The second point is to underscore that any cost comparisons should take into consideration the characteristics of the product and the services that come with it. For example:
How much is the ability to customize an SMA worth to your client?
How much is the ability to do tax loss harvesting worth?
How much are the due diligence and performance reporting services provided by an SMA program sponsor worth?
I believe that SMAs and mutual funds are pretty close in terms of their cost to the investor. But if you believe SMAs are a bit more expensive after you plug your numbers into the equation, consider whether the extra cost is justified based on product characteristics.
Also keep in mind, when considering the relative costs of SMAs and mutual funds, that the costs associated with SMAs tend to be more transparent than those associated with funds. Expense ratios, brokerage costs and sometimes even program sponsor fees are embedded within the mutual fund structure and are not readily apparent to investors. SMA expenses, whether they are "wrapped" or "unbundled," tend to be more visible because they are specifically disclosed to clients in a separate fee schedule.
By Scott A. MacKillop
Lurking in the midst of this discussion is an even bigger issue: how you justify the fees you charge your clients. The move from commissions to fees is driven by something far bigger than how advisors are compensated. It has to do with a fundamental shift in the nature of the services that are provided to clients and the manner in which those services are delivered.
Ideally, fee-based services should be delivered through a consultative process that focuses on understanding and satisfying client needs. The process does not end when a product is sold to the client. That is just the beginning. Fees are not an alternative source of compensation for a product sale so much as they are an ongoing charge for ongoing services provided. Fees support the cost of a continuing relationship with the client through good times and bad. You cannot guarantee your clients continually rising markets and positive performance. You cannot provide them with quick fixes or instant remedies for the losses they have suffered. That is not what your clients are paying you for. They are paying for your best ongoing advice and objective guidance through up and down markets.
If you are having trouble justifying the fees associated with SMAs, mutual funds or other products you may have sold your clients, ask yourself this: Have you taken the time to explain to your client what the fee they are paying is really for? If you have, and the client is still not satisfied, ask yourself this: Have you and the others who are receiving a portion of the fee (managers, sponsors, custodians, etc.) delivered the level of ongoing advice and service the client should expect for the fee they are paying? If they have, justifying the fee should be a lot easier, regardless of the products you use.