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iShares vs. Vanguard

To any other hacksawed retail salesmen out there…..

You might recall that I just pulled the trigger, and now I’m an advisor for HD Vest.  I’m planning on charging an AUM fee, and filling the client portfolios with ETFs. 

One thing I wonder–what’s the difference between Vanguard ETFs and the equivalent iShares ETFs?  I know Vanguard has a cheaper ER, but is there any other difference? 

(FYI - I have a deep hatred of Vanguard, simply because its followers are nothing more than loudmouth brainwashed idiots, much like Texas A&M Aggies.  I respect the company, though.) 

82 > 87
Simple math.

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Difference will be marginal.  Pick the one that gives you the best soft dollaz. 

Maybe you can become our residential advisor.  I know I could use a copilot on my portfolio as I just don’t care to watch it as vigilantly as I used to.  

The only difference, other than expense ratio (which should be almost the same anyway) is liquidity. However, for retail investor size, this might not always matter.

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Buy index funds, not ETFs. ETFs are going to cause major problems one day. 

I would suggest meeting with the wholesalers in your area and ask them to come and review the differences with you. (Its too much to cover in one thread here). The wholesalers are going to be an important contact in helping you on the AM of your practice.

Our office recently had them in to meet and there was a pretty big difference in the quality of the wholesalers. The iShares rep (female) was not up to speed. (and no - not very hot either). The Vanguard wholesaler (male) was really good and provided some very useful information.

The overall product shelf is similar, with cost being one of the factors. We are lending toward Vanguard.

Are you Fee-Based? Are you charging to prep tax returns seperately? Are you planning on getting insurance licensed?

^Good luck getting a wholesaler from BlackRock (iShares) or Vanguard to sit down with an advisor with no AUM. (Unless your partner has significant assets already, Greenie.)

Most wholesalers make 10 bps or more on purchases. Vanguard and iShares can’t pay that to their salespeople considering their expense ratio isn’t much higher than that to begin with. So, those wholesalers whale hunt. They’re looking for the $2B RIA that’s looking to move to all passive. 

That being said, Greenie can always call in to either firm and talk to an internal wholesaler. That’d be my first move.

If you enjoy getting telemarketer phone calls you’ll really love wholesalers.  The key is to ask them difficult questions so they forward you to someone that actually knows about the product and then you can deal with that person directly.  Calling them used car salesman is accurate for 95% of these people.  The other 5% are great, usually come from the industry and used to be a trader/analyst/etc.

Vanguard trumps iShares for all the generic stuff since it essentially just comes down to cost.

*I agree with the index commment.  Use VFINX, not VOO…for example.

BlackRock has a risk analytics department that is designed to analyze advisor model portfolios and make suggestions/recommendations.  If you get a hold of an iShares wholesaler, send them your ‘model’ portfolio that is loaded with vanguard funds.  Let their analytics department do the deep dive into the data and see if they can’t beat the vanguard portfolio.

They’ll do the basic return analysis but they’ll also show you various exposures within credit markets, performance during past rising rate environments, etc.  I think they’ll even ask you what issues you’re most concerned with and try to direct the analysis to those points.  I want to say the report is about 25 pages.

We use both.  

We use mostly vanilla ETFs, and I haven’t noticed a huge difference in liquidity, tracking error, etc.  Both pretty good.  From my experience, ishares likes to party.  They throw down some serious cash down on dinners on a regular basis and sometimes send BBQ to the office on random days.  Vanguard not so much.

One recent concern is that Vanguard has created their own indexes, so there’s a learning curve there.  ishares seems to stick to the majors.

Support staff from both has been good. I’ve often requested some random historical data from both and they’ve come through quickly.  WIth that said, we have around $4 billion in ETF assets, so maybe that’s why.

Huskie87 wrote:

If you enjoy getting telemarketer phone calls you’ll really love wholesalers.  The key is to ask them difficult questions so they forward you to someone that actually knows about the product and then you can deal with that person directly.  Calling them used car salesman is accurate for 95% of these people.  The other 5% are great, usually come from the industry and used to be a trader/analyst/etc.

That’s not at all accurate. Sure, there are plenty of wholesalers that still prefer to wine and dine (and/or golf) instead of talking about product, but their numbers are dwindling. 

Put another way, if you believe people make what they’re worth, being a wholesaler makes you much more valuable than any analyst, just about every advisor, and many portfolio managers. That’s a lot of resources dedicated to glorified telemarketers, no?

Edit: ^Yes, iShares does like to party. They even let guys like me (competitors) in every now and then. Probably just to show off. Still, free booze is free booze.

STL,

I’m not sure how it works in the U.S. but both wholesalers came into our office with absolutely no idea how much AUM we have with either firm; they could only break it down by actual dealer/ firm.

I would suggest that Greenman due his homework on which firm he wants to use as part of his investment strategy and use it for all clients and then customize based on risk tolerance, liquidity etc. So its all Vangaurd, or all iShares.

Huskie made some good points above.

Sweep the Leg wrote:

Buy index funds, not ETFs. ETFs are going to cause major problems one day. 

Could you elaborate on this some more?  Not questioning you, but am genuinely curious.

@Mike79 - It’s pretty hard to get good wholesaler representation from the huge asset managers (PIMCO and American Funds are notoriously bad at seeing their clients) and even harder to get seen by the guys that get paid lower bps. Most of the time (here in the States anyways) the Internals prospect and use various resources to identify the top advisors in their territory. If you’re an RIA in the US, your business is pretty transparent since you put it all down on your Form ADV. Companies like Discovery Database collect all this info and make it easy to search and filter for RIAs that meet your profile. For non-RIAs (say a regular Merrill advisor) it’s a bit trickier but there’s still Albridge and Market Metrics (among others) that can help you paint a picture of the advisor’s business before you ever pick up the phone (or meet with him/her). (We also get information on advisors from their own home office. It depends on what level of partner we are, but generally at the highest level of partnership {i.e. we pay them a ton of money every year} they give us some great profiling data.)

I have no idea how it works in Canada, if wholesalers have the same or similar resources available to them. If not, then I suppose it makes sense you’d see a lot more of them as they’d need to qualify you in person (or through a good phone conversation).

@BValGuy - It would take a very detailed post to describe my thoughts on the ETF market and I just don’t have it in me today. It basically boils down to the impact ETFs have had (and continue to have) on the markets from a trading perspective. There are more than a few ways they could cause some serious damage. I’ll revisit this when my brain is willing to do more than make penis jokes.

cmon STL edumacate us, also interested

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Timely article about the PIMCO Total Return Bond ETF:

http://www.marketwatch.com/story/pimco-warned-sec-may-sue-over-total-ret...

That’s not exactly my gripe with ETFs, but it’s related.

Google ETF bond liquidity for a few reasons why ETFs are criticized.  

FYI - I live about 300 miles from civilzation.  Unless I’m doing an eight-figure sale, no wholesaler is coming out here. 

That means it’s probably going to be up to me to decide what to put clients in.  And right now, iShares is in the lead.  If it weren’t for my dire hatred of all things Vanguard, they would be second. 

@Mike 79 - I have zero investment clients right now, but I would like to steer them toward the fee-based platform.  Yes, I plan to get insurance licensed.  (I have a seven year-old fine that I have to pay first, since I never did my CE when I left the industry.)  Yes, I plan to charge separately for tax prep.  Why do you ask?

82 > 87
Simple math.

Depending on the asset class they could use different indexes, which can sometimes make a pretty big difference.

I like checking ETF.com and looking at their write-ups and E, T, and F ratings.

I’m an Advisor using Fee-Based charging a percentage of AUM as the business model comp. We offer tax prep as well and I’m also insurance licensed (so were full service). I would suggest that you call Vanguard or go on their website and get a copy of the Advisor Alpha toolkit - its a resource you may find helpful in defining your service offering and value to clients (this is important).

^What b-d or RIA are you using?  It seems like Vanguard would be fairly hostile to advisors. 

82 > 87
Simple math.

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.

82 > 87
Simple math.

Greenman72 wrote:

^What b-d or RIA are you using?  It seems like Vanguard would be fairly hostile to advisors. 

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.  

Sweep the Leg wrote:

Timely article about the PIMCO Total Return Bond ETF:

http://www.marketwatch.com/story/pimco-warned-sec-may-sue-over-total-ret...

That’s not exactly my gripe with ETFs, but it’s related.

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.)

82 > 87
Simple math.

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:

- Goals and Planning Summary 

 - Investment Management

 - Cash Flow / retiremnet planning

 - Insurance needs analysis / planning

 - Tax planning and prep (charged seperatly)

 - Estate planning

Investment Management Strategy 15bps

- Risk profile (IPS)

- Asset allocation

- Portfolio Review

- 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. 

82 > 87
Simple math.

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.