^What b-d or RIA are you using? It seems like Vanguard would be fairly hostile to advisors.
IIROC firm in Canada. Nope, Vanguard isn’t hostile to Advisors in my limited experience (which has been limited).
IMO, Fee-based (FB) is the best business model as you can offer full service using a lower cost model. I can use FB for the investment management, charge a seperate fee for financial plans (I don’t though - I include the planning as part of the FB fee), another fee for tax prep (at a discount for client) and earn a commission on insurance sales.
I don’t really like selling insurance to be honest but I want to provide full service to clients (and don’t want them to have to go elsewhere to get it where my investment busines is at risk of getting poached). I just bring in a specialist for insurance when needed and they help advise on the product side.
For Financial Planning, Naviplan seems to be the best software around. I’d recommend this if you are going to provide financial planning to clients. (I’m not sure if you need to have a planning designation in TX to offer this or not).
If your providing advise as the Accountant on the tax side then it shouldn’t be any problem for you to start acquiring investment assets fairly quickly. It is really important (IMO) that when you start approaching your tax clients that you have a really good story about how you have transitioned your business to include investments, tax, insurance and estate planning and why it makes sense for you to be their guy to look after everything.
^Sounds similar to what I plan to do. Charge for tax compliance, have an AUM fee for the assets, and charge separately for any financial planning. I could roll the charge for financial planning into the tax prep fees.
I don’t know whether people want “comprehensive financial planning” or not. It seems like a lot could be accomplished with just a little common sense. And I think most of the challenges people face are some combination of tax + investments, anyway. (That’s all that GRATs, CLATs, IRAs, 401(K)s etc. are–just the intersection of tax and investments.)
Tell me if I’m more right or more wrong.
It’s more the other way around. Advisory firms are hostile to Vanguard, though not without reason. Specifically, Vanguard doesn’t pay any revenue sharing on their funds, even in (and especially) retirement plans. Gotta give Vanguard some props. They basically gave Merrill and Morgan Stanley the finger and got away with it.
This thread has been really interesting.
The Fee-Based model puts the Advisor in control of their compensation that they set based on the services they want to provide to their clients. Another model is where the advisor earns a trailing commission from the fund company (for example - Fidelity) as compensation. In Canada right now, we are seeing alot of new rules and regulation pertaining to the cost of service and more enhanced fee and performance reporting to investors.
One concern that could happen is that fund companys (the manufacturers) could simply say that they need to lower fees and just cut trailing commissions from 1% to say 80bps. That’s a nice haircut to the advisor. That can’t happen if your Fee Based.
As STL mentioned, some Advisors have transitioned to a lower cost manufacturer like Vanguard at the expense of higher cost manufacturers. (then you start toget into Active vs. Passive IM which is a whole other thread…)
Most all clients need some form of planning whether they understand or realize it. What’s your market? Business owners? Do you have a AUM minimum? (and your Fee-based fee can range based on AUM, so as AUM gets larger, volume discounts can apply if you want …). You can put together a Vanguard portfolio very cheap, like 15 bps. For example, if your charging a Fee-Based rate @ 1.35% on AUM up to $500k the clients all in 1.5% plus any tax. (In my province - Ontario this is also subject to HST tax (13% - not a typo)).
Investment Management is only one component of the clients wealth plan. The real value comes in integrating the planning for the investments, tax, retirement / cash flow, estate and insurance planning.
This is a valuation issue when there is a lack of an active, observable market to guage the pricing of the underlying assets. Is this your key concern Re: ETFs?
@Mike - I was planning on implementing a $100k minimum. At the lowest payout range (50-60%), Vest charges 1.00% on the first $100k undermanagement. I have to stack my fees on top of that, and the investments will stack even on top of that. So to make $500, I’ll have to charge 1.65% (Vest’s 1%, my .5%, and a bare-bones fund with a .15 ER). In my mind, it’s hard to justify that kind of charge. I’d rather they just DCA into a stock fund until they reach the $100k fund. (I can charge them a small, nominal fee for giving that advice. TBH, I’d probably just roll into their tax return fees.)
Note that at higher payout rates, Vest’s portion goes down, and it also goes down as the portfolio size grows. EG - for a $1m portfolio, if I were at the 75% payout rate, Vest only charges .2%. Again, I’d have to stack my fees and the investment expenses on top of that.
I know there are some funds that pay a trailing commission, and I know that’s an idea, but I think that’s a bit shady. EG - I saw a broker who put a person in a bond fund with a 1.8% ER. At least 1% of that was a trail. (And even then, the broker actively trades the actively traded funds to generate the front-end load and the trail. This guy is a real POS.)
I agree with you that the integration is the real “meat and taters” of a tax plan. However, I’m not sure how many clients need an actual, written financial plan that needs updating every year. I’m not sure if they see the value in it, or if they’re willing to pay for it. And even if you do spend 20-something hours doing it, I’m not sure how much of it they would implement. I feel like it’s better to just give them 3 or 4 things to do (eg - buy life insurance, establish a will, and create a savings plan), and hope they accomplish them. Then next year we can look at 3 or 4 more. (I say this with no experience whatsoever, so tell me if I’m wrong.)
If the client is all in at 1.65% then you can provide a breakdown of the fees to the client.
Vest charges 1%. Here is a sumary of the services they provide :
-
Technology
-
Compliance
etc…
Greenman charges 50bps. Services include:
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Goals and Planning Summary
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Investment Management
-
Cash Flow / retiremnet planning
-
Insurance needs analysis / planning
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Tax planning and prep (charged seperatly)
-
Estate planning
Investment Management Strategy 15bps
-
Risk profile (IPS)
-
Asset allocation
-
Portfolio Review
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Optimize asset mix and tax optimization of portfolio
-
Portfolio re-balancing (trading cost extra?)
-
Behavioral investment counselling (i.e. hand holding when the market tanks…)
The financial plan is a working document that evolves over time. If you look at samples of the Financial and Estate plans you can produce using the Naviplan software you’ll see what I’m talking about. These aren’t being updated every year (maybe every 5 years or if they have a big life event).
If you show a prospect this and they balk at your $500 fee for all the services you provide then they shouldn’t be your (investment) client anyway. Its good to see that you have a minimum AUM in mind.
What about client profile? (for me, I only work with clients who are nice and follow advice. If a client wants to be a co manager on the portfolio or try to trade themselves I advise them I don’t do that and they should have their own online account to do this) or go find another advisor.
^We don’t really have a set “profile” with our tax clients, so I imagine we wouldn’t have one with our investment clients either.
I also don’t think we’ll have “just” investment clients. You’re either a tax client, tax+investments, or not a client at all.
I agree with you that I’m not a “trader” or a “stockbroker”. I don’t recommend individual positions, and I don’t advocate individual positions. If a client wants that, they need to go elsewhere. I’m a long-term strategic planner. Not a day trader.
Greenman,
12b-1 fees (trails) …the industry is supposedly moving away from those types of fees and will start to discontinue the practice on A shares and eliminate C shares completely. Supposedly. I agree it is shady and most advisors collect that money and probably never mention it to their clients.
However, many B/Ds collect a much smaller piece of that revenue so there are instances where you can use a C share mutual fund to actually keep client fees lower than they would be with A shares. It sounds like you’re going the low cost ETF route so this may not be relevant for you.
Do they charge 1% on all clients under $100K or just with the platform that allows you to charge management fees as a percentage of AUM? That seems extremely high. Our B/D maxes out at around 0.25% for the smallest clients. I don’t know much about Vest but I would assume if that 1% is accurate then they are a B/D for very wealthy clients only.
Nope. I’m talking about SPY and other gigantic ETFs. Bond ETFs are a dumpster fire all on their own. Still too lazy to explain. I’ll probably write something up on Friday.
I’m not necessarily an “index fund” disciple, but I like low-cost, low-turnover funds. I just think that AUM is the way to go, and that ETFs are the best option, since it keeps costs as low as possible.
If there’s a situation where AUM is not appropriate, then I don’t really know what I’ll do. I’ll cross that bridge when I get there.
The aforementioned 1% is Vest’s AUM fee. (As noted, it goes down with higher portfolio sizes and my production.) Whatever I charge above that is what I get to keep. So if I charge 1.5%, then I get to keep the .5%. (Then the individual investments are another incremental charge, which is one reason I want to stick with low-cost funds. Doesn’t have to be ETFs, but 1% to Vest, 1% to me, and 1% to the fund company is a prettty high hurdle.)
To be honest, I really haven’t paid much attention to their other platforms. I know they have a regular B/D platform, which is probably geared toward selling A-shares.
Very interesting thread, appreciate everyone’s comments. STL, I look foward to your commentary regarding ETFs vs Index Funds.
Off topic but somewhat related…HD Vest was my first job out of college. I was straigt-up a BOM but there were so many ladies. It was just a bunch of 20 somethings sleeping with each other. Very fond memories of that place. I left just after Herb Vest sold the company to Wells Fargo. I don’t think WF owns it any longer.
Kill a bottle of red and write it!
Greenie, have you considered Schwab? Limited ETF line-up compared to Vanguard but may suffice for your needs unless you plan to put people in sector-specific ETFs and such. And lower ERs overall. EDIT: and OneSource ETFs trade commission-free.
Fidelity has also come out with their own ETFs (sector specific, same ER as Vanguard at .12%) and lots of iShares ETFs are commission-free to trade there.
Just trying to help you avoid Vanguard 
I look forward to STL’s ETFs vs index funds op-ed.
Dude, hating Vanguard is un-American. It’s by the people. For the people.
I would look at Vests B/D platform and compare against the current model so that you can understand the total cost of service and breakdown including your comp. You may be able to go B/D and still be Fee-based which may offer a better payout.
Agree with Mike on that last comment. I’m sure you chose HD Vest for a variety of reasons, but from the limited information I’m hearing it sounds like the best move you can make for your clients is to choose another B/D, if possible.
1% is massive, I’m curious how they justifiy that fee. Like I said, our worst case scenario is that our B/D takes 0.2% of the AUM fee plus an additional cut of about 20%. So if we charged a $100,000 client 1%, we’d keep 0.40%. So to make your 0.5% you’d have to charge roughly 1.1% at our B/D. I’m just not sure how you’ll compete when you have to charge 1.5%. Also, if you’re only using low cost etfs, you’re somewhat competing with roboadvisors which will be quick to point out your 1.5% fees for the same products they are using.
Just to give you an idea, we keep roughly 80% of our revenue. So if our target on a client is 1% take home pay, we charge 1.25%. So we could charge a client less and keep 100% more revenue.
I’m not saying that you can’t compete, but it just puts you at a disadvantage. Obvioulsy there’s a focus on tax planning at HD Vest, so I"m sure there are a few things you’ll be able to do that we cant.
^ yep.
Grid payout is usually based on Advisor total AUM. So a Advisor with say $200 million has a slightly lower grid payout than an Advisor with $500 million AUM. I haven’t heard of the grid being different based on the size of each (household?) account.