Morgan Stanley question and advice for friend

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Morgan Stanley question and advice for friend

Postby SGM » Fri Feb 01, 2013 1:16 pm

I have quite a few conversations with a retired federal empIoyee that revolve around his investments, conversations usually instigated by my friend. He uses Morgan Stanley and the suggestion was made by a M-S employee to change from Putnam funds to a Black Rock fund. I explained to him that the Black Rock funds in his federal retirement program had extremely low ERs but not so for personal accounts. The average for personal accounts is an ER of 1.3%, I believe. I looked this up on Morngingstar a few weeks ago so I could be off a little bit.

He states they do not charge for AUM nor does he buy any funds with loads. Many funds can be bought without a commision. He doesn't buy funds with commissions or loads.

After talking to me and conferring with a like minded Boglehead type, he did ask his advisor/broker why she moved him into a Black Rock balanced actively managed fund that has an ER of 1.8% vs. what I quoted as the typical ER of a Vanguard index fund. She also took him out of Putnam funds into the Black Rock funds.

She answered to him that these ERs are figured differently for different funds. She also warned him about the changing of index used by Vanguard for some of their index funds, as if that was a negative. Both ideas are patently non-sensical, and typical of the kind of advisors Bogleheads have been warned about.


:?: A sticking point for my friend is how so many companies can be in business all these years with high ERs? I explained to him how poor performing funds disappear creating seclection bias. We also discussed advertising, commisions to brokers/advisors. Maybe some running 401Ks have low incentives to improve lower ERs, also very large pension funds can get better rates and the MF companies make money on the volume.

My buddy is trying to figure out if it is worth it to change to low cost Vanguard funds and admit to himself that he was foolish for all these years. :oops: I explained that he was never foolish, he is just making adjustments to improve his game.

This friend is handling his own funds and those of several of his relatives. He appears to be doing a good job with the exception of paying higher ERs than most people on this board pay. He is also helping young relatives with disabilities continue to work and to get out of jams that have cost them money. I admire his dedication and selflessness in these endeavors.

:?: Can you think of any additional reasons why high ER funds survive?
:?: How does Morgan Stanley make their money if one buys funds without commissions or loads and they are not charging for assets under management or hourly charges?
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Re: Morgan Stanley question and advice for friend

Postby bottlecap » Fri Feb 01, 2013 1:23 pm

She's lying. We know that its bs about the different calculations as to ERs, why would she be telling the truth about anything else?

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Re: Morgan Stanley question and advice for friend

Postby barnaclebob » Fri Feb 01, 2013 1:24 pm

Many high ER funds exist because people simply don't know better or they are afraid of making a mistake due to lack of knowledge. We are all used to paying experts like doctors, lawyers, and mechanics to take care of us and our things so why should a financial "expert" be any different?

People look at me like I'm crazy or they give me some kind of worried look like i have been scammed when I tell them they can do better than most financial advisors with a few hours of research.

Also people may be hanging on from the pre internet age where doing research on funds was more difficult and it was not as easy to see how being a boglehead has its benefits.

Next is ego, some people cant admit that they are no better an anyone else and they are smart enough to pick the best funds.

Finally when many high ER funds do "about the same" as the market. So when someone sees the S&P is up and they see their account balance go up they assume its by a better or the same % because their "guy" is good at what he does.
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Re: Morgan Stanley question and advice for friend

Postby JW Nearly Retired » Fri Feb 01, 2013 1:58 pm

Can you think of any additional reasons why high ER funds survive?
Mainly because there are countless swarms of highly paid salesmen out there pushing them.

How does Morgan Stanley make their money if one buys funds without commissions or loads and they are not charging for assets under management or hourly charges?
They do sell lots of funds with loads. If you avoid load funds they also sell funds that have a 12b-1 fee as part of their ER. That is an ongoing yearly kickback from the fund company to the broker. That's why your friends Blackrock fund ER of 1.8% is as high as it is. The 12b-1 fee could be more than half of that. Google MCDVX, for example. Look up your friends particular fund and see what the 12b-1 fee is.

They take plenty of money from you either way. They might even make the arguement that their front load funds are actually cheaper if you hold them long term because of their lower ER. Whatever might sell.
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Re: Morgan Stanley question and advice for friend

Postby MN Finance » Fri Feb 01, 2013 2:21 pm

I would virtually guarantee the broker HAS to sell a fund with a load, (or obviously an ETF with a trade commission.) They CANT access no load funds for clients. It's not even possible. The firm doesn't let brokers place trades that loose everyone money (understandable).

Without spiraling into a discussion about this fund and that fund and ERs of this and loads on that, you are best off explaining it this way.... you have two options (for simplicity sake) when it comes to managing your money. You either do it yourself or you pay someone else to do it. That's it. It's not like mowing your lawn where only those that really can't be bothered hire someone, in that it's not "just that easy", but it's also not like brain surgery, where it's impossible to complete yourself. Then think of the investment world where there are two sets of products... one set for professionals and one set for DIYers. Though contrary to how it might sound on the surface, the set for professionals are no better for you. That set carries additional fees to compensate the advisors; fine, fair enough. The other set (which is created, marketed, managed by the same people as the first set), is identical to the first set but without the additional costs and marketed directly to the public. The difference is that you need to do some homework and stay moderately engaged if you are going to do it yourself. I'm sure you can think of an analogy that translates to his previous line of work. Like, buying a car off the lot from a salesman or buying it direct from the factory for a lower price, same car (or something like that), you just have to know what you want when you call the factory rather than sit with a salesman who shows you how to recline the seats and program the radio.

And not everyone is willing to do it themselves and will end up paying money, that's fine. My next door neighbor is 70 and pays a kid to cut his lawn, though it would save him $20 / week to do it himself. I cut mine myself to save $20. The difference, of course, is that in investing, the money is huge. This isn't a silly exaggeration, but pretend it cost me $500 to cut my 1/4 acre lot. Virtually the entire neighborhood would stop paying at that price point and even the single mom IT executive down the street who can hardly change a lightbulb just might decide how a lawn mower works and take an hour every sunday afternoon to do it.

One good example you can use is Fidelity because they make it really clear. They have the "direct" funds that you and I can buy at fidelity.com, then they have the "advisor" funds. It's so clear because if you pull up the Fidelity Small Cap Value Fund (just picked out of thin air) and the Fidelity Advisor Small Cap Value Fund A, you will see exactly the same fund of course. One has ER of 1.1 and the other 1.4 plus a 5% load. One fund you can buy directly through Fidelity and one you can buy through your broker at MS, but not reversed. Again, same fund, same company, just two totally different product distribution channels. [disclosure: I've never owned a Fidelity fund, though I like/appreciate the co; they just make an easy example].
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Re: Morgan Stanley question and advice for friend

Postby SGM » Fri Feb 01, 2013 5:09 pm

Thanks for the replies. I talked to my friend and will see if he will look at prospectus for breakdown of fees. He has been dealing with the same person at Morgan Stanley for a long time and seems to like her. He might ask her directly how she gets paid. I am not sure he will get a true answer and would be better off just reviewing the prospectus.

He said," You mean I have been acting as an annuity for her all these years?" :oops:
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Re: Morgan Stanley question and advice for friend

Postby gwrvmd » Fri Feb 01, 2013 5:20 pm

It is not true that they cannot access or sell funds that are not front end loaded. The answer is the 12b-1 Sales and Distribution fee as indicated by JW Nearly Retired. The 12b-1 fee is an annual fee so the sales man gets a small fee each year as long as you stay in the fund....Gordon
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Re: Morgan Stanley question and advice for friend

Postby JW Nearly Retired » Fri Feb 01, 2013 5:44 pm

SGM wrote:Thanks for the replies. I talked to my friend and will see if he will look at prospectus for breakdown of fees. He has been dealing with the same person at Morgan Stanley for a long time and seems to like her. He might ask her directly how she gets paid. I am not sure he will get a true answer and would be better off just reviewing the prospectus.

He said," You mean I have been acting as an annuity for her all these years?" :oops:

I'm sure they have it calibrated so the fund and the brokerage are sucking off something like 25% of the return on your friends investment.

Can you find out the trading symbol of the fund or funds? They might even be on a statement. If we know the trading symbol we can look it up on yahoo or morningstar and get the fee structure from an honest source.
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Re: Morgan Stanley question and advice for friend

Postby livesoft » Fri Feb 01, 2013 6:02 pm

SGM wrote: :?: A sticking point for my friend is how so many companies can be in business all these years with high ERs?

The answer to that lies with your friend. If he didn't know he was getting ripped off, how do any of the other customers of these places know? PT Barnum [didn't] had a saying for that I think.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Morgan Stanley question and advice for friend

Postby MN Finance » Sat Feb 02, 2013 9:52 am

gwrvmd wrote:It is not true that they cannot access or sell funds that are not front end loaded. The answer is the 12b-1 Sales and Distribution fee as indicated by JW Nearly Retired. The 12b-1 fee is an annual fee so the sales man gets a small fee each year as long as you stay in the fund....Gordon


I didn't say they can't access funds with without upfront loads. They can't access funds without loads, nor should they. That doesn't make the investment selection any better, and probably worse than upfront loads. Of course they can access wrap accounts as well which utlize no-load finds, index finds, etc. That's also presuumibly not an option anyone here is interested in.
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Re: Morgan Stanley question and advice for friend

Postby afan » Sat Feb 02, 2013 11:19 am

If your friend asks directly how his advisor is compensated, she will be obligated to tell him. She will also be obligated to review the commissions and fees with him. He will probably get a lot of sales talk about why he should deal with MS rather than risk going it alone.

The answers can be complicated, but here is a generic example.

http://www2.morganstanley.com/wealth/ou ... ndfees.asp

The real expenses for him will depend on the details of how his account was set up, how much he has, how much he trades, what he buys, and discounts...

Hard to imagine MS can generate any value for someone who is buying mutual funds. If he has a business that needs complex financial services, investment banking, custom derivatives and so forth, then he would have to deal with a major brokerage firm.
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