Why Should I Pay 1%

Our fimr has a mutual fund advisory program where a fee of 1.25% is assessed. That allows us to purchase A shares at NAV, thus reducing the potential trading costs of rebalancing, getting in/out of money managers, etc. Our firm has an investment oversight committee that actively monitors the performance, style adherence, risk/return characteristics, etc, to make sure the managers in the program are doing what is expected. Also, the program has a quarterly rebalancing feature to keep the portfolio aligned with the clients strategy. All told, the program runs about 1.9% annually. That program, coupled with the fact that an FA is monitoring it as part of the larger strategy, should allow the client to see the value of outsourcing that account…

What blarmston said. 

If the client needs professional advisory help (plus all the other service matters that come up in the course of a relationship), they're obviously going to have to pay for it.  Advisory fees are one way, loads & trails (i.e., commissions) are another.

If they don't want professional management of the underlying assets (i.e., mutual funds), total costs can be reduced by using ETFs instead of funds.

Ditto all of the above, plus the fact that such a program allows you to select managers from various fund families without breakpoint issues.  This prevents the problem of having to use a sub-par manager just because the fund is in the family that you are using for breakpoint discounts.

Nothing raises the hair on the back of my neck more, than when the mere question of justifying fees is raised. I had this conversation just yesterday with a client and a propsect. "The plain fact is I have the ability to manage your account to gain opportunity, and to reduce risk. I know how to do this, in order for me to truly help you, there has to be something in it for me. If  after 12 months you don't believe iv'e added significant value or service to justify my fee....you should fire me.

It just kills me that people will go out and blow money on the most rediculous things, yet the fact that they have to pay someone to manage their money (one of the most important jobs behind saving lives)  drives them crazy.

I know the answer... I know why this is... The typical investor has not the foggiest clue how we manage money. The concept of moving money out of bonds because of limited opportunity in bonds, and exposing them to international or another area showing promise...which there is no extra charge for....this move is included in the annual fee completely escapes them. They don't understand the simplest aspects of allocation or rebalancing. And there are so many "Stockbroker" horror stories out their, that will substantiate their fears, along with a very sporadic 5 year market. It's no wonder they don't want to spend money investing.

I would love to be in the position to confidently tell a fee concerned prospect. "I really would welcome the opportunity to work with your account. our fee is 1% on every cent in the account. You would be a great addition to our business, and will receive the best service and financial planning in town. We manage a frkn ton of dough for people and institutions, and there are many out there that need help, and feel a 1% fee is fair. If this is an issue for you we may not be a good fit." ...........................prick!

IMHO 1% is an obscene amount of money to pay for most people. 
There is a reason advisors are switching from commissions to the 1% fee
rate - it’s a bonanza of cash in an annuity form.  We’ve been
using C-shares charging 1% for almost 10 years and most with less than
$75k haven’t heard from us in years over the phone - they just get
mailings. 



I charge the 1% up to $150k and then we charge commissions and use
ETFs, CEFs, individual bonds and stocks with a buy/hold strategy. 
With this the client also receives free tax analysis and preparation if
they have the $150k. 



Any client with $150k gets just about the same service as a person with $500k so why should they pay a huge amount more?

your right…kinda, we discount as account size grows. I think there comes a time when you  realize your own worth, and marketability. What a nice point to reach…when the fee is a consideration only in the eyes of the client. (I am not there, hope to be someday)

Beagle,

Spoken like a true cheap accountant. BTW "c" share expenses average 2% in management fees, your take is 1%. Also 1-2% is not an obscene amount for managed money. No wonder your're charging 1% or commissions for a buy and hold strategy. Buy & hold strategy and actively managed money are not apples to apples. Two different things. To which the latter requires additional fees. BTW buy & hold doesn't cut it for commissions or fees you're charging.

Take a look at the mfd you are using, what are their man fees? 

To have a "mutual fund" that is designed specifically for that client, managed for taxes, and with fees being possibile tax deductions...  Why would you not use a professional money manager?

... Plus if you are managing stocks, and things go "south", you as the one who picked the stocks are to blame.  With a $manager, you can fire that manager and find a new one.  But the big plus is, you get to keep the acct, rather than being fired if you choose the investments.

Food for thought!!!

So I should use investment managers because I can then defer the blame
when things so sour?  What sort of credit do you expect when
things are going well? 



I’m not a fan of “financial planning” for the vast majority of the
public because I feel it is complete overkill.  I do believe the
vast majority of the public needs an advisor to help them and someone
to guide them away from major mistakes like investing a major portion
of their money in CDs.



Our industry has all sorts of different opinions.  I for one hate
annuities but a huge segment of the industry finds them suitable for
every person.  Everyone has a different opinion and a different
set of clients. 

I guess it depends on how you want to build your practice. I for one do not want the conversations about individual stocks, who, what, why to buy or sell, cannot get in touch with client half the time. Very high Maintenance. Give me a managed book, where i can appropriately manage money, and have control of my life anyday.

Well said, moneyadvisor.

Beagle,

Why do you think financial planning is overkill?  Have you ever noticed pople 401K's seem to revolve around a certain level based on their income.  As a simple rule of thumb 3x their income, of course their are exceptions (good savers).  Don't you think if these people had an advisor show them retirement is going to cost a million or so dollars that they would start saving at an early age and save more rather than spend spend spend?  Financial Planning is a way to add value people are learning they can pick funds on their own and save alot in commission costs and their performance is similar to what they're broker could do.

If your never using annuitties your doing a disservice to your clients, like any product it fits for certain situations to say never for all types is doing a disservice, learn the product and learn where it fits.  My uncle purchased an immediate annuity in the 80's and locked in a payout based on interest rates in the high teens he couldn't be happier.

I have 3 words for you...... CONFLICT OF INTEREST.

These conflicts are removed when you use a money manager or mutual fund wrap program.  I don't care what manager you use Mr. Client.  We are on the same side of the table and have the same goal that you have.  If you make more money, I make more money.  If I call you to make a change, you'll know it's because I think it is best for you, not because I need a commission, not because the manager gave me golf balls last month.  I want you to make money.

You get the best manager in each asset class and if one isn't up to snuff, we fire them - Trump Style and move on.  If you hate me in 6 months... leave.  No penalties, no upfront fees.  Simply pay as you go. 

 Inconsult100 - I really see no arguement against your post. It truly creates a win win situation.

ICONSULT- C shares is the same argument…

THE NICE THING ABOUT A MUTUAL FUND WRAP ACCOUNT IS THE REBALANCING FEATURE. FOR NO EXTRA CHARGE, OUR FIRM REBALANCES ON A QUART, SEMI, OR ANNUAL BASIS- AUTOMATICALLY. wITH C SHARES, YOU HAVE TO ACTIVELY MONITOR THOSE SWINGS. I WOULD MUCH RATHEWR SIMPLIFY MY LIFE BY HAVING A DISCIPLINED APPROACH INSTEAD OF WINGING IT AND GOING IN RANDOMLY TO REBALANCE.

I’m curious, what exactly is (are) the deciding factors to “fire” a money

manager? and how many times in the past 3 or 5 years have you fired

one?



Is it performance slippage? or personnel changes? is it redundancy in

positions or changes to asset allocation? And why did you select those

managers in the first place?



I guess what I’m driving at is the dreaded word “performance” We and

most all investors are attracted to results. Its the first thing we see when

you look at a firm’s profile. Alpha or beta or r-squared is a distant

consideration.



Also what value is a financial plan if your assets aren’t performing? I think

the industry has blown smoke up everyone’s asses with this financial

planning stuff. Like the question, “what are your goals?” my simple

answer is "make the most with the least amount of risk!"



Can you imagine your doctor/lawyer asking “what’s your goal today?” I

mean have you seen some of these questionnaires? I’m embarassed to

pull them out because they’re so stupid.

I fired a couple for dramatic underperformance compared to their peers.

I fired one because the money manager was retiring.

I fired one because they had been in the media a lot over questionable business practices even though they had average performance.

[quote=noggin]ICONSULT- C shares is the same argument....[/quote]

I suppose there's some truth to that if you're dealing with small accouts that otherwise wouldn't qualify for a fee break and don't care about tax issues. I just find the hidden fee aspect annoying and I don't have much use at all for funds with clients with over about $500k.

[quote=iconsult100]

I fired a couple for dramatic underperformance compared to their peers.

I fired one because the money manager was retiring.

I fired one because they had been in the media a lot over questionable business practices even though they had average performance.

[/quote]

Same here. Underperformance of peers, changes in management teams, changes in management styles, allegations of misdeeds....

When I said Financial Planning was overdone, I meant the theory of
charging $5,000 to analyze the insurance, investments, build a
portfolio, analyze budgets, holistic crap…  People need financial
advisors to build a portfolio, invest the money and educate them. 
The vast majority of middle income America can pass on the rest of the
garbage. 



I had a client pull out a financial plan that was over 100 pages that
someone had run for him.  What the hell is that?  He paid
several thousand and never read the entire thing.  The planner was
paid hourly so didn’t care if the recommendations were actually
performed - bunch of crap.



I’m all for building a situation where I’m on the same side as the
client.  My opinion is 1% for an entire portfolio is rather
expensive.  I’ve been getting clients from a regional firm who is
dumping clients with less than $500k.  They charge 1.5% for assets
up to $2million.  I’ll take all their small clients they want to
pass my way and I’ll make about $2,500 each per year.

Financial Planning is a process, not a product.  The book is
useless after a year or two.  Running non-detiministic planning is
needed in order to have an education conversation about goals, risk
tollerance, and allocations.  For the typical middle class client,
they do not know if they are saving the right amount, in the right type
of account, in the investment allocation, and in the right
investments.  They do not know know how to properly review the
situation, rebalance, and re-act to life changing events.  Anyting
other than following a planning process is guessing, and that is
dangerous.  Everyone should go get their CFP.

Get your CFP and provide financial planning to clients for free.   Then watch the rest of your business boom.  Use managed accounts.  Wow.  You and your clients will make a lot of money and will be really happy with the results.

In the end.... if they don't reach their goals, they're really not gonna care about returns that they got.

Wrong, wrong, wrong.

Q: What is the client’s perception of “free” financial planning?

A: The same as free legal or tax advice.



Q: What value is a financial plan if your returns don’t meet your

projections?

A: Zero.



Gee Mr. Client, I know you want to retire at 59 but with these returns, it

looks more like 69. Financial planning is something I address after the

client’s portfolio is “back on track”, ie: making money.



I have a 51 year old attorney that I’ve worked with for almost 10 years

with no financial plan. Recently, both parents passed away, and client is

now coming into about $2 million in assets.



For years we brought up the subject of financial planning but nothing

developed. Why? because client always felt like they would work forever

and because nothing I could propose would match the firm’s generous

401(k).



Now, client resigned from firm and is planning to study Chinese abroad

for three months and sees the value of financial planning. I’m involved

because the client knows what I can do with $600K, and feels comfortable

with me handling the rest.

[quote=skeedaddy]Financial planning is something I address after the
client's portfolio is "back on track", ie: making money.

[/quote]

How do you know where the "track" is if you don't have a plan?

…capital gains

[quote=skeedaddy]...capital gains [/quote]

Capital Gains of 8% mean nothing if the client need 9.5% to meet his/her goals.  Why give the same blind advice to everyone?  Those who discount planning either don't have the knowledge to do it, or they're just too lazy to do it.

Rule 405.  Know your client.

So if you don’t hit your bogey of 9.5% (your number, not mine) your client

should replace you?



What has been the annual return since Jan 2000? FYI its negative as far as

US equities are concerned. Nobody brings this point up, but this could

very well be a decade of flat performance for US equity market. How will

the client realize their goals?



Financial planning, as it is used 90% of the time, is nothing more than a

fancy term for time value of money. It was devised as a means of

uncovering a prospect’s assets. A sales tool…plain and simple. It has no

bearing on a portfolio’s results, or the probablity of the plan’s success.



Take a look at some of the plans that you prepared in 1999 and tell me if

it still holds true.

[quote=skeedaddy]So if you don't hit your bogey of 9.5% (your number, not mine) your client
should replace you?
[/quote]

No, you replace the under-performing money managers.  As far as the past 5 years are concerned, I can show you several portfolios that have performed 5-10% since 2000.

It's about balance, clients should NEVER be 100% equities as it is.  Planning helps you identify what returns you need to hit your goal and you build the portfolios around that.  It's called efficiency.

If you don't plan, you don't know what the bogey is for that client.

[quote=iconsult100]

[quote=skeedaddy]Financial planning is something I address after the
client's portfolio is "back on track", ie: making money.

[/quote]

How do you know where the "track" is if you don't have a plan?

[/quote]

Exactly. And without a plan you and your client don't really know what his asset allocation should look like, how much risk he needs to take on, what sort of insurance (life and disability) he should carry.

No professional could claim with a straight face that your slightly-better-off-than average Joe could plan for retirement (to name just one goal) with the same asset allocation of a seriously wealthy client. One may need to be 75% in equities, the other may be able to get by with 75% in munis.

"Making money" isn't a plan, it's a tiny part of it.

[quote=skeedaddy]
What has been the annual return since Jan 2000? FYI its negative as far as
US equities are concerned.

[/quote]

Check again, "US equities " is a much broader defintion than you seem to realize. The DOW and the S&P 500 may be down Jan 2000 to date (I haven't checked lately) but other US equity indexes are up during the same time period.

[quote=skeedaddy]

Nobody brings this point up, but this could
very well be a decade of flat performance for US equity market. How will the client realize their goals?

[/quote]

Because, hopefully, they're dealing with a professional who looks beyond the headline indexes and has them in international equities, perhaps TIPs, converts and US equities aside from just large cap growth.

[quote=skeedaddy]
Financial planning, as it is used 90% of the time, is nothing more than a fancy term for time value of money. It was devised as a means of
uncovering a prospect's assets. A sales tool...plain and simple. It has no bearing on a portfolio's results, or the probablity of the plan's success.

[/quote]

It's a fine sales tool, it does turn up all assets, but everything else you said is wrong when applied to every professional I know of.

[quote=skeedaddy]

Take a look at some of the plans that you prepared in 1999 and tell me if it still holds true.


[/quote]

It clearly does...

Based on our previous exchanges, I’m going to start by acknowledging

that every man is entitled to their opinion. I guess that if you hear the

same thing enough times…you begin to believe it. That’s how religions

were started.



As far as financial planning, the thought of taking out an 18 page

questionnaire and coming back a week later with a canned, cookie-cutter

38 page analysis, (that 95% of clients don’t even read) is nonsense.



Instead, I use a one page worksheet for estate planning, if the client has

over $5 million in assets right now. The same goes for insurance, a one

page worksheet.



Now, allow me to broaden my definition of equities. Here are total returns

(not annual averages) for the last 5 years:

Russell 1000     -1.27%

Russell 2000       6.45%

Russell 3000     -0.72%

Russell Midcap    7.17%

Russell SmallCap 1.35%

Russell Top 200    -4.02%



Pretty flat, and that doesn’t include transaction fees, wrap fees or any

fees. TIPS peaked my interest but I passed because the FED is sooooo

focused on inflation, I don’t think those securities have much of a chance.

The Franklin Convertible Fund, one of the best, has averaged about 5.5%

per year, hardly worth the risk when compared to a Treasury Note.



For the last 5 years the only standouts are Latin American and Emerging

Markets at about 20% per year. Now Mike, you have to admit that even if

you do have any clients involved, the percentage is likely so small that it

can’t have a material impact on accounts.

[quote=skeedaddy]Based on our previous exchanges, I'm going to start by acknowledging that every man is entitled to their opinion.[/quote]<?:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

Agreed.

[quote=skeedaddy]

As far as financial planning, the thought of taking out an 18 page
questionnaire and coming back a week later with a canned, cookie-cutter 38 page analysis, (that 95% of clients don't even read) is nonsense.

[/quote]

“Canned, cookie-cutter”… I suppose there could be some truth to that, if the plan produced for every client looked the same. What I’ve seen is that plans for people in SIMILAR CIRCUMSTANCES tend to look the same. That’s hardly the same thing you said, and it seems completely logical to me.

But, on the subject of “canned, cookie cutter” responses, are you telling me that every single one of your clients has a wholly unique portfolio and investment strategy offered by you to them? Yeah, I didn’t think so.

[quote=skeedaddy]

Instead, I use a one page worksheet for estate planning, if the client has over $5 million in assets right now. The same goes for insurance, a one page worksheet.

[/quote]

Hmm, sounds like bits and pieces of a plan. Say, those worksheets, do any of them resemble any of the others that you’ve produced for clients? And what do you produce for people considering retirement planning? Doesn’t their retirement goal and timeline greatly narrow the investment process that follows?

BTW, I would say that over $5M TODAYis too high a hurdle (try 2M) and estate plans that don't take into account reasonable asset growth and general life expectancy are useless. The question isn't just what would happen today, it's what would happen if you lived 10-20 years (and your assets grew accordingly). Otherwise you're doomed to last minute estate planning.

[quote=skeedaddy]

Now, allow me to broaden my definition of equities. Here are total returns
(not annual averages) for the last 5 years:
Russell 1000     -1.27%
Russell 2000       6.45%
Russell 3000     -0.72%
Russell Midcap    7.17%
Russell SmallCap 1.35%
Russell Top 200    -4.02%

[/quote]

You might want to check your numbers. I didn’t check them all, but the 6.45% you showed for the Russell 2000 is an annualized total return, not a total return. Here’s a link;

http://www.russell.com/us/indexes/us/calculator.asp

It shows the Russell 2000 at 7.45 ATR. The Russell Midcap was 7.9 (The value portion at 13.72).

It’s also important to note that we’re talking indexes here and it’s been my experience than active management beats index performance (aside from the S&P500 exception) regularly.  An example, while the Russell 100 Value produced a ATR of 6.6% from 6/2000 to 6/2005, Brandes returned a whopping 15.4% over the same time period. Or Small Cap Value managers annualizing at better that 15% for the past 5 years.

[quote=skeedaddy]TIPS peaked my interest but I passed because the FED is sooooo
focused on inflation, I don't think those securities have much of a chance.

[/quote]

Rising rates would be a reason to buy TIPS, and you can hold them in a variety of ways. I maintain an asset allocation for most clients that includes fixed income and I often use TIPS as part of it.

[quote=skeedaddy]

The Franklin Convertible Fund, one of the best, has averaged about 5.5%
per year, hardly worth the risk when compared to a Treasury Note.

[/quote]

First, converts aren’t a Treasury Note alternative, it’s an equity alternative. Second, what’s been the total return of a T Note for the past five years? Would you continue to hold any note in the face of upward rate pressure? Just curious.

[quote=skeedaddy]
For the last 5 years the only standouts are Latin American and Emerging
Markets at about 20% per year. Now Mike, you have to admit that even if
you do have any clients involved, the percentage is likely so small that it
can't have a material impact on accounts. [/quote]

As I mentioned above, there are many managers that beat their respective indexes like a drum. Secondly, you didn’t have to go exclusively into <?:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Latin America or Emerging markets to get a great return over the last five years. The MSCI EAFE index provided a ATR of -.2% (ex Japan 1.8) but managers like NWQ (13.3%) beat the index like a drum w/o going deep into LA or Emerging markets.

For all but my most conservative clients, international equities makes up 24% of their equity total. As others have pointed out in the past, even in the very difficult market of the past five years, well diversified portfolios using mainstream asset allocation models have produced ATR of 10% or better. I have plenty of happy clients willing to testify to that effect.

Mike:

I applaude you…no I salute you. Your clients are indeed in good hands.

Your analysis back in 1999 was able to position clients in Emerging

Markets ahead of a six year positive trend while the Dow and S&P have

faltered.



Tell us your secret. Where can we get some of this higher insight? My

clients should fire me today…my accounts are up only 14% YTD. How will

they be able to live their golden years in comfort? Less than 10% have a

"financial plan". I’m a disaster.



C’MON MAN…FIRING AN OUTSIDE MONEY MANAGER BECAUSE OF

PERFORMANCE SLIPPAGE IS A COMPLETE COP OUT.



I’m planning on converting to an incentive-based compensation plan

where the client pays me a bonus based on absolute performance.



As far as convertible bonds are concerned…had you invested in a 5 year

T-Note back in 2000 you could have locked in 6.00% guaranteed with

your capital returned. Why subject yourself to the volatility low-rated

bonds to capture the same rate of return?

[quote=skeedaddy]Mike:
I applaude you...no I salute you. Your clients are indeed in good hands. Your analysis back in 1999 was able to position clients in Emerging Markets ahead of a six year positive trend while the Dow and S&P have faltered. <?:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

[/quote]

Not emerging markets so much as international equities. I thought I was pretty clear about that. The US equity market is less than 1/3 of the world's markets (from memory). Seems to me having 24% overseas is no great insight, it's simple asset allocation. The same applies to the S&P 500, that's just one part of the US equity market and if you're not including small and midcap equities as well, you're not covering large parts of the market.

[quote=skeedaddy]
Tell us your secret. Where can we get some of this higher insight? My clients should fire me today...my accounts are up only 14% YTD. How will they be able to live their golden years in comfort? Less than 10% have a "financial plan". I'm a disaster.

[/quote]

Hmmm, up until now you've been talking about how "the market" has been flat to down for the past five years, now you're up 14% YTD. By your own logic, since your clients are making money, shouldn’t you be writing financial plans for them now?

All I can say to you is there's not much of a secret beyond a disciplined approach to asset allocation and a realization that better than 90% of your portfolio's returns don't come from individual equity selection as it comes from cap size and style (value, growth). That’s why when I hear a prospect say they have one guy running their money, after I ask for their investment policy statement (which usually leaves them staring blankly, since their guy never produced anything of the sort) I ask if their guy is a large cap growth manager, a small cap value guy, or what. Most people gather the point very quickly that it’s pretty unlikely that their guy is a master of all styles and caps. Then, since their guy has, no doubt, sold the client on performance, we simply examine his real risk adjusted performance against a real diversified portfolio. Then the ACAT gets signed.

I didn’t invent the process, but I do know how to use it.

[quote=skeedaddy]
C'MON MAN.....FIRING AN OUTSIDE MONEY MANAGER BECAUSE OF
PERFORMANCE SLIPPAGE IS A COMPLETE COP OUT.
[/quote]

I don't see how that's true if you're measuring their performance against other managers in the same cap/style discipline. Now, if you're firing a large cap manager because he's under performed a large cap value average, or a midcap average, well, then you're a fool. That’s like the folks that fired Warren Buffet style value managers in the late 1990s because the momentum growth guys were doing so much better. We all know how that turned out.

[quote=skeedaddy]
I'm planning on converting to an incentive-based compensation plan
where the client pays me a bonus based on absolute performance.

[/quote]

I sincerely wish you luck with that. There are many ways to skin the cat.

[quote=skeedaddy]

As far as convertible bonds are concerned....had you invested in a 5 year T-Note back in 2000 you could have locked in 6.00% guaranteed with your capital returned.

[/quote]

When could you last buy a 6% five year T bond? When high quality corps were paying 8%? When the market was running at 15% and money markets were paying 4%?  And, if it isn't a 5 year Note, what's the current value of the bond? I can promise you it isn't face value. That was quite a decision to tie up money for a long period in what was at the time grossly under performing asset. I congratulate you on how that worked out.

Converts aren't a TNote alternative, they’re an equity alternative. Take a look at Calamos's SMAs. They offer around 75% of the equity market's upside with only 30% of the downside. I consider that a good thing to include in an equity portfolio.

Oh, and a final note. I think I was pretty kind to you after your egregious error of reporting the indexes annualized total return as merely total return.  Feel free to return the favor.

This message board is a perfect example of why “financial planning” is over sold - in my opinion.



I’m all for the occasional look at estate planning - we have an attorney who does it.

I’m all for the occasional insurance analysis - we have a CLU ready to step in when it’s time.

Tax planning and preparation?  It’s done in office.

Budget analysis - we’ll charge a little and run it but only if we see a problem.

The rest of the stuff I handle and it can be done very quickly - just
as Skeedaddy said.  Every client runs through it when they are
signed up and we develop a risk analysis, develop goals, write up a
plan of action and implement.  That’s our job.  Selling
someone 1,000 shares of IBM isn’t going to cut it anymore. 



But is this the same financial planning someone who is charging per
hour and isn’t following up and implementing the plan?  It’s
different, not saying it is better or worse.  My plan of action is
what 98% of the public needs.  If you deal with the top 2% of
wealth, you probably need a little more.

Mike:



First of all I concede that I read the Russell results wrong.    The work

I do is primarily focused on the S& P 500 as my benchmark. Since I cream

the index consistently, and because its [S&P 500] components are

headline makers, my clients feel comfortable participating in the space.



I do continue to take issue with “financial planning” as a metric to target

specific returns to meet future obligations as specified by a client. Since

no one can assure or predict portfolio results, I don’t see how a canned

report can pre-position a client’s assets to reach that objective. Even by

your own admission, often, an outside money managment firm with

billions under management fails to meet objectives, and must be

replaced.

[quote=Beagle]  Every client runs through it when they are signed up and we develop a risk analysis, develop goals, write up a plan of action and implement.  That's our job.  Selling someone 1,000 shares of IBM isn't going to cut it anymore. [/quote]

That sounds a great deal like financial planning to me. I don't know how you can say you do it for every client and then say you agree with skeedaddy.

[quote=skeedaddy]Mike: 

Since I cream the index consistently, and because its [S&P 500] components are headline makers, my clients feel comfortable participating in the space.

[/quote] <?:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

We have difference of opinion about what it takes to diversify a portfolio and what's an appropriate benchmark to measure relative performance. The S&P 500 is a small percentage of the equity market of the US, much less the entire world.

[quote=skeedaddy]Mike:

"I do continue to take issue with "financial planning" as a metric to target specific returns to meet future obligations as specified by a client. "[/quote]

[quote=skeedaddy]Mike: 

Since I cream the index consistently, and because its [S&P 500] components are headline makers, my clients feel comfortable participating in the space.

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We have difference of opinion about what it takes to diversify a portfolio and what's an appropriate benchmark to measure relative performance. The S&P 500 is a small percentage of the equity market of the US, much less the entire world.

A plan doesn't target specific returns. What it does it determine the appropriate asset allocation that stands the best chance to achieve the goals (keeping with the client's tolerance for volatility). Over reasonable timeframes we can be fairly confident what the risk/reward profile of a give asset allocation is going to look like and a reasonable idea about what performance to expect.

You wouldn’t go off on vacation without a plan, why would a reasonable person not map out his financial future as well.

[quote=skeedaddy]Mike:

I do continue to take issue with "financial planning" as a metric to target
specific returns to meet future obligations as specified by a client. Since
no one can assure or predict portfolio results, I don't see how a canned
report can pre-position a client's assets to reach that objective. Even by
your own admission, often, an outside money managment firm with
billions under management fails to meet objectives, and must be
replaced.
[/quote]

Skee, as an earlier poster said, financial planning (properly done) is a PROCESS.  It doesn't end with whatever initial plan is designed. That process continues to evolve with each client as their situation and the investment/economic climate changes.  The asset allocation/investment portion of a plan will have a targeted overall return objective to meet the client's objective, taking into consideration their risk tolerance. 

I think of that targeted return as the client's "financial speed" (not a drug, but a rate of return).  For example, if a client's objective is to retire with "X" dollars of aftertax income in 20 years, and to do that (factoring in all new investable funds, etc. during the 20 years) they need to generate a total return of "Y" to grow their retirement funds; Y is the "speed" that needs to be achieved.  For some clients, Y may require a high degree of risk that they're not comfortable with.  So, they may have to do something like changing their objective (delay retirement, etc.) or reduce current expenses to increase investable dollars, and travel instead at a more comfortable "speed" of, say, 75% Y.  Other clients may currently be achieving returns of 2Y (well above the required "speed") and they're taking higher risk to do that.  If they're comfortable with that risk then they also may change their objectives -- a sooner retirement date, use investment assets to buy that retirement home at the beach now, make larger gifts to their children/grandchildren, etc.  Conversely, if they're not comfortable with that risk, then their investments can be repositioned to expose them to a much lower risk level, knowing that their objective can still be achieved and they'll sleep much better in the interim.

But, as time goes on, every review of their plan may well adjust that "speed" and/or their objectives depending upon how their financial situation and outside forces (inflation, market conditions, etc.) have changed.  My point being, Skee, that financial planning (as it relates to targeted investement returns) isn't just fixed on any one return target that a one-time 20 year cash flow analysis arrived at.  If someone practiced financial planning that way, then I'd have the same objections to it as you do.

In reading this thread I think the opinion differences are because you're coming from the view of a money manager focused on generating the best possible returns pursuant to the investment discipline you follow, while others are coming from the view of structuring investment portolios to meet the individual needs of clients.  There's no right or wrong to either; it's just a difference of how each is running their business.  You're quoting your YTD returns and thinking of going to a performance based compensation; that's classic money manager stuff.  I take a financial planning approach and couldn't even quote you a composite rate of return on my accounts because it's superfluous to what I do.  Some accounts have relatively high returns because that's what the asset allocation for some clients calls for (their "speed"), while other accounts have relatively low returns for the same reason.  Actually, my HNW clients (who theoretically can take the risk of going for high returns) are generally my more conservatively structured asset allocations.  They're not interested in meaningfully growing their assets any more; they're more concerned with protecting & preserving the wealth they already have.

So, in sum, unless I'm missing something there's no right or wrong here.  I think it's purely how each of us here are defining our role.  One may be a pure money manager & their clients love them because they're doing what they've been engaged to do -- get the highest possible return relative to their peers with the same investment discipline.  Others are taking a financial planning or asset allocation approach that's customized for each individual client's situation.

Duke:



It is truly refreshing to read such a thoughful and deliberate post as yours.

I’m having trouble framing a response as I am watching the Astros on their

way to the World Series.

Two on, two out, bottom of the ninth, and Pujols up to bat...

Oh what the heck, we all know the rest of the story.  Now it's back home to finish up the series.

[quote=Duke#1]

So, in sum, unless I'm missing something there's no right or wrong here.  I think it's purely how each of us here are defining our role.  One may be a pure money manager & their clients love them because they're doing what they've been engaged to do -- get the highest possible return relative to their peers with the same investment discipline.  Others are taking a financial planning or asset allocation approach that's customized for each individual client's situation.

[/quote]

In the end, clients tend to gravitate to people they identify with. Also, I

think your explanation was on point and eloquent. There really is no right or

wrong. If I had $5 million or $10 million or more in liquid assets, I’d

probably park it in munis and call it a day.

will you guys put 50k into wrap programs? Should I be messing with these low balls or just be using c shares and be done with it. I do get 1.5% for the wrap.

I typically put these accounts in my b/d’s discretionary asset allocation account.  Software identifies the allocation, investment management committee & MF research selects the funds, and it’s automatically rebalanced.   The client gets a great service and the accounts are pretty much on auto-pilot.  My primary time is spent keeping in communication with the clients to ensure nothing has changed in their situation that might affect their allocations, and hopefully to uncover other assets and/or referrals.