Yetman: I agree. In an MDP-type account you have one contract, one 1099, one quarterly performance report and one fee-so basically you have one brokerage account.
Muldowney: I agree with George and John. However, attention must be given by the investor as to the cost of the services provided both by the OPM and the underlying investment provider [i.e. the index fund or the costs of the active manager.] This typically also includes the portfolio efficiency and end-of-year tax reporting. Keep in mind that the word "efficiency" means that there is optimal return provided with the least amount of necessary investment risk.
von Borstel: For clients to whom simplicity is paramount, this platform's appeal is clear. One of the challenges I face in setting up complex portfolios with deep diversification and nontraditional asset classes for clients is that they get overwhelmed by how complicated it becomes and the mountain of paperwork required to get it implemented.
FA: Do you think MDPs minimize the advisor's value because most of the work is outsourced? Lockwood President Len Reinhart says if you're not giving advice or making investment decisions, what are you doing? What is your point of view?
Strickland: I would agree with his point. They are the perfect product for Schwab, TD Waterhouse and other non-advisor distribution entities. It is similar to the problem encountered with one-step products [SEI, Russell, etc.] What are you paying an advisor for?
Walker: Yes, but it depends on how the advisor is adding value in the client relationship. If the role is classic investment management consulting, yes, value may be diminished. The firm offering the MDP, like a Lockwood, will specify the asset allocation, pick the managers and rebalance. However, where advice is holistic as part of an overall financial planning process, and where investment management is a sub-function of financial planning, there is no problem. The MDP can free the advisor to concentrate on other aspects of the planning process.
Muldowney: I feel Reinhart's statement misses the point. The advisor's real job is always challenging and deserving of reasonable compensation. Advisors are continually "talking people off the ledge." The investor was ready to "jump" with both feet, heavier and heavier into stock positions in the late '90s. Now they are standing on the ledge trying to make two jumps! One completely out of stocks and the second jump completely into bonds. The job that is threatened is that of the investment manager. He sets out his own job description, then fails to meet it. His typical goal is to "pick good stocks," which by definition simply means better than average. Better than average simply means better than the index. And the managers have not done so well here; the indexes constantly and routinely outperform the managers, and they do so with less cost and with less tax exposure.
Yetman: I disagree with Reinhart's statement-the MDPs put us, as the advisors, in a consulting position, on the same side of the table as the client. The advisor can select from a pre-set model. At our firm [Wachovia] we have ten to 15 models already set up. Our other option, in line with the normal consulting approach, is we can tailor the portfolio. We can select from 17 managers and how much money goes to each manager.
von Borstel: It's a scary road, though. I have a tough time justifying why I'm getting paid to hire someone else to do all the work. There's a danger that we're commoditizing what we do, and we have to be careful about that in our business.
FA: Other comments?