Cost comparisons used for RIAs, reps misleading

In response to the letter from Michael Smith, senior vice president of institutional marketing at Granite Springs Asset Management LLC, “B-Ds are pricier for clients than RIAs” (Dec. 6), he mentioned specific examples that his firm uses to demonstrate the cost difference between fee-based registered investment advisers and commission-driven registered representatives for clients and prospective clients.

I think that his comparison uses assumptions that are misleading to his prospective clients.

I will give you my actual ex-penses for a client, and it is much lower than Mr. Smith’s assumptions.

Using the same $100,000 example (poor choice for RIAs, who I know require a minimum of $250,000) and using American Funds, this client will pay 3.5%, or a $3,500 upfront sales charge. I will use Income Fund of America due to its mix of stocks and bonds.

The annual expense ratio is 0.61 (not an assumption), and using Mr. Smith’s formula of $589 annually, the total expense to the client over 10 years (again using his math) is $9,390.

As he said in his letter, his client’s cost, using an RIA with a 1% management fee and an exchange-traded fund over the 10 years, is $10,900. As Mr. Smith noted in the example, the ETF had an expense ratio of 0.09% (one of the lowest in the industry).

The average is considerably higher. Using 0.25% on the ETF puts his firm at $12,500, versus mine at $9,680.

My point is that every firm is different, and it should be. It is up to the client to ask questions and determine what they want to pay.

And most importantly, it is the performance that provides retirement down the road. The cost isn’t important as long as it is disclosed in a manner that is easy to understand.

Let the customer decide.

Mr. Smith, let’s talk about actual performance.

The average annual total return for this example was 5.98% after expenses over the 10-year period ended Sept. 30 — so much for the Lost Decade. This is from a firm that has been around since 1931 with 10 portfolio counselors and a research department that has offices and employees around the world, not to mention a mutual fund that has real numbers, not assumptions, since 1973.

How has Mr. Smith’s firm done for a client looking for income over this same time period?

Most RIAs I know haven’t been in the business 10 years as RIAs. So when working with an RIA, a client pays more in fees, gets a little more liquidity and hopes that the manager will have control over capital gains and losses.

Orrin B. Webber

Owner

Compass Group Insurance and Investments

Kalispell, Mont.

Health care must be a free-market system

I agree with the Just Thinking column “Forget Obamacare; the real problem is “Me-Care’” (Jan. 31).

Government has so distorted the free market in health care that it has deteriorated into a tug-of-war among special interest groups, as was correctly suggested in the column.

This is what happens when you try to design economic systems from the top down. Such systems always will break down because the needs of individuals can’t be met.

In health care — and all markets — we need a strong legal framework, and free and open national markets. Attempting to design something better than a free-market system is folly.

I think that we have an obligation to cover the poor and disadvantaged. Congress should focus on the best way to do that, which is a pretty challenging task.

Right now, government is pulling far too many strings. We need to scrap the current system and get the strings back into the hands of individuals.

Brian Schreiner

Vice president

Schreiner Capital Management Inc.

Exton, Pa.

RIAs more careful on VAs than brokers and agents

In the article “The GMWB and why it’s so popular” (Feb. 14), Kevin Loffredi, vice president of Morningstar Inc.’s annuity solutions group, said: “[Registered investment advisers] don’t necessarily understand or appreciate the insurance features that come with the product [variable annuities].”

I would respond that unlike the broker/insurance world, fiduciary RIAs actually investigate the so-called guarantees touted by variable annuities and find that they are largely worthless marketing ploys used to sell products to unsuspecting customers.

Here is an actual case I reviewed: A client purchased a variable annuity through her bank, contributing $39,000. Five years later, the actual account value was $35,000, while the phony-money, ratchet amount was $45,000.

When I went into the several-hundred-page prospectus to determine the guaranteed monthly annuity amount from the $45,000, I found that the client would receive the same monthly amount as she could obtain from another firm’s immediate annuity with her $35,000 of actual money.

I have seen this time after time. Buried in the fine print of the prospectus are one or two sentences that say that the annuity guarantee from the variable annuity is based on the client’s age minus two or three years (greatly reducing the value of the annuity).

Thus, the insurance companies tout the automatic ratchets to generate a higher amount of phony money but take it back when the client annuitizes.

I find such practices unethical and they should be illegal. No wonder the insurance industry is so afraid of fiduciary duties.

We in the National Association of Personal Financial Advisors re-ceived an outstanding presentation at our last national conference by David B. Jacobs, president of Pathfinder Financial Services, during which he showed that VA guarantees were typically worth 30% to 40% less than what could be ob-tained by directly purchasing an immediate annuity. Hence, if the VA ratchet amount was $45,000, the annuity benefit would be 30% to 40% less than could be obtained by purchasing an immediate annuity with $45,000.

To summarize, brokers/insurance agents have no incentive to question the products they sell. They are rewarded by taking the information from wholesalers at face value.

Many really think that they are doing a good thing for their clients. No, Mr. Loffredi, it is the brokers/ insurance agents who need education, not the RIAs.

We actually have to be able to prove that it is in our client’s interests, and bait-and-switch tactics by insurance companies leave a very bad taste in my mouth.

Ron Pearson

Proprietor

Beach Financial Advisory Service

Virginia Beach, Va.

Miller poster child for what investors should avoid

I had to read the article “Comeback kid? Bill Miller vaults to top of fund heap” (Feb. 14) before I realized that it was touting the fund manager’s one-month performance.

It is very disappointing to have a serious investment publication run such an irresponsible article. Mr. Miller’s story is the model for what investors need to avoid — buying past performance.

Even if an investor invested Day One with him and experienced years of market-beating performance, they would trail the S&P 500 today. Of course, the dollar-weighted returns are even worse, as most investors had never heard of Mr. Miller until many years of market-beating performance had occurred and therefore missed many of the good years before buying in.

The one stock that was highlighted in the article, Cisco Systems Inc. (CSC), has also had devastating losses since January.

Although I don’t blame Mr. Miller, he is the poster child for why we should never sell past performance.

Scott Vincini

President

Financial Solutions Group LLC

Trumbull, Conn.

Related Topics: Letters To The Editor