like you were fishing for commish. But still, I can see why compliance would question it.



And FYI, compliance really doesn't care which fund companies you use. I once got an FSPend when moving stuff from Janus to AF. And that's comparing apples to oranges. I almost always get an Fspend when I dump fund familes (I rarely dump fund familes - I usually try to work within them if it makes sense)

Jun 25, 2008 9:53 pm

Wow...I don't think you would even need to go indy to avoid that issue, I would think most wirehouses would have no issue with that. I haven't ever been questione don a trade in 8+ years @ AGE.

Jun 25, 2008 11:41 pm
Magician:

B24 - It was a 10k TICKET, not 10k net.

I had more than enough reasons. Different strategy - the fact that the asset mix inside the funds was nearly identical.

I got paid $200 NET. That's why I said it was a small part.

 
Ok, that makes much more sense.  Still curious what you dumped and what you bought though.  At my firm, as long as the switch letter was complete, never would have been questioned on this trade.
Jun 26, 2008 10:08 am

My guess is that it wasn't really the trade that caused the hour long conversation.  It  was the attitude you had when talking with your FSD.  Most FSDs are relatively reasonable when it comes to making switches.  Unless you cop a tude with them, then they can get a bit pissy.  I can just imagine his reaction when your explanation to make a switch on a fund (AF or otherwise) was that it is an index fund with a load. 

 
 
 
 
Jun 26, 2008 1:03 pm

"As for past performance - if you're selling on past performance - you've got a problem."



So what your saying is all funds are equal as of today? You have to look at what the money managers did in the past to get an objective view of how they perform during good and bad markets. Does it guarantee anything? Absolutely not. But it gives an indication of their golf/work ratio and how forward thinking they are. Also, so you could care less that CAIBX made $ during '00,'01,&'02? Are all college football coaches equal today? If you were looking to hire someone to run your team would you look at his win/loss ratio or do you throw it out b/c it was the past. Do you think Tiger Woods will be a good golfer in '09? Sounds to me like you're coo coo for coco puffs.

Jun 26, 2008 1:06 pm

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As already stated, you would need a switch letter signed by the client to make a change from one fund family, or any other type of investment, to another with an explanation of why the change was made.  We don't get to do just anything that we want to, but we are also not pressured to put all of our client's assets in to American Funds or any other investment.
 
American Funds are pretty good as a core holding for your conservative clients.  They have never blown up in my face like some fund families have, but they do lack some of the asset classes and sector plays that are available in other funds.  For instance they lack a BRIC sector, Real Estate and other more narrowly focused categories.  That might have been a better explanation than yours.
 
Also a word of caution for moving from one investment to another, even within the same fund family, in a taxable account: You should ALWAYS find out what the cost basis is and discuss the tax ramifications with the client.
Jun 26, 2008 2:02 pm

Ah, the dreaded mutual fund switch!

 
This thread serves to confirm my view that  advisor advised investors are out of their minds investing in mutual funds. it's not because the funds are bad. The advise is bad. Or, at the least, put on a scale and weighed against the advisor's best interest. And that unintended consequence of regulation is the problem.
 
There was a day when advisors could make mutual fund investments based on only one criteria; their client's best interest. That day has passed.
 
With today's regulatory environment, where the regulation tale wags the investment dog, advisors are given pause before calling clients and advising them to do the right thing. That call, in some situations, could be a career decision. This thread is a good example of case in point. The conflict of interest couldn't be more clear, even if "being more clear" were possible.
 
There are many reasons to sell a fund. Yet, in today's environment selling is unlikely. Not because it shouldn't be done, but because the advisor fails to take action. The reasons for not acting are two fold. First, making that change, especially in short term situations, is now taboo. And secondly, newly minted advisors don't know any better. They're  being taught to overlook near term events, regardless of how material those events may be. They are taught that the near term doesn't matter because mutual funds are long term investments. They are guided in this thinking not by their firm's investment analysts, but by the no investment knowledge compliance departments.  Add this to the new "buy the fund family" approach to marketing mutual funds, versus finding the best fund in each asset category, and the advisor advised client doesn't stand a chance of getting honest investment advice. They get advice that best serves the firm first and then them as clients of the firm.
 
 
Another sad part of this is that newly minted advisors don't know any better.
 
Let's face it, if you put your clients into a stock today and found out tororrow that it was headed substancially down because the world had changed you'd call them in a New York minute to sell that stock. That ain't happenin' with a mutual fund. Not if you want to keep your license or not forfeit your commission. And if you sold that stock you would be completely unencumbered as to where to go with that money. Do what's best for the client. Buy what's best. Again, not happenin' with a mutual fund. With mutual funds we are handcuffed and the client suffers for it. 
 
And then there's the mutual fund exchange. Here's a great rule where instead of moving long suffering underperforming assets to the best in class you have to instead move them to a mediocre performer within the same family as the loser fund you're trying to get out of. Yeah, that makes sense. Buy a fund you ordinarily wouldn't touch just so you can stay employed.
 
Exchanges best serve only the firms, which avoid regulatory scrutiny in employing them. If the fund being used for the exhange is good enough to invest the client's money into why wasn't it the primary recommendation?  Clearly, exchanges serve the firms first and client interest second. Afterall, the alternative would be to seach the entire mutual fund universe for the BEST possible alternative. Gee, even though that's what the client is paying you to do you gotta put the firm first, and exchange it is. How ironic that the best alternative is ALWAYS in the same fund family.
 
Do all this; don't make the calls that should be made,  buy into near term events don't matter, do mutual fund exchanges into "me to" mediocre don't quite fit right funds, and then look the client straight in the eye and tell them what a good job you are doing. That's us when we buy mutual funds for clients.
 
And therein lies the irony. The regulators in their zeal created all these rules to protect investors. What they've done is consign them to mediocrity and much worse. And yes under the old rules there were some scum bags that abused clients. What's changed is that today's clients are subjected to wholesale abuse by advisors who put their best interest in front of that of their clients.
 
Moving 1/2 mil out of American Funds? If the advisor acting in the best interest of the client believes it is the best thing to do then why not?
 
 
 
Jun 26, 2008 2:19 pm

BondGuy... I am really starting to like you...

 
The regulators would most like index funds, 60/40 split.  That is what this whole 401k fee issue is all about.  The bloomberg report even brought it down the trade costs within the managed funds.  If it is managed, there has to be trade fees within the fund or it isn't being managed.... Crazy daze...
Jun 26, 2008 2:27 pm
 
Great points Bond Guy.  This is why I have moved many of my clients into fee based managed accounts.  No longer encumbered by being forced to invest in the same fund family to get breakpoints, I now can fund the best fund for the portfolio from hundreds of other funds or ETFs or individual stocks. Whatever the best investment is for the moment instead of being forced to hold onto a losing or declining investement because we are so over regulated that we can't do what is really in the client's best interest.
 
Exchanges in a fee based account are not srutinized in the same way as in a commission account because there is no vested interest switching to generate commissions.  The exchanges are for the betterment of the portfolio in a fee account.
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Jun 26, 2008 4:18 pm

Let's see... Your time is worth $900 an hour, & you spend a whole hr on a $200 net trade?

 
If you did that in a fee based account, then who cares what funds you move in or out of?