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Old 06-21-2017, 12:05 PM   #71
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DOL Unintended Consequences? Re: DOL Unintended Consequences?
Originally Posted by DHK View Post
But now you're putting your value in the RETURNS you can achieve. There's a difference between chasing returns and managing portfolios on a risk-adjusted basis.
So, if the allocation says put X into US large cap, would you not want to be in the fund that is performs well? Or are we risk adjusting the risk adjustment?

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Old 06-21-2017, 12:17 PM   #72
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DOL Unintended Consequences? Re: DOL Unintended Consequences?
It's about the manager and management style, not the particular fund.

You're applying Series 6 thinking to a Series 65 advisor relationship.

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Ideally, you do a risk tolerance assessment, and you tell the institutional money manager to invest in a tactical or strategic method, on a "3" risk tolerance (for example)... and let them do their thing.

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Then you "manage the managers" as you compare their performance to others during your review process.

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In short, *I* wouldn't be making the tactical decision of asset allocation, only asset allocation among different management firms and their investment style.

If I was doing a mutual fund allocation with a Series 6, I would create my own models (or other 'fund of funds') and pick those and have them rebalance quarterly automatically.

With asset management with a Series 65, you let the management firms decide the allocation within a specific risk tolerance.

Two sides of the same coin, but one is based purely on MY judgment (series 6) while the other is based on an entire firm's judgment (series 65).

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This book would probably answer a lot of your questions. It was written by the founders of AssetMark and geared towards consumers. I read the 1st edition, but here's the link for the 2nd edition:

https://www.amazon.com/Art-Investing.../dp/B00IHCN5D2

Here's the 1st edition book:
https://www.amazon.com/Art-Investing...lio+Management
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Old 06-21-2017, 12:18 PM   #73
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DOL Unintended Consequences? Re: DOL Unintended Consequences?
Originally Posted by DHK View Post
It's about the manager and management style, not the particular fund.

You're applying Series 6 thinking to a Series 65 advisor relationship.

----------

Ideally, you do a risk tolerance assessment, and you tell the institutional money manager to invest in a tactical or strategic method, on a "3" risk tolerance (for example)... and let them do their thing.

----------

Then you "manage the managers" as you compare their performance to others during your review process.
No, I'm applying a consumer's thought process to it all. While I respect you, nothing you have said has increased my understand or respect of managed money. If anything, it has done the opposite.

At this point, I am going to step away from this part of the thread.

I will return to my two main points about this though.

1. This will only further drive advisors away from clients with less assets. Which is ultimately bad for the industry. If someone can grow and accumulate to X without an advisor, why do they suddenly need one to make their investments? Maybe they do, but investors won't be thinking that. They will be thinking, "I got this far without anyone, why do I need someone now?"

2. I don't believe this was unforeseen by the powers that be. They have been down this road before, whatever you may think of regulators, I do not believe they are stupid enough not to have anticipated this.

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Old 06-21-2017, 03:22 PM   #74
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DOL Unintended Consequences?
Originally Posted by VolAgent View Post
asking as an investor, what am I getting for my management fee, say 1%?

...............

It appears that many advisors are charging 1% and basically giving a computer printout for asset allocation, sending out some rebranded newsletters and maybe making some phone calls. If that is all they are really doing, then I question if they are worth 1%.

Originally Posted by pfg1 View Post
So my understanding is the avg fees/costs for a employer based 401k plan is around 2%, sometimes more... yet you don't really hear people complain about that. They gladly contribute and hope it grows, and often praise how great it is when we're in a bull market.

For about a decade now, the 401k world has dealt with being Fiduciaries (in some capacity.... there are different types and levels of being a Fiduciary). And it most certainly has caused changes over the long term.

The exact same thing is happening right now to the IRA world with the recent DOL Ruling.



Both now and in the past, people have complained about 401k Fees. There have been lawsuits over it... and the Plaintiffs won. (as they should have in many cases)



For years now, Funds within a 401k Plan have been picked by computers. Then the Advisor recommends funds from the computer generated lineup of "approved" funds.

This begs the question.... what value does the advisor bring if all the funds given by the computer are appropriate. Why not have the Employer just choose a certain amount from each Asset Class???

And as a FIDUCIARY, how can the Employer justify allowing the Employees in the Plan pay a 1% Fee for this "service"?

And as a FIDUCIARY, how can the Adviser justify charging 1% for this "service"?



Long story short, Employer Sentiment, Employee Sentiment, Tech Savy Competition, and of course US Courts of Law; all decided that there was no justification for those levels of comp based on services rendered.

Thats why on average, 401k Advisers charge around 45bps.
The average expense ratio on a Fund within a 401k plan is about 75bps. And that figure is dropping every year as old plans find new less expensive platoforms to use. But it also has a high chance of being a 4 or 5 star fund that has actually beaten its benchmark in many years.


The ones who make a living off of 401k plans are not just allocation experts. They are experts in ERISA Law, Tax Law, Retirement Income Planning, Behavioral Finance, etc.

Here is the first paragraph of a webinar invite I received today from a 401k vendor:
As financial professionals, our world is in a period of revolution. Clients have historically valued your input on activities such as asset allocation and fund selection. But as these tasks can now be outsourced to technology, your clients priorities for your services are shifting. Concepts such as financial planning, behavior management and tax optimization are more valuable than ever before.
This is the service model the institutional side has had to take on. Its coming soon the the RIA/IAR/BD near you

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Originally Posted by DHK View Post
It's not about beating a benchmark. It's about managing portfolios on a risk-adjusted basis.
Thats a great sales pitch, and true to an extent. But a court of law cares about which funds are being used and if they are meeting their respective benchmarks.

Portfolio Allocation is about Risk Managment.

Fund Selection is about exceeding the Benchmark.

Owning a certain % of Large Cap Funds is a measure of risk. Owning a certain % of Small Cap Funds is a measure of risk. etc. etc. All of that put together (your Portfolios Allocation) is the measure of your total risk level.

But within that Allocation, those funds should meet or exceed the Benchmark most years, or be switched for ones that have. If not, then you have failed in your Fiduciary Duty to the Client. This is well established legal precedent.
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Last edited by scagnt83; 06-21-2017 at 04:15 PM.
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Old 06-21-2017, 04:35 PM   #75
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DOL Unintended Consequences? Re: DOL Unintended Consequences?
Originally Posted by scagnt83 View Post
Thats a great sales pitch, and true to an extent. But a court of law cares about which funds are being used and if they are meeting their respective benchmarks.

Portfolio Allocation is about Risk Managment.

Fund Selection is about exceeding the Benchmark.

Owning a certain % of Large Cap Funds is a measure of risk. Owning a certain % of Small Cap Funds is a measure of risk. etc. etc. All of that put together (your Portfolios Allocation) is the measure of your total risk level.

But within that Allocation, those funds should meet or exceed the Benchmark most years, or be switched for ones that have. If not, then you have failed in your Fiduciary Duty to the Client. This is well established legal precedent.
If the market went down -30% and my managed portfolio did only -5%, I would have beaten the benchmark by any measurable means.

From that point, if the 1st portfolio gained 30%, and the 2nd one only gained 10%... I will STILL have beaten the benchmark by any measurable means.

Portfolio 1:
Year 1: $100,000 x -30% ($30k) = $70,000
Year 2: $70,000 x 30% ($21,000) = $91,000

Portfolio 2:
Year 1: $100,000 x -5% ($5k) = $95,000
Year 2: $95,000 x 10% ($9.5k) = $104,500

Which portfolio gained and preserved the most money? Portfolio 2.

But don't tell me that if I don't meet Portfolio 1's Year 2 results with portfolio 2 that I would be failing to meet my fiduciary duty. Why? Because to get that result, you would've had to experience portfolio 1's negative result the prior year.

You have to figure out that it's about wealth building and preservation, not annual %'s every year. I'd rather help clients avoid the losses and have decent gains... than chase returns. That's what good tactical asset allocation would do and that's why I would prefer it... if I were with an RIA.
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Old 06-21-2017, 04:42 PM   #76
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DOL Unintended Consequences? Re: DOL Unintended Consequences?
Originally Posted by DHK View Post
If the market went down -30% and my managed portfolio did only -5%, I would have beaten the benchmark by any measurable means.

From that point, if the 1st portfolio gained 30%, and the 2nd one only gained 10%... I will STILL have beaten the benchmark by any measurable means.

Portfolio 1:
Year 1: $100,000 x -30% ($30k) = $70,000
Year 2: $70,000 x 30% ($21,000) = $91,000

Portfolio 2:
Year 1: $100,000 x -5% ($5k) = $95,000
Year 2: $95,000 x 10% ($9k) = $104,000

Which portfolio gained and preserved the most money? Portfolio 2.

But don't tell me that if I don't meet Portfolio 1's Year 2 results with portfolio 2 that I would be failing to meet my fiduciary duty. Why? Because to get that result, you would've had to experience portfolio 1's negative result the prior year.

You have to figure out that it's about wealth building and preservation, not annual %'s every year. I'd rather help clients avoid the losses and have decent gains... than chase returns. That's what good tactical asset allocation would do and that's why I would prefer it... if I were with an RIA.
Even though I said I would stay away...

That is not how I measure beating the benchmark. Unfortunately the chart you showed for FINBAR? did not have it. The one for W.E. Donoghue did. The chart where if you started with a fixed investment on X date, what is the investment worth on Y date.

Just as you pointed out, sequence of returns matters a lot. Just like with indexed annuities, if you can avoid the down years, you don't have to do as well on the up years to be ahead.

With the fund from W.E. Donoghue, I believe they were even beating the S&P year after year, but more importantly, the starting investment was worth more than if it was in the S&P. And this was even after going through '07-'09. It is a total return fund and measured against the S&P Total Return.

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Old 06-21-2017, 05:03 PM   #77
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DOL Unintended Consequences?
Originally Posted by DHK View Post
If the market went down -30% and my managed portfolio did only -5%, I would have beaten the benchmark by any measurable means.

From that point, if the 1st portfolio gained 30%, and the 2nd one only gained 10%... I will STILL have beaten the benchmark by any measurable means.

Portfolio 1:
Year 1: $100,000 x -30% ($30k) = $70,000
Year 2: $70,000 x 30% ($21,000) = $91,000

Portfolio 2:
Year 1: $100,000 x -5% ($5k) = $95,000
Year 2: $95,000 x 10% ($9.5k) = $104,500

Which portfolio gained and preserved the most money? Portfolio 2.

But don't tell me that if I don't meet Portfolio 1's Year 2 results with portfolio 2 that I would be failing to meet my fiduciary duty. Why? Because to get that result, you would've had to experience portfolio 1's negative result the prior year.

You have to figure out that it's about wealth building and preservation, not annual %'s every year. I'd rather help clients avoid the losses and have decent gains... than chase returns. That's what good tactical asset allocation would do and that's why I would prefer it... if I were with an RIA.

Its not about a single year or two years. And unless you are invested in a single fund, there is no single benchmark for an entire portfolio.

To know if you were exceeding the benchmark, you would need to examine the portfolio on an asset class by asset class, fund by fund basis.

I agree that from an overhead view, its about risk and meeting an expected return over the long term. But as an Adviser, if your clients funds are not at minimum meeting their benchmarks (they should be exceeded them if actively managed) on a consistent basis over time (not just over 2 years or a major market event) then you have a Fiduciary Duty to change those funds. That is case law and something that you would be bound by law to do... if you were with an RIA.

If all of my Small Caps are lagging the 600 for 5 years straight, telling me "its ok because your overall return is were it needs to be" is not the answer I want or need as your client. You have caused a Lost Opportunity Cost by your negligence.

Again, this is not my opinion. This is ERISA case law. At that point I would be ahead of where I need to be if you had done your job. If you think the funds that did hit the benchmark are too risky, then I should not have been in that asset class in the first place!

Your answer is to trust a third party manager to make sure that the underlying funds are exceeding their benchmark, and allocated in a way that is appropriate for your client's objectives.

Aside from the fact that you can get the same type of risk control and dynamic (tactical) allocation for 1/3 of the price. There is also the issue of the recommendation itself. As a Fiduciary, you have a duty to review what that Fund Manager is doing and what algorithms they are using for the tactical allocation. And unless that Fund Manager is acting as a 3(38) Fiduciary, then YOU take on ALL THE RISK of their management. So if those new fangled algorithms dont work out like they would have during 2008 (since that is the scare tactic they all use to get business) then you are on the hook for the mess up. And I only know of 1 or 2 that act as a 3(38) on IRA accounts.


And as I said before, many of the Tactical models that were around pre 08' did not exceed the benchmark from a total return perspective over the 5 year period after. Meaning they lagged despite not losing as much. So all of the hypotheticals about "which would you rather have x% loss or xx% loss" have not worked out that way so far in real life for the tactical models.
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Last edited by scagnt83; 06-21-2017 at 10:16 PM.
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Old 06-22-2017, 08:56 AM   #78
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DOL Unintended Consequences? Re: DOL Unintended Consequences?
Earlier there was a discussion about a 50k account. It all depends on circumstances. The new law would make it more difficult for RIA's to manage such an account for a 88 year old. Too much risk. However, 40 year old surgeon would have no difficulty finding someone. You have to look at the future cash flows and profitability.

I take on 20 to 30 years olds because they always need term life insurance and sometimes disability insurance. Scagnt83 says, asset allocation is priced as a commodity. 100% agree. 30 year old 50K portfolio, lets says pays me $250 a year in fees, if I also sell $100 a month in life insurance, I would make about $2500 in in the first 5 years. It would also cost me about 15 hours of my time. I would guess 12 hours of mine and 3 hours of my admin. That comes out to over $150 an hour for my time.

Now the math won't work for a 88 year old who has no friends no relatives and comes to my business through yellow pages. I would have too much risk in taking on someone like that and frankly not enough money in it for me.
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Old 06-22-2017, 12:38 PM   #79
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DOL Unintended Consequences? Re: DOL Unintended Consequences?
Originally Posted by walthamny View Post
Earlier there was a discussion about a 50k account. It all depends on circumstances. The new law would make it more difficult for RIA's to manage such an account for a 88 year old. Too much risk. However, 40 year old surgeon would have no difficulty finding someone. You have to look at the future cash flows and profitability.

I take on 20 to 30 years olds because they always need term life insurance and sometimes disability insurance. Scagnt83 says, asset allocation is priced as a commodity. 100% agree. 30 year old 50K portfolio, lets says pays me $250 a year in fees, if I also sell $100 a month in life insurance, I would make about $2500 in in the first 5 years. It would also cost me about 15 hours of my time. I would guess 12 hours of mine and 3 hours of my admin. That comes out to over $150 an hour for my time.

Now the math won't work for a 88 year old who has no friends no relatives and comes to my business through yellow pages. I would have too much risk in taking on someone like that and frankly not enough money in it for me.
As to your basic premise, I am in complete agreement. Certain people will be left to their own devices. I'm not sure I agree with who you have selected, but then I'm not working that market. I also firmly believe regulators knew this would happen, although I suspect who they think will be ignored is completely different that what the market eventually picks.

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Old 06-22-2017, 10:43 PM   #80
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DOL Unintended Consequences? Re: DOL Unintended Consequences?
If I am paying a premium for asset allocation, I want returns that exceed the benchmark for that sector. If they dont, they why not just buy the index funds myself or use a roboadvisor? I can even get Volatility Control ETFs if its risk is my #1 concern... if a 5% loss is all I can stand... then find a 5% Risk Control ETF and save thousands per year.

There is something I just dont like about an "Adviser" putting clients in Index Funds. Stock Picking is a lost art on a Retail level. FAANG stocks have been the only thing propping up the S&P 500.... its been that way for at least 2 years now... and the return of FAANG has killed the overall index. If an Advisor can construct a FAANG type of portfolio on a consistent basis, Id pay them 2%-3% all day long.
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