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DFA vs. Vanguard

Thanks for the link, S2000. 

I was unaware when I first read the thread, but that discussion actually began the same day you posted the link.  Do you know if the guys are who they say they are on there?  (That is–is “Rick Ferri” the real Rick Ferri?  Ditto Larry Swedroe.) 

82 > 87
Simple math.

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Greenman72 wrote:
Thanks for the link, S2000.

My pleasure.

Greenman72 wrote:
I was unaware when I first read the thread, but that discussion actually began the same day you posted the link.  Do you know if the guys are who they say they are on there?  (That is–is “Rick Ferri” the real Rick Ferri?  Ditto Larry Swedroe.)

I do, and they are.

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams
http://financialexamhelp123.com/

This article reminded me of our discussion here:

One Answer to the Index Fund: Build a Better Index

http://dealbook.nytimes.com/2013/11/11/one-answer-to-the-index-fund-buil...

You want a quote?  Haven’t I written enough already???

Bump, for whomever asked “Who is DFA?”

82 > 87
Simple math.

This thread made me think I had entered the twilight zone. Suggesting that you need to be in multiple funds to meet your fiduciary duty….. Was that a joke? The deparment of labor feels ONE target date fund is sufficient and that in fact has become the default selection for many retirement plans. Certainly fine for non-deferred accounts that have more liberal standards.

And the idea that you have to “appear” to be “doing something” for your HNW clients..that is breaking your fiduciary duty. You do not act in a way that you think will give you the best chance of keeping your clients. You act in a way that is in the best interest of your clients. If that means losing your client, so be it. You have no choice as a RIA.

Felt a little ill reading the thread. Sounds like Greenie has some ethics. Most of the other posts sounded like a sales pitch. 

 

“Our lifeline is CO2 emissions. Don’t let them decline.”

^But QDIA options exist because the general public is too stupid to pick reasonable fund allocations. Naive diversification is a real problem in 401k-land. The DoL put some guidelines together (they still don’t exactly spell it out) on what a QDIA fund should look like, then strongly suggested 401k plan sponsors limit their options to these funds; or at least provide different tiers of fund options (i.e. first tier - QDIA only, second - some passive funds, third - active funds across all major categories).

If I took a few hundred thousand to any advisor and he told me I should throw it all in a global balanced fund, target date, or target risk fund, I would do this:

Sweep the Leg wrote:

^But QDIA options exist because the general public is too stupid to pick reasonable fund allocations. Naive diversification is a real problem in 401k-land. The DoL put some guidelines together (they still don’t exactly spell it out) on what a QDIA fund should look like, then strongly suggested 401k plan sponsors limit their options to these funds; or at least provide different tiers of fund options (i.e. first tier - QDIA only, second - some passive funds, third - active funds across all major categories).

If I took a few hundred thousand to any advisor and he told me I should throw it all in a global balanced fund, target date, or target risk fund, I would do this:

Great advice. Say the person with the few hundred thousand was thirty years old and didn’t plan to touch that money for 35 years. He just paid $150.00 for an hour consult. How would telling him to put it all in VFIFX  be bad advice? He gets to keep most of his returns and won’t be eaten by the industry. And he’ll beat most of his peers. Probably would even beat STLs Super Duper Return Strategy. Sure, there are other options, but definitely not bad advice. If you are worried about custodial risk,  buy a few different target date funds, vanguard, fidelity, etc. 

“Our lifeline is CO2 emissions. Don’t let them decline.”

^RIAs get a % of AUM, not an hourly fee. If I was giving someone advice, and had one hour to do it, target date all the way. But that’s not how RIAs work. They get paid to monitor your account to ensure it’s meeting your IPS. In turn, they get an annual fee based on AUM. There’s no reason to go to an RIA to have them put you in a single fund solution. I’m not saying your results would be better one way or another, it’s just not what they’re built for. 

Your understanding is not accurate. Many do offer hourly consultations. Some charge a set annual fee regardless of AUM. Some sell hard copies of total financial plans. And, yes, a very common arrangement, some take a % of AUM.

Another interesting arrangement, within the RIA setup, is running SMAs as a bunch of mini-hedge funds complete with heavy margin, options, and futures trading. With today’s trading platforms, twenty accounts can be run as one. In this case, the RIA rep is really a PM and only trades individual securities and derivatives. I personally collaborate with a few nine digit one man operations that are set up this way.

“Our lifeline is CO2 emissions. Don’t let them decline.”

Ghibli wrote:
Your understanding is not accurate.

Yes, it is. While you’re correct that RIAs occasionally charge a stand-alone fee for services, that’s not how they make their living. I’ve read more Form ADVs than any human should and it spells it out right there how they make their money and who their clients are. 

Bottom line is, I’ve worked with hundreds of RIAs and I’ve never run into one that recommends fewer than 8 funds/ETFs for an allocation…and that’s on the very low end. On average I’d say they have around 16 funds in their balanced model.

Sweep the Leg wrote:

I’ve read more Form ADVs than any human should

And I thought I was a nerd for reading tax code. 

Sweep the Leg wrote:

Bottom line is, I’ve worked with hundreds of RIAs and I’ve never run into one that recommends fewer than 8 funds/ETFs for an allocation…and that’s on the very low end. On average I’d say they have around 16 funds in their balanced model.

 ”Everybody is doing it” doesn’t make it right and it doesn’t make it good for the client. 

Itl doesn’t mean that it performs better for the client than a two-fund portfolio, one being a total stock market fund and the other being a total bond market fund.  Maybe they just add funds to project the fake image that they’re doing intense market research and adding value because the intricacies of asset allocation are too mind-blowing for most people to understand. 

Then again, maybe 16 funds is necessary for proper asset allocation.  I don’t claim to know. 

82 > 87
Simple math.

Greenman72 wrote:

Sweep the Leg wrote:

I’ve read more Form ADVs than any human should

And I thought I was a nerd for reading tax code. 

Sweep the Leg wrote:

Bottom line is, I’ve worked with hundreds of RIAs and I’ve never run into one that recommends fewer than 8 funds/ETFs for an allocation…and that’s on the very low end. On average I’d say they have around 16 funds in their balanced model.

 ”Everybody is doing it” doesn’t make it right and it doesn’t make it good for the client. 

Itl doesn’t mean that it performs better for the client than a two-fund portfolio, one being a total stock market fund and the other being a total bond market fund.  Maybe they just add funds to project the fake image that they’re doing intense market research and adding value because the intricacies of asset allocation are too mind-blowing for most people to understand. 

Then again, maybe 16 funds is necessary for proper asset allocation.  I don’t claim to know. 

We’ve already been through this so I won’t rehash, but some things have changed in the marketplace since this thread was started. For example, the old 60/40 balanced portfolio is dying a rather quicker death than I expected. Advisors aren’t so dumb as to think a 60/40 portfolio will perform similarly to what it’s done over the last 20 years. With rates in the 2’s, who wants 40% of their money in a total bond fund that’s 40% Treasuries? 

While everyone has been wrong about when rates are going to rise, they will eventually. When that happens, if you’re not allocated to high-yield, alternatives, or some sort of managed volatility fund, your clients are going to have a bad time.

What’s happening in the industry right now is a perfect example of why you can’t have a “set it and forget it” attitude toward your allocation. Not saying you have to go crazy, but covering all your bases has become more difficult of late.

^ +1

Sweep the Leg: "I’m tired."
KMeriwetherD: "Well, you were basically Legolas in the Battle of Water Cooler."

After re-reading this thread, I also wanted to make something clear…not sure that there is any confusion around this but just in case…

The total cost to the retail client is independent of how many funds you put them in. You could easily build an 18 fund portolio that’s lower cost than a four fund allocation. The question is really more about how many funds it takes to be fully diversified (and the definition of that is not clearly defined either).

Anyway, don’t mean to beat a dead horse. Just wanted to be sure I was adequately communicating my position.

Sweep the Leg wrote:

The total cost to the retail client is independent of how many funds you put them in.

I understand the point, but I’m not really sure that this is correct.  Sure, the actual wrap fee is probably going to be a function of amount of AUM.  But I imagine it’s a lot easier to convince people to pay 1% if you have 16 funds, rather than two. 

If you have 16 funds, then there obviously must be a lot of economical insight by top-2 MBA’s, combined with mathematical precision and fundamental/technical analysis in order to come up to the exact asset allocation that would be most beneficial to the client, given their risk/return profile.  This must surely be worth a mere penny per year to you. 

If you have a basic 60/40 split, then you’re just following an archaic rule that any idiot can do.  Why should the client pay a dime for this? 

Which strategy will actually perform better is still up in the air. 

82 > 87
Simple math.

STL, not sure why you think your exposure is representative of all RIAs in existence, but I’ve seen accounts run by a RIA that have only 8 stocks, not funds, stocks. And i personally know of RIAs that only create financial plans. They have nothing to do with actually implementing the plan. Is your exposure just to large national firms? There are many different models operating as state registered RIAs. These are just facts. Sorry if you fancy yourself as a RIA expert. There is a whole world of RIAs of which you are not familiar. And if you haven’t figured it out, do you think i might own one?

“Our lifeline is CO2 emissions. Don’t let them decline.”

Greenman72 wrote:

I understand the point, but I’m not really sure that this is correct.  Sure, the actual wrap fee is probably going to be a function of amount of AUM.  But I imagine it’s a lot easier to convince people to pay 1% if you have 16 funds, rather than two. 

If you have 16 funds, then there obviously must be a lot of economical insight by top-2 MBA’s, combined with mathematical precision and fundamental/technical analysis in order to come up to the exact asset allocation that would be most beneficial to the client, given their risk/return profile.  This must surely be worth a mere penny per year to you. 

I don’t know about that. I would say you have a higher degree of risk (manager risk especially) when only picking four funds. You had better get it right or a large portion of your client’s portfolio just blew up. If you spread your bets around 15 funds, you have less chance of letting one or two bad calls derail the entire portfolio. And, you certainly don’t need to be some investing wizard to come up with a dozen or two funds to use. If you don’t think you can handle it yourself, there are plenty of services that can assist you. Littmon Gregory for example, or many of the Turnkey Asset Manager Programs will do it all for you. 

Greenman72 wrote:

If you have a basic 60/40 split, then you’re just following an archaic rule that any idiot can do.  Why should the client pay a dime for this? 

Which strategy will actually perform better is still up in the air. 

Setting an allocation mix between equities and fixed income is hardly archaic and it just so happens that a 60/40 portfolio is the most popular mix as it has historically offered steady returns with low volatility. If you look at the home office models of any major wirehouse or broker-dealer, they’re going to have something very close to a 60/40 portfolio, though they now look more like 60% equities, 20% fixed income, and 20% alternatives. 

And as to what will actually perform better still being up in the air, well, that’s kind of the whole point. Your strategy puts all your eggs in a few baskets while ignoring some very important asset classes. The very fact we don’t have any idea what asset classes will do well over the next X number of years is the very reason you need exposure to most, if not all, of them to some degree. But, we’ve discussed that already….

Sweep the Leg wrote:

Greenman72 wrote:

I understand the point, but I’m not really sure that this is correct.  Sure, the actual wrap fee is probably going to be a function of amount of AUM.  But I imagine it’s a lot easier to convince people to pay 1% if you have 16 funds, rather than two. 

If you have 16 funds, then there obviously must be a lot of economical insight by top-2 MBA’s, combined with mathematical precision and fundamental/technical analysis in order to come up to the exact asset allocation that would be most beneficial to the client, given their risk/return profile.  This must surely be worth a mere penny per year to you. 

I don’t know about that. I would say you have a higher degree of risk (manager risk especially) when only picking four funds. You had better get it right or a large portion of your client’s portfolio just blew up. If you spread your bets around 15 funds, you have less chance of letting one or two bad calls derail the entire portfolio. And, you certainly don’t need to be some investing wizard to come up with a dozen or two funds to use. If you don’t think you can handle it yourself, there are plenty of services that can assist you. Littmon Gregory for example, or many of the Turnkey Asset Manager Programs will do it all for you. 

Greenman72 wrote:

If you have a basic 60/40 split, then you’re just following an archaic rule that any idiot can do.  Why should the client pay a dime for this? 

Which strategy will actually perform better is still up in the air. 

Setting an allocation mix between equities and fixed income is hardly archaic and it just so happens that a 60/40 portfolio is the most popular mix as it has historically offered steady returns with low volatility. If you look at the home office models of any major wirehouse or broker-dealer, they’re going to have something very close to a 60/40 portfolio, though they now look more like 60% equities, 20% fixed income, and 20% alternatives. 

And as to what will actually perform better still being up in the air, well, that’s kind of the whole point. Your strategy puts all your eggs in a few baskets while ignoring some very important asset classes. The very fact we don’t have any idea what asset classes will do well over the next X number of years is the very reason you need exposure to most, if not all, of them to some degree. But, we’ve discussed that already….

Epiphany?

http://www.analystforum.com/comment/91321000#comment-91321000

“Our lifeline is CO2 emissions. Don’t let them decline.”

^No, there’s a world of difference between how I manage my money and what’s appropriate for the general public. Also, this isn’t the Water Cooler so quite being a ***** and drop the attitude. I’m having a constructive conversation with Greenie (and whomever else is reading).

I’m well aware of different RIA models but Greenie specifically outlined the type of shop he would run. I do have extensive expertise in that area. While you may own an RIA, that means less than a fart in the wind to me. I’ve worked with RIAs that have $20mm under management to guys at Hightower that manage billions. Obviously there can be huge differences in the way they run their business but I’ve been around long enough to form an education opinion on the most successful business models. Yes, I fully admit - seeing as how I work for a mutual fund company - I don’t work with RIAs that only use individual securities, for example. But, again, that isn’t the business model Greenie is talking about implementing, so it really isn’t germaine to this discussion.

If you want to contribute something to this thread, by all means please tell us about your RIA and how you run your business. Or, if you just want to talk smack, let’s head back over to the WC and I’ll beat you like a red headed stepchild.

Your overconfidence, inconsistency, and lack of humility has been exposed. You come across as wet behind the ears. Sounds like you’re a wholesaler……The comments are important because your advice is questionable and the way you are painting the industry is inaccurate. Layering fees is the way to go…..please. Frankly if I were to see a wholesaler in a RIA office, that would be my clue to move on. “Fee only”, thanks. 

Greenie has humility. A very important trait for asset management. I say greenie should take the 65 and open a RIA. I certainly would go to him before I would go to any “fee-based” national firm peddling mutual funds with residuals. Ameriprise has that covered. And greenie’s credentials are perfect. 

“Our lifeline is CO2 emissions. Don’t let them decline.”

Wow, I don’t even know where to begin. Don’t take it from me though, let’s see what a third party site like Investopedia has to say on what exactly an RIA is…

http://www.investopedia.com/articles/financialcareers/06/whatisaria.asp

Since we’re talking mostly about how RIAs generate revenue, here’s the important part:

“Paid much like mutual fund managers, RIAs usually earn their revenue through a management fee comprised of a percentage of assets held for a client. Fees fluctuate, but the average is around 1%. Generally, the more assets a client has, the lower the fee he or she can negotiate - sometimes as little as 0.35%. This serves to align the best interests of the client with those of the RIA, as the advisor cannot make any more money on the account unless the client increases his or her asset base.”

That’s the general model for most RIAs. It’s a “fee-only” business model. Hell, RIAs pretty much invented it. Mutual funds are the vehicle of choice, but obvious it varies. And, believe it or not, wholesalers call on every RIA that has over $25mm in assets (I did it in my old territory many years ago). Through resources like Discovery Database, I can easily pull every RIA in my area and learn a good deal about their business (it’s nothing that’s not on their ADV). ****, give me a name of an RIA in your city and I’ll tell you how they run their business. Seriously, give me a name of a firm that your familiar with and let’s see how they really run their book.

Quite frankly you make very little sense and I don’t think you really know anything about being an RIA even if you are one. You don’t seem to understand what a national RIA is or you don’t understand how small of a market that is. Wholesalers mostly call on individual RIAs, not the Mutual Fund Store (which you actually can’t wholesale). 

And, charging ad hoc fees is a horrible business model for several reasons. If you’re not custodying the assets and placing the trades your client retention is going to be much lower than other RIAs. Not to mention your annual income is going to be harder to predict. That’s why people love the fee-based model - it’s a perpetuity. There’s nothing unethical about it. The marketplace is competitive. Charge too high a fee and people will go next door. 

So many things you just…you just don’t have a clue. 

tl;dr - don’t take my word for it. Google “what is an RIA” and see who’s closer to the mark. 

The majority of RIAs are in fact fee-“based”, which is a euphemism for fee and commission. Some say there is nothing inherently unethical about it as long as ALL compensation is disclosed and discussed, but in practice, extremely unethical. Most clients under a fee-based model have no idea what they are paying at the end of the day, and the industry likes it that way. And even if fees are disclosed, which is required but rarely emphasized, why set things up in a way that tempt the advisor to go against the interest of the client? The advisor inevitably picks products that cost more because the advisor makes more. If someone wants to be just another scummy salesman, follow that model and join the country’s largest “fee-based” firms. They break the law every day. Study after study shows “fee-based” clients pay more in total than “fee-only” clients with equal assets. Go figure. 

The very term “fee-based” came to be because “fee-only” was becoming popular and touted by financial journalists. The commission shops knew the consumer would confuse “fee-based” with “fee-only.” Great ethics, no? Use of such a term should be enough warning to steer clear. Two very different compensation models. Fortunately for the consumer, the fee-only non-custodial model is growing rapidly. And making sure discretion and custody is split would have avoided a lot of past scandals. Virtually no opportunity for larceny or embezzlement. 

The examiners certainly would not be happy with me quoting Investopedia. Hell, they weren’t happy when I quoted actual regulation. Take my advice. If you’re ever a target of an exam, do not argue, do not discuss. The requirements are whatever that particular examiner says they are. Check your ego at the door. 

The referenced article states that, “He or she must register with the Securities and Exchange Commission (SEC) and any states in which he or she operates.” Not true. SEC registered firms do not need to register in any state they operate in. If they peddle insurance products, they do need to be licensed by the state’s regulators, as was mentioned in another thread.

As far as my understanding of this subject, I do not read Investopedia for information on RIAs. I am happy to check their articles for accuracy before misinformation is posted though, but a compliance professional would be a much better source than me…… Or maybe some salesman would be a good source as well. Salesman usually have the most reliable information….

So STL, I was told by a national head of distribution that he would rather hire a Division 1 pitcher than somebody with a CFA designation. Is it hurting your advancement? And on the plus side, you keeping talking about what is the best business model for the advisor, as opposed to the client. You  probably fit in well. Maybe that focus makes up for having the charter in their eyes…

 

“Our lifeline is CO2 emissions. Don’t let them decline.”

Ghibli wrote:

The majority of RIAs are in fact fee-“based”, which is a euphemism for fee and commission.

False, RIAs are not allowed to collect commissions. That’s the whole point. Indeed, they don’t even hold the right licensing to legally do it.

Ghibli wrote:

The advisor inevitably picks products that cost more because the advisor makes more.

Again, this is incorrect. RIAs can’t make more money on products that “charge more.” They don’t get front or back-end loads, commissions, or trails. Being licensed as an RIA only (not dually registered) precludes you from selling these products. Whether the RIA puts a client in a fund that charges 3% or 1% the RIA doesn’t make any more money on the former. That’s why RIAs are amazingly fee conscience.

Ghibli wrote:

Fortunately for the consumer, the fee-only non-custodial model is growing rapidly. 

Please source this. I would actually really appreciate learning more about this model. In all the trade rags I read and industry conferences I go to, I’ve never once heard about this model growing unless you’re talking about the TAMPs. That market is growing very rapidly, but ultimately the client’s money is still being run through a fee-based RIA, the TAMP is just acting as an outsourced CIO.

Ghibli wrote:

As far as my understanding of this subject, I do not read Investopedia for information on RIAs. I am happy to check their articles for accuracy before misinformation is posted though, but a compliance professional would be a much better source than me…… Or maybe some salesman would be a good source as well. Salesman usually have the most reliable information….

No reason to be snide. I simply posted the first thing that came up on google for perspective. The main point was about revenue generation which Investopedia got exactly right. If you want to delve deeper we can look at more “official” sites, but I think I’ve made my point.

Ghibli wrote:

So STL, I was told by a national head of distribution that he would rather hire a Division 1 pitcher than somebody with a CFA designation. Is it hurting your advancement? And on the plus side, you keeping talking about what is the best business model for the advisor, as opposed to the client. You  probably fit in well. Maybe that focus makes up for having the charter in their eyes…

 

My advancement? No, the CFA has only helped me advance and unless I want to go into management, which I don’t, there’s not really further for me to go. I appreciate your concern though.

Regarding the second part of that paragraph, the RIA or advisor should build a business model that caters to making the client have the best experience possible. That could mean anything based on each client’s unique objectives. The model is simple, do what’s in the best interest of your clients, stay in regular contact with them, be sure their investment goals are updated regularly, and, ultimately, provide the best possible experience. Doing this will keep your clients happy, your retention will be high, and you’ll probably enjoy your job. I don’t see anything unethical about it. 

By the way, those evil wholesalers that focus on RIAs? They don’t normally push product. That doesn’t go over well in the RIA market. Instead, they bring their value-add tools, things like how to better engage with your clients, build deeper relationships, family wealth education resources, etc. RIAs are hyper-sensitive to conflicts of interest so there’s not a lot of steak dinners or entertaining (like you’d wholesale someone at Merrill for example).  It’s really about helping them build a better practice. If the wholesaler adds value, then the RIA is more receptive to hearing what sort of products the wholesaler offers. Still far from a slam dunk though. That’s why the RIA market is the hardest to wholesaler, but also the most rewarding when you get it right.

Your own posts are contradictory. You say RIAs are not allowed to deal in commission products and then you say, “money is still being run through a fee-based RIA.” Fee-based means fee and commission. There is nothing that precludes someone working under a RIA with the appropriate licenses(I agree. They need the relevant license) from selling any product as long as they disclose ALL fees, and are meeting their fiduciary duty. That’s the rub. People don’t realize all the back end payment going on. I shock people constantly when I work out what their advisor is actually getting paid. And in your description of a good business model you conveniently left out ensuring that the client is aware of all costs associated with his or her investments and is familiar with all forms of advisor compensation. The omission illustrates the problem. All conflicts of interest should be disclosed. Having a license to sell commission-based products does not excuse a firm from having to meet their duties as a RIA. 

A good check on a RIA is making sure they don’t have the licenses to sell commission products. Avoid the ones that do. Some say what about annuities…Advise and have your client buy direct if that’s appropriate. That’s your duty. As I said, I do agree that just being an RIA does not authorize you to sell commission products, but it does not preclude you from doing so if you are appropriately licensed. It is the most popular model, because it extracts the most revenue from the client. 

If I’m wrong, there is a lot of whistle blower money to be made….have at it.

In regard to the non-custodial model, just search RIA custodian. All sorts of brokers will pop up. Schwab, Wells Fargo Financial, Interactive Brokers, etc. Everybody is pushing their platform. There is another world out there besides conferences and expense accounts.



 

“Our lifeline is CO2 emissions. Don’t let them decline.”

Ghibli wrote:

Your own posts are contradictory. You say RIAs are not allowed to deal in commission products and then you say, “money is still being run through a fee-based RIA.” Fee-based means fee and commission.

The most troubling thing about your posts is you don’t seem to understand very basic industry and RIA specific jargon. Perhaps it’s a language thing, but if you do own an RIA as you alluded to, then I’m really shocked you don’t understand these concepts.

My statement about money still being run through an RIA when the RIA outsources their investment decision has absolutely nothing to do with commissions…at all. It works like this, Joe Smith RIA doesn’t want to pick his own investments so he hires Envestnet to build his portfolios. He pays Envestnet a (pretty reasonable) fee for their service. Joe Smith still meets with his clients, talks about how he’s hired a consultant to provide the best investment options possible, then he clears the trades through Schwab/Fido/TD and continues to earn his fee. During no point in that exchange is their any commission. When dealing with a pure RIA there is never any commission. You can’t be a pure RIA and even be licensed for it since the 6 and the 7 require sponsorship from a broker-dealer. Now, if Joe Smith wants to become a hybrid RIA, then yes, he can sell products that charge a commission. Pure RIAs, no.

Ghibli wrote:

There is nothing that precludes someone working under a RIA with the appropriate licenses(I agree. They need the relevant license) from selling any product as long as they disclose ALL fees, and are meeting their fiduciary duty. That’s the rub. People don’t realize all the back end payment going on.

Again, you’re changing the conversation. Are you talking about a pure RIA (which was the subject of the original topic) or are you talking about the new and rapidly growing hybrid RIA market? If you’re staying on topic and talking about pure RIAs, please name one single product they get a commission or back-end load on. Disclosing fees for an RIA is much easier than for your average advisor at a broker-dealer (the exception would be for 401k plans which are hard for everyone to get their heads wrapped around). For an RIA you’re just charging a fee on assets and it’s clearly disclosed to clients on a quarterly basis. If it’s not (not all RIAs are perfect or ethical) then they’re breaking the law. As for the expense ratios on the products they sell, like I said in my previous post, most RIAs are extremely cost -conscience.  They’re always looking for lower cost options.  The overall fee charged to the client is pretty straightforward. It’s the wrap fee (the RIA’s fee) and the weighted average of the products they’re in.  That’s just for investment services of course (tax planning, for example, could be a seperate fee).

Ghibli wrote:

I shock people constantly when I work out what their advisor is actually getting paid. And in your description of a good business model you conveniently left out ensuring that the client is aware of all costs associated with his or her investments and is familiar with all forms of advisor compensation. The omission illustrates the problem. All conflicts of interest should be disclosed. Having a license to sell commission-based products does not excuse a firm from having to meet their duties as a RIA. 

I’m not here to lay out the exact framework on how to run an RIA. Obviously a good RIA has a very detailed discussion around what their clients are being charged. That should go without saying. If you’re saying there are RIAs out there that try to skirt the issue, I’m sure there are, but what does that have to do with what we’re talking about? I’ve never stated that all RIAs are the epitome of ethical behavior.

Ghibli wrote:

A good check on a RIA is making sure they don’t have the licenses to sell commission products. Avoid the ones that do. Some say what about annuities…Advise and have your client buy direct if that’s appropriate. That’s your duty. As I said, I do agree that just being an RIA does not authorize you to sell commission products, but it does not preclude you from doing so if you are appropriately licensed. It is the most popular model, because it extracts the most revenue from the client. 

You’re changing the basis of the conversation to retroactively make your statements make sense. We were never talking about dually registered RIAs. You didn’t know what fee-based means, what custody and clearing mean, or how TAMPs operate. On top of it all, you seem to think all hybrid RIAs are crooks. That’s obviously not the case. Some are, sure, but most just want to be able to offer a bigger product set. Or, sometimes an RIA might merge with another advisor (or team) that has sold VAs in the past and need to continue to do so, so the RIA has to become dually registered. Finally, the hybrid RIA model is not the most popular, it’s the fastest growing. The pure RIA market still dwarfs the hybrids.

Ghibli wrote:

In regard to the non-custodial model, just search RIA custodian. All sorts of brokers will pop up. Schwab, Wells Fargo Financial, Interactive Brokers, etc. Everybody is pushing their platform. There is another world out there besides conferences and expense accounts.

And again, this doesn’t make any sense, at least the way you describe it. Many posts ago you discussed RIAs charging an hourly fee for investment advice while the client directs the trades…at least that’s how I assume you think the process happens? In this context, your above statement doesn’t make any sense. Individuals can’t use an RIA custodian…you have to be an RIA to do that. Of course they can use IB, Scottrade, Schwab Direct, etc. but ultimately the client would be starting their own account and placing the trades themselves. 

Or, maybe you mean the RIA charges a nominal fee for the advice, sets up the account, and places the trades at the discretion of the clients. That does happen, but infrequently. Either way, if you think either of these models is going to usurp the fee-on-assets model that’s the cornerstone of the RIA world, I would love to read up on it. I ask again, please provide anything that says this model is taking business away from the traditional RIA model. That’s something of great interest to me if it’s in fact true.

Edit: Regarding my last paragraph, the Form ADV breaks out discretionary vs non-discretionary assets so I can get a good idea of how they operate right away. Non-discretionary assets are harder to pin down because it could be something like a pension plan, endowment, etc. not simply the above scenario.

Edit part 2 electric boogaloo - I’ll again ask you to give me the name of an RIA your familiar with and I’ll look them up and tell you how they do business. You may be surprised. Feel free to PM me if you don’t want to put it out here publically.

Yep, jargon is the problem. For whatever reason, you hung your hat on that I must be talking about a “RIA-only” firm using industry jargon. I hung my hat on the fact that as soon as the term “fee-based” is used, obviously there is a BD connection. Any fee-based RIA you call on is not a RIA-only. In my circles, using RIA does not imply RIA-only. RIA-only does imply fee-only. Maybe our definition of fee-only and fee-based are diffirent. I covered what they mean in my world. You seem to think my uderstanding is incorrect. You like to search. Query “fee-based vs fee-only.” And yes, I think most fee-based RIAs are not transperant enough with their clients. And a lot are crooks pretending to operate has fudiciaries. They forget they are not just brokers.

And in regard to RIA platforms marketed by the large brokers. Again, maybe we are having communication issues. The typical arrangement is the the client opens a sub-account with said broker. The advisor is granted full discretion over the account and daily or quarterly fees are withdrawn and transfered to the Advisor Master account by the custodian. The advisor has discretion, but not custody. The safest arrangement. Having custody and operating with a BD affiliation creates all sorts of concerns that most clients are not capable of policing.

Ok, an hour to go. Back to work for me.

“Our lifeline is CO2 emissions. Don’t let them decline.”

Look, I just want to say I’m pro-family and anti-drugs. 

Greenie, what hath thou wrought?

Bump.  Just wanted to see if any of the noobs here knew anything about being associated with DFA. 

And I think I just answered the other question that I asked Sweep earlier today. 

82 > 87
Simple math.

Sweep the Leg wrote:

Greenman72 wrote:

For the vast majority of individuals, you should have a four-fund max.  That is, you should be able to achieve the desired risk/return using only four funds.  The more funds/managers you start adding, the more homogenous your risk/return becomes, and it adds additional complexity with no added benefit. 

This is an interesting idea, but you can’t run a business like that. If you mocked up a portfolio with four funds in it for a prospective client and they took it to a competitor for a second opinion you’d get eviscerated. Even the advisors that like to only go with “best in breed” ideas still have at least 10 funds in an average 60/40 portfolio. And that’s considered fairly concentrated. 

If you’re thinking about how you want to run your book, you need to be aware of what the corner office guy at Merrill is doing…or the RIA down the street for that matter. And, how do you think a client is going to react to paying you a fee for setting them up in four funds and calling it a day?

Bump.  

In the past six years, I’ve learned what a TAMP is, and I’ve learned to love the TAMP.  

Vanguard is one of the strategists in the TAMP.  And they have a “ten-fund” portfolio.  But interestingly enough–it’s 99.99% the same as their famous “three fund” portfolio.  That is, they take the Total Stock Market and break it into two funds (S&P 500 and Extended Market).  Then they take the Total International and break it into two funds (International Developed and Extended Market).  And they take the Aggregate Bond and break it into several different funds.  But at the end of the day, it’s really just the Three Fund Portfolio.  

82 > 87
Simple math.