AG Edwards management fee

[Andrew White]

I have recently met with an AG Edwards broker. I like the firm and
want them to manage my money. The broker offered me their services at
50% off of their standard management fee structure on our assets of
less than $200K. This means a 1.125% annual fee. That fee amount in
itself is not bad I think, but this "50% off" business threw me off.
If I pushed hard, could I have gotten 60% off? 70%?

What do you think? Is there anyone else here who uses AG Edwards? What
are you paying? And do you think 1.125% is too much in general?

Thank you.

 

[dapperdobbs]

I advise people to read Ben Graham and build their own portfolios, but
the knowledge in that book is also critical to evaluating a manager's
plan, or style, as well as their performance. That said, 1.125% is
about as low an annual fee as I have seen.

 

[Dave Dodson]

If the 1.125% includes all of the management fees of the underlying
investments, then it is not a bad deal. However, if you are paying the
broker 1.125% to select mutual funds, and those funds themselves have
management fees of 1%, say, then you are paying a lot for management.

Another possibility is for you to do some reading and learn enough
about investing to select your own funds. You will see two benefits.
First, you will earn that 1.125% for yourself instead of for the
broker. Second, you will gain experience while your portfolio is
relatively small that will allow you to manage it with confidence when
it is much larger, we hope.

Dave

 

[Elle]

Spend a few weekends to come up with an asset allocation
plan, using ideas from the free online tools linked at
http://home.earthlink.net/~elle_navorski/id4.html . Refine
it over the next six months. Ask questions here. Then open
an account with Vanguard. Buy its index funds to satisfy the
plan.

Your costs will be lower; your return, higher.

Or at least experiment with the tools above before meeting
with any broker or financial planner. Knowing a little about
asset allocation can save a lot of time.

 

[BreadWithSpam]

I advise people to read Ben Graham and build their own portfolios, but
the knowledge in that book is also critical to evaluating a manager's
plan, or style, as well as their performance. That said, 1.125% is
about as low an annual fee as I have seen.

Unless the manager just pockets that 1.25% and invests the
whole portfolio into two or three mutual funds which are
themselves charging another 1-2% of assets as a management
fee. That can make it pretty expensive. It still might
not be horrible - if he chooses excellent funds and tailors
your portfolio carefully to your needs - doing such a
thing is non-trivial and there's no reason for him not to
be compensated for it - but it's also something that the
OP could probably do for himself after a few days of reading
appropriate materials and investing in well-managed no-load
mutual funds.

So, OP - what, exactly, are you going to get for that 1.25%?

 

[Don]

Another possibility is for you to do some reading and learn enough
about investing to select your own funds. You will see two benefits.
First, you will earn that 1.125% for yourself instead of for the
broker. Second, you will gain experience while your portfolio is
relatively small that will allow you to manage it with confidence when
it is much larger, we hope.

By similar logic, another possibility is to do still more reading and learn
enough to select your own stocks. Then, you will save not only the 1.125,
but also the management fees of the various funds. Of course, I realize that
people have different opinions about how much expertise would be required to
take this second step, but I do not think it is as vast as it is often made
out to be. The savings can be even greater if you select your individual
stocks among companies with dividend reinvestment plans (DRIPs).

 

[Andrew White]

Unless the manager just pockets that 1.25% and invests the
whole portfolio into two or three mutual funds which are
themselves charging another 1-2% of assets as a management
fee. That can make it pretty expensive. It still might
not be horrible - if he chooses excellent funds and tailors
your portfolio carefully to your needs - doing such a
thing is non-trivial and there's no reason for him not to
be compensated for it - but it's also something that the
OP could probably do for himself after a few days of reading
appropriate materials and investing in well-managed no-load
mutual funds.

So, OP - what, exactly, are you going to get for that 1.25%?

I see that I've left out a critical piece of information. The account
that I'm opening is going to be invested into what they call a
Cyclical Asset Allocation Portfolio Plus (CAAP Plus) consisting of
about 15 or so ETFs from sector-specific Large caps, Mid caps, Small
caps, foreign ETF and cash. AG Edward's committee reallocates the
assets between those ETFs using different % split every quarter or
more frequently depending on their view of the market and economy.

Besides the 1.125% fee there are no other fees or expenses.

As far as suggestions of alternative approaches, I appreciate them,
but going with an advisor is probably the best thing for me right now.
I've been investing and doing my own research for about 15 years. But
I can't say that I've done very well. My impulsive nature and
relatively high personal risk aversion prevents me from having a good
systematic approach to investing. Plus I've got kids and very
demanding job now, so it leaves almost no time for proper research.

Thank you.

 

[dapperdobbs]

Sounds like a "go" to me. The committee approach is a very important
aspect, in my most humble opinion: 1) there is an investment policy in
place, with pre-established parameters, 2) you are not dependent upon a
"guru" having a good hair day. The *only* mutual fund I hold is DODGX,
for reasons just cited. Back to fees, managed account structures I have
come into contact with have been one-manager jobs, usually with 500k
minimums, charging between 1%+ and 2%+ annualized, on the end of
quarter balance, and as other posters have alluded, some did include a
mutual fund allocation of between 5% and 20%. Perhaps your people are
anticipating that a) your funds will grow, b) you will be so pleased to
add more. Good omens. (Sorry if I derailed you from your original
question, but with so many posters and such different levels of
experience, I really wanted to toss in something about the importance
of evaluating the management, or as BreadWith put it, checking what you
get for that one and an eighth.)

 

[Elle]

I see that I've left out a critical piece of information.
The account
that I'm opening is going to be invested into what they
call a
Cyclical Asset Allocation Portfolio Plus (CAAP Plus)
consisting of
about 15 or so ETFs from sector-specific Large caps, Mid
caps, Small
caps, foreign ETF and cash. AG Edward's committee
reallocates the
assets between those ETFs using different % split every
quarter or
more frequently depending on their view of the market and
economy.

So they're chasing returns to some extent, and using a
strategy that is not well-explained to do so.

Besides the 1.125% fee there are no other fees or
expenses.

Each ETF has a fee called the "expense ratio" (or similar).
That costs you money as well.

As far as suggestions of alternative approaches, I
appreciate them,
but going with an advisor is probably the best thing for
me right now.

Sure. I doubt you'll lose your shirt with the CAAPP. Though
I think it's more likely you could considering some other,
easy alternatives.

For others still open minded to alternatives: It's not easy
to find info about this CAAPP at A.G. Edwards web site. That
puts me off, along with the 1.125% fee this plan charges.

For others open to something likely less expensive and as
likely to produce returns, I'd consider Vanguard's Target
Retirement Funds (among other Vanguard funds for those who
want professionals making their decisions) . For example,
Vanguard's Target Retirement 2025 fund, or VTTVX, 0.2%
"average weighted expense ratio."

But if you want to give away around $2000 ( = approx.
0.01125*$200,000, and this doesn't count the expense ratios
of the ETFs) a year to A.G. Edwards, as opposed to your
kids' future, that certainly is your prerogative. Plus, you
can change your mind anytime, right? You could do worse.
Good luck.

 

[pixel_a_ted]

Besides the 1.125% fee there are no other fees or expenses.

Does this mean that you don't pay a commission each time an ETF is
bought and sold?

 

[TB]

I see that I've left out a critical piece of information. The account
that I'm opening is going to be invested into what they call a
Cyclical Asset Allocation Portfolio Plus (CAAP Plus) consisting of
about 15 or so ETFs from sector-specific Large caps, Mid caps, Small
caps, foreign ETF and cash. AG Edward's committee reallocates the
assets between those ETFs using different % split every quarter or
more frequently depending on their view of the market and economy.

I'm not familiar with that program but a couple questions, some to ask
AGE, some for you:

1. what amount of turnover should you expect in this strategy? This is a
VERY important question if this is going to be in a taxable account. I
have seen some "rotation" strategies that generate a constant stream of
trade confirmations and a lot of short-term capital gains. That adds tax
drag that the strategy has to overcome before truly going into the black.

2. (if in taxable account) what kind of tax tracking will AGE do, what
kind of reports will you get to assist in tax preparation? If someone
does your taxes how much will their fee go up (if at all)? I've seen
some extreme examples involving many dozens of transactions over the
course of a year and a lot of extra work at tax time. If your 15 minute
TurboTax return turns into a $1200 return by a CPA you need to earn
$1200 more on your portfolio or else you're no better off.

3. "the big one": are you comfortable that this committee is going to
earn their paycheck, and justify messing with things? I.e. - has it
worked? Look, it'd be easy to come up with a static allocation to say
large, mid, small cap US stocks, foreign stocks, and cash, and let it
tick along, rebalancing say once a year or whatever - AGE could even do
this for you. If they're going to mess with things, and do "tactical
asset allocation" (shifting money among these asset classes based on
their predictions about each) or "sector rotation" (concentrating money
in what they think are the most attractive industry sectors within an
asset class) presumably it's so you'll end up with more money at the end
of the pipe. Has it worked, when done by this specific committee, and if
so for how long? Has it worked after factoring in the higher taxes that
result from shifting money around (if this is a taxable account)?

#3 is a tough question because the response is, "compared to what?" But
they should have some kind of comparison prepared for you showing why
there's some advantage to the program. Amazingly though - I have
certainly see these kinds of programs where they didn't do as well as
just sticking the money in a "boring" and static asset allocation and
forgetting about it. If you're going to be paying 112 basis points a
year to "do better" it's a fair question to ask.

-Tad

 

[Andrew White]

Does this mean that you don't pay a commission each time an ETF is
bought and sold?

Correct.

 

[brian.s.saroken]

This is great, very funny. Instead of earning 12% or so through the
incredible market we have witnessed, you probably earned 3% or less.
Now you are worried about 1% which gives you a pretty strong service.
If you trust this person DO IT. Picking a financial plan based on the
fee is kind of like picking a doctor based on height. You are going to
get what you pay for. And if this person is not making money from
working with you, don't use him or her because there is no reason why
he/she should give you attention.
So interview this person and make sure you respect his/her opinion,
character and firm (not a bad firm) and then let them do what they do
best.
Good luck.

 

[Rich Carreiro]

You are going to get what you pay for.

That's far, far, far from true in the financial services world.

Higher fees doesn't remotely mean one necessarily receives better
advice or services.

 

[BreadWithSpam]

I see that I've left out a critical piece of information. The account
that I'm opening is going to be invested into what they call a
Cyclical Asset Allocation Portfolio Plus (CAAP Plus) consisting of
about 15 or so ETFs from sector-specific Large caps, Mid caps, Small

Fair enough. Note that you are paying both that 1.125%
and you are paying expense ratios on those ETFs. ETFs
usually have very low expense ratios - comparable to the
best index funds. Overall, you are going to end up
paying something similar to the average management fee
of an actively managed fund. If you are getting a well
managed customized portfolio for that, that might be a
great deal.

Bear in mind that you may do just as well or better
by simply buying a "lifecycle" or "lifestyle" fund -
several of the major groups have them and they, too,
allocate your funds into a set of indices and rebalance
as necessary. Sine you are simply going to end up with
the allocation that the CAAP+ portfolio gets you, if
there's a "lifecycle" fund that has a similarly appropriate
portfolio, you may do better by saving on expenses.
You may not, and, of course, there's the question of how
you ended up selecting that asset allocation in the first
place. If the AG Edwards guys have sat down with you
to figure out that CAAP+ is the best for your situation -
and they are going to keep having those conversations
with you and continually re-evaluate that, you may be
getting a decent value for your money. But if they are
just sticking you into that program and letting it sit,
you aren't getting anyhing more than you'd get from one
of those funds, but for several times the price.

 

[Elle]

That's far, far, far from true in the financial services
world.

Higher fees doesn't remotely mean one necessarily receives
better
advice or services.

What Rich said.

As one concrete example, mutual funds with higher expense
ratios have not been demonstrated to perform better than
funds with lower expense ratios, on average. On the
contrary, funds with lower expense ratios tend to have
better performance. One explanation for this is chasing
returns is a strategy based on past data that cannot predict
the future.

Both financial advisors and car salespeople will happily
take money one blithely throws at them, and there will be no
difference in portfolio returns or the quality of the car or
repair and maintenance service subsequently.

 

[Tad Borek]

This is great, very funny.

"Funny" is how you didn't address any of the three questions I posed.
With SSB pushing a lot of SMAs these days - don't you get these kinds of
questions from prospects? Have you seen the 1099s (and lousy
performance) coming out of some of these sector-rotation strategies? Not
AGE specifically, I don't know about theirs, but I've seen a couple of
the wirehouse programs that were substantially worse than "just leaving
it alone."

-Tad

 

[tytab99]

I don't support these management fees one bit. Most of the things I
learned have not been rocket science. I have done around 27% a year,
after fees. If you are serious about quitting work in the traditional
sense; a zeal would lead you in the right direction. There are a few
things that could help you learn your risk. Check the sites. If you
are disciplined to come here to the internet, then I think you are
disciplined enough to do it yourself. Society gives insurance people,
and so-called professionals way too much power, but that is probably
for a reason. The last book I read said that if you find 1 out of
1000, who knows the truth, and you can trust in finance; you are lucky.
By the age of 30, you should have met roughly 9000 people in life; so
go figure. You would be better off teaching yourself, unless you hate
reading about it.

 

[Will Trice]

That's far, far, far from true in the financial services world.

Higher fees doesn't remotely mean one necessarily receives better
advice or services.

New research to back this up (as least as far as brokers selling mutual
funds are concerned):

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=616981

-Will