ML SMA Performance Report and Fees

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Aug 19, 2010 3:44 pm

We are competing for a municipal pension client that is currently advised by ML via a mix of SMAs.

I have seen a quarterly statement briefly and one thing I cannot get my arms around is that in the front part of the report there is a performance report showing all returns "net of fees" but in the back of the report there is a report which shows returns "gross" of fees in one column and then right across from it a "net of fees" column.

The different between the two columns is 1%. Is this difference just the advisory fee to the FA?

Are the costs of the SMA's in that 1% too or are the "gross" returns really the returns "net" of the SMA fees?

I am having a hard time believe that the ML FA is charging just 1% all in on $3.9mm mixed between 6 SMA managers and that 1% is his fee and the managers fee combined.  

Any help is appreciated.

Aug 19, 2010 4:51 pm

I would put nothing past ML greedy [email protected][email protected]()$.

Aug 19, 2010 5:05 pm

It is possible that it's 1% all-in.  If the managers are getting, say 0.25-0.45%, and ML gets 0.55-0.75%.  It is tough to compete for institutional business on anything over 1%.  Granted $3.9mm is not a huge account (for an institution), but if you are competing with RIA firms that will go direct, they are getting 1% on the whole thing.

Our local Community Foundation is about $26mm, and they pay like 25bips (plus cost of funds, which are primarily institutional index funds).

Just looking at our SMA platform, with NO discounts, a 50/50 split between equity and fixed incomes strategies would result in a 1.43% total fee to client (@$4.0mm).  With discounting, we could get it down to exactly 1.0%.  100% Fixed Income, at max discount would be 0.71%.

Aug 19, 2010 10:02 pm

My company’s sma fixed income is 1.25 w/ break points at 500k and above. We would charge around .5-.75 w/ the break points, not the full 1.25 though. 1 percent seems sorta steep.

Aug 19, 2010 10:53 pm

This is a topic of interest to me. I manage a pension plan of around 9 mil in assets. It is currently all in funds, and I have been exploring different options. With the funds the cost is slight less than 1% including the .25% 12b-1 fee. Most of the funds average around .75% in costs. I have thought about Advisory programs and SMA programs, but not sure if I would be cost competetive with either. If any of you on this site manage any pension funds, I would be interested in knowing what you are using, ie..... funds, sma, advisory, etc... What sort of fees are being charged? etc...

Aug 20, 2010 7:36 am

1% or less is pretty common on fixed income sma's, over 3 million they could easily be charging .75bps. (all in, .30 bps manager, .45 bps to brker)>

Aug 20, 2010 8:47 am

The current allocation of the pension plan is 60 equities /40 fixed income and NOT all fixed income. I should have made that clearer in my initial post.

The 60% equities allocation is 19% International, 7.5% Small/Mid Cap Value, 12.50%  Small/Mid Cap Growth, 30.5% LCG and 30.50 LCV.

The 40% Fixed Income is 26% S/T Bond, 14% LT Bond and 60% Intermediate. Bond managers are mostly core style with a lot of corp debt.

I appreciate the insight so far and hope to hear more from those who already contributed but quoted prices based on all fixed income.

Aug 20, 2010 8:53 am

Yes, that is an all in price.  The way it works at ML is that ML takes a certain percentage of the overall fee, and the manager, the rest.  If it is a UMA SMA, for fixed income, the manager is getting something like 25-30bps (flat) and the rest goes to ML.  If it is their Consults SMA, the manager gets 32% of whatever the fee is, and if it is SPA SMA, it can vary. 

It might not be exactly 1% mind you.  The gross of fees vs. net of fees numbers often are skewed by the timing of the fee run. 

Aug 20, 2010 9:33 am

That’s a municpal pension allocation? Isn’t it a tad bit aggressive? I just manage accts for individual investors, but I thought pensions were supposed to be conservative?

Aug 20, 2010 10:31 am

Not necessarily Buddy.

The pension should be (in my opinion) built around a few factors, one of the most important of which is the actuarial return assumption. These normally range between 5-10% with the majority in the 7% area.

This particular instance the actuarial assumption is 7% annually.

Aug 20, 2010 12:31 pm

But if your looking to achieve 7 percent, can’t that be done with majority in bonds and maybe like 30 percent in equities? Sorry if I sound uneducated, I deal mostly with retired individual investors. I found achieving 7 percent or so with majority in bonds and some equity wasn’t that hard to achieve. But the thought of 60 percent equity exposure seemed a little steep should there be another massive drop. That’s a lot of pissed off municipal workers you have to deal with ya know?

Aug 20, 2010 12:39 pm

Agreed again on many levels Buddy but there are also Investment Policy Statements which detail what the allocations can be and if there is any leeway.

IPS may call for 60/40 with 10-15% leeway in either direction at the discretion of the Board or Advisor. We are a bit handcuffed from time to time by those IPS's in terms of sometimes mandates require we have X% in equities, etc no matter what. We work with them and have had success in changing many of the IPS for clients we work with. It is hard to explain to them a lot of it since they are not professionals in finance but rather elected people to a board/council.