As the fourth quarter (and year) comes to a close, it will soon be time to meet with clients and review their accounts. With this in mind, I’d like to share some of what I will be discussing with them. In the past I’ve always reported on performance. I’ve also discussed their portfolios’ composition and the funds and ETFs they hold. In 2009, I added my fiduciary score for each mutual fund and ETF to the review. This time around I plan to add an additional component to the review that you might call “factors involved in getting to the performance numbers.” In other words, I plan to discuss which trades worked out well and which ones didn’t.
In 2009, I did well with a couple of ETFs but not so well with a bank loan fund I bought in 2008 and sold recently. The client needs to know that I am willing to discuss my failures as well as my successes. I believe clients appreciate an advisor who is honest enough to say, “I missed that one.”
Another issue involves the cost of trading or “transaction costs.” Now some of you might be thinking that discussing the costs of trades may open a Pandora’s box. I look at it differently and here’s why.
We all know that mutual funds come in a variety of share classes and that each share class has a different expense ratio. Let’s say we have the choice of buying an A share with no transaction fee or an institutional share with a $20 fee (that’s the fee with my custodian). Because the A share has a higher expense ratio it will underperform the institutional share. Let’s assume the A share has an expense ratio which is 0.50 basis points higher than the institutional share. If you bought a $20,000 position then the difference in expenses would be about $100. Subtract the $20 transaction fee and you are still $80 ahead. The larger the position you buy, the more advantageous it is to buy the institutional share and pay the fee.
I inform clients that I will buy the cheapest share class available to reduce their expenses. At some point in the future I may decide to pay this fee for larger clients, but at this point, the client pays it.
Thanks for reading!