Date: Thu, 15 Apr 2004 16:43:16 CST
From: Joseph Weinstein 
Subject: Re: Assets Under Management Fee-reasonable?
Newsgroups: misc.invest.financial-plan
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	llngRkB8biovcD8c9b7E5PyXdo9col4dUYxZNah0+KKUnOZ/B5y7/g==
	=dhen

Brent D. Gardner, ChFC wrote:

 >  wrote in message
 > news:48CFFE95.346CAD5B.00ACC7AA@netscape.net...
 >
 >>My 2 cents is that in such a market 1.5% is going to be a sizeable
 >>fraction of everything you make. I would rather see you pay a
 >>CFP an hourly fee to discuss your goals and your financial state,
 >>and come up with an investment portfolio that you can trust for
 >>the long term. I would have this person concentrate on no-load
 >>funds, and low-expense index funds as a core. This way you will
 >>get to keep most of your money. Have your accounts in a low-fee
 >>brokerage.
 >>   I would also suggest going a little up the learning curve so
 >>that you become comfortable with making the occasional change yourself
 >>as your circumstances change. Please note that 85% of all the experts
 >>running mutual funds have historically been unable to equal the
 >>performance of a simple S&P500 index fund that has 0.2% annual fee.
 >>Joe Weinstein
 >
 > Hourly fee financial advice is a non-starter for most. Why? The answer is
 > exceedingly simple: Talent, like capital, flows to where it is best
 > compensated, and it stays where it is well treated.

It would be nice to see a comparison of customer gains (normalized for risk)
between the hourly-fee advise and the give-me-1.5% advise.
    My question is about what *sort* of talent is selected... My concern is 
that
it might be for generating company revenues or self-marketing, as opposed to
generating superior client gains...

 > Talent in the investment advisory business has NEVER flowed to hourly fees,
 > and probably never will. The best in the business charge fees based on
 > assets under management. Period. End of discusssion, as there is no
 > successful argument to the contrary.

It might depend on who is to be convinced. It would be practically 
impossible to
convince most herbalists of their impotency, if one were armed solely with
double-blind studies and the like.

 > Plus, there is no basis in fact to support an hourly fee arrangment as
 > superior. It simply does not exist.

Which is not to say that if there was a big enough constituency to generate
such data, that there would not be such data. However, there *is* data to show
that most mutual funds do worse than a simple SP500 index fund over the
long term, despite higher fees and higher volatility.

 > With the advent of segregated accounting programs for separate accounts, one
 > can bypass the scandal ridden mutual fund industry entirely, starting with
 > as little as $25,000, with total transparency of ALL fees, including
 > brokerage costs.

I agree. It is also possible to avoid the scandal-ridden mutual fund industry
*and* the high fees of full-service brokers and advisors, by buying the
ready-diversified broad index funds. If you buy the market, you achieve
market performance by definition, which 85% of fund-managers fail to
make over the long term, let alone the necessarily downstream cast of
fund-manager-choosers.

 > Finally, the 85% figure is incorrect. If it ever was correct, that was one
 > point in time, only. Anyone that uses one data point to support an argument
 > in this business is destined for the losing side of the litigation lottery,
 > with a guaranteed humiliation at the hands of seasoned professionals.

Can you point us to the current 5 and 10 year data? I would expect that the
advisor industry would be quick to publicize any flattering change to this 85%
failure figure.
    It is my personal opinion that until advisors will put their money 
where their
convictions are, and take their fees as a percentage of *gain* as opposed to
holdings (A well-marketed chimp can earn from the assets-under-management
format), and to moderate the high-beta-or-bust crowd, impose a shared loss
clause as well, it seems that the talent that creeps to the top of the advisor
crowd is maybe to be avoided.

"Gain from our perspective"
(whether or not there is any gain from *your* perspective...)