One of the planners at my firm is in the process of competing with a wirehouse broker for a $500,000 account. The broker wants to put the money into a portfolio of open ended mutual funds. I find that kind of suggestion to be totally malignant. The broker will charge 1.25% and the funds will charge whatever AOER they charge and the prospect, if he is dumb enough to choose that alternative, will get no active management whatsoever.
I have a couple of close friends that work at wirehouses at all different levels of production and I hear similar things from all of them. They don't have time to manage assets, their job is to sell and let other people manage the money. I can't begin to tell you how bad this is. In the situation I just described the person managing the money has to fully invest whatever he has been given. He has to assume that the asset allocation decision has been made. This is true for a separate account manager getting assets from a broker or a mutual fund manager in all situations. It is a big problem waiting to happen when changes that need to occur won't happen because the broker is too busy trying to raise more assets.
I worked at one of the wirehouse firms for a short while and I can't tell you how many times I heard "...and it probably won't hurt the client...." as part of a pitch for a new fund or product. Are you kidding me?
Mutual funds are a good tool for small 401ks or other small accounts. Exchange Traded Funds make more sense for accounts between $20,000 and $50,000. For accounts between $50,000 and $100,000 I would say a blend of ETFs and some individual stocks. Between $100,000 and $200,000 use mostly individual stocks and a couple of ETFs and above $200,000 use common stocks almost exclusively. I say almost because I will use a sector iShare to capture a particularly volatile area of the market for an unusually risk adverse client. While those numbers make sense to me you can apply the logic to any parameters that makes sense to you. I think you get what I am saying.
The use of mutual funds for people with substantial wealth is absolutely criminal. Enough soap boxing for now.
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2 comments:
Right on. What's the point of having a FC if he is just going to rake off mutual funds. Don't they have ideas of their own anymore?
I find your comment rather arrogant. While I agree that the fees on a mutual fund wrap can be expensive, that does not mean investing in active funds is all that bad. I am sure I could find plenty of open ended funds that have produced higher returns with less standard deviation than your record as an investment mgr. what is your record? Net of fees? Most investors do not have the stomach to invest in concentrated portfolios, they sell low because of fear. And ETFs are index funds, which are the epitome of momentum style investing. The s&p 500 weights whatever is working at the time. If you invested in a SPX etf in March of 2000, you were a fool and bought tons of stocks at bubble prices. Indexing cares nothing about price of a security, it just cares about the mkt cap of the company.
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