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elliot

403(b) Vendor Reps

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Guest Sierra

Just for fun....

 

Is somebody here willing to run a cost comparison on 2 scenarios:

 

1) Susie teacher invests $100 per month in the no load Vanguard Wellington Fund (Morningstar Balanced Fund Category) for 10 years paying an additional advisory fee of $100 per year to her fee only advisor for her annual review.

 

2) Susie teacher invests $100 per month in the load fund American Balanced (Morningstar Balanced Fund Category) paying the standard load of 5.75% for the 10 year period but paying no advisory fee of $100 per year to her advisor for her annual review since he/she is compensated by the sales charge.

 

I know what the answers are. I wonder if anyone here has the courage to find out for themselves and then reveal the answers here for all to see.

 

 

TR: Please define "annual review" for us.

 

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Guest Sierra

A review that takes place once a year.

 

What does the review include? What is its substance? Is a written report issued by the RIA?

 

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Guest Sierra

Elliot: I know you are in the gathering of information stage. So please review what the teachers union in Wisconsin has done. Here is the link: http://www.weatrust.com/wea/weamain.nsf/vw_pb_d/InvChoices. After reviewing it I trust you will agree with me that you do not need a city of 8+ million in order to do right by your employees. Why not find out why the teachers' union in the state you intend to do business in has not done the same thing as Wisconsin? Please get back to us with your findings.

 

Joel

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Ap,

You are partly right and partly wrong and you make my point. First of all, the sales charge goes down as the client reaches breakpoints in their investment, typically at the $25k and 100k levels and beyond. Secondly, a client might increase their contribution but we don't know at what rate and the amounts that young teachers put in are not typically in the $5000 range. I typically see people putting in $1000-3000 annually.

My point is this: The cost differential in these scenarios is not that different until someone has substantial sums accumulated in these programs. That is the ISSUE. It's fine for people here to suggest that advisors should only offer no load mutual funds to teachers on a fee basis. The problem is that the teachers don't want to invest that way and it isn't really saving them that much money(it might cost them more). Plus, if the industry and advisors could make money doing it that way, they would. They can't and therefore, they won't. I think it is interesting that some advisors who post here that are sympathetic to this site don't really do business this way at all. They either do it the way it is now or they don't take on small fry clients.

 

Now, the rest of you go ahead and call me unethical, immoral, a cheat, a scumbag, a shark and all the other words you want to throw at me for telling the truth. I guess it's ok if it makes you feel better. It just won't change anything.

 

Oh, heck, I won't call you any of those things, but I will provide an alternative to the "Two Susies:"

 

Susie #3 does some research on her own and determines that she is perfectly capable of managing things herself. She consults the following site to develop her investment policy statement:

 

http://news.morningstar.com/article/articl...p;t1=1168990492

 

She then selects no load index funds that are appropriate for her IPS, rebalancing them at the end of each year.

 

I think that Susie will be just fine, thank you.

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Guest TR1982

Nice play, AP. There's only one problem. 99% of the time Susie 3 won't have that choice. So what's a Susie to do? Hm.......

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Nice play, AP. There's only one problem. 99% of the time Susie 3 won't have that choice. So what's a Susie to do? Hm.......

 

Well, not really 99% of the time. I've looked over the 403b compare site and have been surprised at how many CA districts have at least one no load family available. The following districts have at least one provider such as Vanguard, Fidelity, T. Rowe Price, or TIAA-CREF:

 

LA Unified

LA County Office of Education (through which many districts in the county contract)

San Diego Unified

San Francisco Unified

Oakland Unified

 

These are the largest districts in the largest state. Fortunately, there is a decent chance -- way, way more than 1% -- that Susie #3 is going to have a decent choice of no load funds.

 

Gotcha, TR!

 

 

 

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Guest TR1982

Don't think so, AP. You still got 49 states and their thousands of school districts! Good try, though.

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Elliot,

You asked if I thought all advisers were useless? No, I have the highest respect for fee only advisers. Advisers who charge commissions and receive money from 12b fees on an on going basis are too expensive. There is too much risk in the market for more expenses. Donald Trump does not invest in the stock market because of the expenses. I think he knows about indexes but he has his empire so why should he change.

 

By what you say about advisers adding value by trying to beat the benchmarks makes me think you are still in business school. Why don't you read the books that we have read and recommend over and over again. Wall Street wants you to think like that and I am afraid that you swallowed the hook and can't spit it out.

 

If you think my mind is set on costs, Wall Street mind is set on turning your portfolio and trading like there is no tomorrow. Perhaps you do not day trade but your analysis and justification, in other words your responses to what we say here by saying that the averages can be beat is conceptually the same as day trading. Its all about costs. Wall Street is hypersensitive about costs. Did you notice that the average bonuses paid to the wall street pros was $125,000! So why bash me when I want that money to go in my account and not going to buying some Wall Street trader/analyist another new Lamborghini. Give me a break!

 

Good investing is boring. I am just along for the ride. I invest in the broad domestic, international, REITS and bond indexes. I have one low cost managed fund. So if the market goes up my investments go up and if all of my asset classes go down so does my portfolio. But in a diversifed portfolio, after many years, I will make money because I have controlled costs and I was diversified. Its pretty simple.

 

Just forget for a moment that most of us are teachers who know much more about investing than most advisers with all of your time, resources and support. Just think about the ideas. You continue to reject these ideas and some day you will regret that you apparently had not learned a thing from this discussion from all points of view. What stuns me is that you have your mind made up so quickly and you are the one who asked for good experiences. You did not get what you expected and that should be a revelation to you about this stinken system we call the 403b that needs reform.

Steve

 

 

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Guest Sierra

Elliot: How would you earn a living in the investment world if there was no IRC section 403(b)?

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First, someone made a comment about taking other reps' clients, and that this is a bad thing. Basically anyone in some sort of external sales is out to steal clients and market share. This isn't sleazy. Toyota has been doing it to GM for almost 30 years. I don't think the company is sleazy though. They found a way to have a valid reason for others to switch over. So perhaps steal is too strong a word.

 

I'm not sure how I would enter the field if the 403(b) didn't exist. I looked at other firms. Some I didn't mesh well with, others didn't want me. The ones I didn't like were going to have short-term asset management goals. This would mean simply trying to get money under management, in any way necessary. Do right by clients is difficult enough. Besides, the assets I would need would require me to only go after larger net worth clients, and I just didn't want that.

 

Steve- This directly for you. I have learned a lot. I've been a self-guided investor for a number of years, and am not fresh out of business school. I have not once disputed that costs play a role into returns. I have narrowed that to ongoing future costs, rather than potential one-time upfront transaction costs. I also did state that there is largely a place for index funds in a portfolio. But I also believe, and you are free to disagree, that there is a place for actively managed funds. This doesn't mean throw the expenses out the window and not to care. It means be prudent, look for a manager with an investment philosophy you like, and where there are relatively low costs. A portion of your portfolio can be in active managed funds. They may, in some years, under perform the market. But a solid manager shouldn't miss by much. However, that's not why you invest in it. You invest in those funds because of the thinking and real world events reaction they can bring. There are good managers who will earn their fee. You can feel free to disagree, but don't say I'm ignoring your point, and certainly don't say I'm rejecting your ideas. I'm freely acknowledging them, and adding that your point, in my opinion, cannot exist in a vacuum. Indexes are not the be all, end all, of investing. Oh, and I also believe portfolio turnover should be an element of any fund screener. I have not bitten any hook from Wall Street. If I had, why would I want to help people who don't yet have much money to invest? The $165,000 income won't be for years. I'm going to come close to starving for the next 5 years, which is why I'm questioning entering the field.

 

On a different note, those bonuses aren't for mutual fund managers. They are for investment bankers, M&A guys, and other types of advisors. Not those, for the most part, working on the retail side.

 

Oh, and of course Trump doesn't invest in equities. He's completely in real estate. But I bet the Trump Organization offers a 401(k) and employees buy into the markets through it. Unless, of course, he lets them share in his fortunes.

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Guest Sierra

Just for fun....

 

Is somebody here willing to run a cost comparison on 2 scenarios:

 

1) Susie teacher invests $100 per month in the no load Vanguard Wellington Fund (Morningstar Balanced Fund Category) for 10 years paying an additional advisory fee of $100 per year to her fee only advisor for her annual review.

 

2) Susie teacher invests $100 per month in the load fund American Balanced (Morningstar Balanced Fund Category) paying the standard load of 5.75% for the 10 year period but paying no advisory fee of $100 per year to her advisor for her annual review since he/she is compensated by the sales charge.

 

I know what the answers are. I wonder if anyone here has the courage to find out for themselves and then reveal the answers here for all to see.

 

 

The game is based on a falsehood. While it is true the 5.75 percent commission is standard the annual review is assumed to be standard. How many of you paying a load have received your annual review for 2006? Are you expecting it? Is it done automatically? Do you have to request it? What does it include? "Annual reviews" ...just part of the make-them-feel-good salestalk to get you to buy a loaded product.

 

Peace and hope,

Joel

 

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