Practice English Speaking&Listening with: Review & Reaction: Morgan Stanley Investment Proposal

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Bill Woodruff: Hi, I'm Bill Woodruff, Founder & Chief

Investment Officer at WealthFactor. Today I came

across a Investment Proposal put together by a Morgan Stanley

advisor, and it reminded me why I started WealthFactor. I

thought I'd go through and share with you some of some of the

things that I takeaway from this piece.

As you can see, I have blacked out the names to protect the

innocent. So let's dive right in. Right away, they're building

themselves up "leveraging our vast resources, we're big, we

can do a lot." I'm not going to dwell on any one particular

point, but kind of build towards a variety of things they're

recommending here. Their select UMA and "U" "M" "A" is unified

managed account. And what that allows for is the inclusion in

one account of a variety of different types of investment

delivery vehicles, mutual funds, ETFs individual securities,

outside managers who might employ their investment strategy

using individual securities directly in a client account.

It's a a technology based solution one, I guess, if you

want to call it an advantage, is that Morgan Stanley has is, and

being big as they have this unified managed account, and

this technology that allows them to wrap lots of different things

together. And so the statement here is the ever increasing

complexity of investment management, and I would push

against the back against that really, really hard. Investment

Management hasn't gotten more complex. What is gotten more

complex is Morgan Stanley's need to justify fees that just

Absolutely don't make sense investment profile is pretty

generic stuff. Here's what we recommend. And this is specific

to the client that's for a prospective client that you know

that their information is being blocked out. equities and fixed

income. You know, it's interesting here, which is

consistent with, you know, the risk tolerance being

recommended. But what's interesting here is fixed income

is put on here as a 20% allocation and then you go to

the very next page, and that entire fixed income allocation

is represented by one high yield, municipal bond, mutual

fund. And I spent a little bit of more time with that in just a

little bit. So, you know, what we have here effectively from a

Morgan Stanley recommendation using this vast need for you

know, doing very complex things in in global financial markets

and investing is three different managers, two of which are set

through separate account and one that's through a mutual fund

which So, if anybody falls, if you follow my comments, you

know, I am as big of a critic on mutual funds as there really can

be. And then the the two different equity portfolios. One

is that, you know, benchmarked against the s&p 500. So I'll

come back to some of these points. But what really is a

fairly simple exposure set, there's nothing esoteric,

there's nothing complex about this, as perhaps they try to

build up build themselves up, they spend some time kind of

talking about their, you know, what they do with selecting

managers, and then, you know, watching them how they do lists.

You know, my I grew up in the investment management side of

this business, and I thought of Morgan Stanley as a prospect for

my investment strategy. They had, effectively a paid to play

environment it really there in order to be available at more

Stanley, it costs $250,000 per year for the investment manager.

So, you know, they Morgan Stanley builds this, you know,

in these couple pages here this perception that they are

canvassing the world for investment opportunity and they

have this robust process.

My experience coming at it from a investment manager with a

investment solution was well our first and most important thing

is how much are we going to get paid for selling your product?

So I'll try to keep my bias against the cultures of these

large brokerage and banks as professionals I can. Okay, so

here's this mutual fund that's being recommended, it calls out

.62%. So since I just go in their order, so the expense

ratio or the net expenses for this fund and this is before

paying Morgan Stanley to recommend to you to invest in

this fund, or .62%. And so I've got this tab here this morning

star analysis of this fund. And so what does this recommendation

even look like? Well, this is a five star fund for Morningstar.

I'll save my thoughts on morning star star ratings for another

piece. But let's look at let's drill down into this a little

bit. So on the surface, as you look at See, or oops, I pushed

on the wrong one. Performance you can see that this fund has

done well against its benchmark its category. So okay, that that

sounds good. Right. And you know, that's that's a simple

thing. You know, from a manager research and due diligence

perspective, which again, is part of my background. To me,

I'm not going to buy a mutual fund, or a manager or investment

based on this, I'm going to dig a levels And so let's take a

look here the portfolio is, I think telling so far. So first

of all, just for, for context, this fun invest in municipal

securities that are effectively rated the low investment grade.

So these are the types of municipal bonds that have the

greatest or highest probability of default, in general, and

that's what the benchmark is. And so, in this, this section

right over here, it shares the existing portfolio relative to

its benchmark or category. So effective duration or this is

it's the portfolio sensitivity to interest rates. So this

portfolio is taking more risk interest rate risk than the

benchmark category. And you can see that as well in terms of its

effective maturity. 21 years of maturity on average versus 15

for the benchmark, You can also see the so average credit rating

actually in this broad measure is both triple B. But if you

drill down into the breakdown, you can actually see where the

fund in non investment grade relative to the category has

significant additional exposure 14% and double B versus under 10

in the category. So, on the surface, you say a five star

rated fund. It's outperformed, well, it's outperformed, but

it's taken a significantly more a greater amount of risk. And so

let me tie this into the philosopher smart philosophy,

high fees and so I there's lots of data here, but there's, if we

go back to morning stars, overview it highlights that this

fund is a high fee fund. Let's see right here low fee level

high So, at this mutual fund level, at a layers for again,

for my risk smart philosophy having layers is inefficient.

So, fee, the fee level is high on the mutual from a mutual

funds at this specific mutual fund level. And then you can see

in the actual portfolio that's really putting that fund in a

position where it's forced to take more risk in order to

justify speed and is outperformed in on a backward

looking basis, the category during a period where really

every investor has been compensated for pretty much any

risk that they take. And so I wouldn't touch this fund with a

single investment dollar. And so let me let me add to why that

might be so you can look at the portfolio see here performance.

So you know, it's common, this is what Morning Star effects

Does and assigning us five star rating? Let's look backwards and

say, Well, how is this fun done by believe the annualized

returns are like five or 6%. So, you know, investor looks at that

and says, oh, man, it's it's generally 5%. I mean, I'm in a

municipal bond fund that's generated five or 6%.

Well, what it's done in the past really has no bearing on what

this fund will do in the future. And that's true, really across

all types of investments, but it's simpler in fixed income or

bonds. So the bond fund or a single bond is going to

appreciate or depreciate as market interest rates go up or

down. And then there's going to be a yield component. And so as

you can see here, the yield, which is at this point, with

interest rates already very low, and generally credit spreads

very tight. The prospect of the market yields falling

significantly further from here and then causing prices to

appreciate is low. The yield for the fund is 2.86%. So the idea

that Oh, it's done, generate a five or 6% return net of fees

backward looking. That's really irrelevant. And so really what

you have here is an incredibly risky portfolio of municipal

securities that has a 2.8% percent yield before Morgan

Stanley charges you their fee. So So let's go back to the the

overall presentation or proposal for this prospective client

here. So performance review, you know, they're everything here is

backward looking. It's interesting here that it takes a

little bit of digging. It's not a separate page, but you can

actually identify that all of their proposals are gross of

fees, and then their proposal benchmark is not all that

transparent, probably ought to be the s&p 500 given how much

equity and then the likely correlation of the high yield

municipals to equities, but you can see here, the proposals are

all that different in terms of their long term performance from

the benchmark. And so as well okay, well, what why am I hiring

Morgan Stanley, the you know, they've had this incredible

reach and opportunity and then they don't really, you know,

they spent a lot of time on the front end and then it's kind of

market returns and that I see that pretty consistently across

the what I call the mass advisor.

Okay, so here's a little here's a little bit more of the same,

but they're putting the specific managers on here, and you can

see that their particular manager has just three from a

three year, five year and seven year Looks like maybe 70 of the

outperform, but it's kind of a mixed bag of, you know,

basically this is the s&p 500. And you should expect that

really across any fund that is being managed relative to a

large cap index. So we've hired either, you know, the Morgan

Stanley is pitching this person to hire them to pick something

that really has limited potential to outperform or even

perform without Morgan Stanley's fees to the equivalent of the

s&p 500. So here's what we do. This is fairly generic, although

there it should they have had five or 10 different separate

accounts and all in there, there are certainly some overlay

management services that they that really impressive

technology to deal with. All of that mess. Again, to tie that

though back to the last page, they're kind of creating that

complexity and those layers in order to justify themselves and

those that complexity and layers, those layers, how do we

don't do anything relative to the adding value versus just

owning the index. So this is the this is the part that inspired

this whole piece is this summary of their fee schedule or the fee

schedule here? I didn't realize that it was as bad as it is. But

all the way out to a million dollars. They're charging well

in excess of 1.2%. And these are, this isn't like once you

get to a million dollars or $2 million, your fees go down to

1.1. These are as you can see, as you can infer on the right

side of this, these are tears fees. So, you know, at $5

million and over, you're starting to get down to 1%. But

you're still paying 1% or more, you know, effectively more at a

portfolio $5 million. And that's just the Morgan Stanley part. So

you can see here with this relatively small,

propose $250,000 portfolio, the aggregate or the combined

advisory fee is 1.5. to two, Morgan Stanley, then they have

then, you know, there, this is nice, in that they're

identifying the sub managers, which are those two separate

accounts that they're recommending through their Yomi

platform unified managed account at 25 basis points that they

cost. And then they have an overlay manager fee. And so I

suspect this is the new ma fee, I guess, to deal with all their

complexity and so forth. And then it's worth pointing out

here that this is separate from the embedded point six, two, I

think it was percentage or expense ratio for that mutual

fund for a total effective rate of 1.8. And so let's think about

this, from an the end investors perspective. They're

recommending a 2.8% yielding municipal portfolio, and the

total fees for the 250,000 or 1.8%. And so that investor has

the potential after fees, you know, assuming we don't see, you

know, this, you know, high yield defaults. And interest rates

continue to fall, maybe we see some, you know, again, that's a

very limited potential for appreciation in high yield

markets, given the current timing, but really net of that

fee about a 1% potential return. I mean, that's an absolutely

incredible amount of risk to take and for so little potential

compensation, it really makes no sense.

And so the basis for this is, you know, you have to draw some

sort of conclusion that the advisors, Morgan Stanley, just

simply have a degree of in competence. I hate to say that

out loud, it makes me feel bad. But, you know, if they're

looking at the backward looking returns for this mutual fund,

it's on the Morgan Stanley approved list because Invesco

pays $250,000 and probably more, based on the incredible amounts

they probably have through Morgan Stanley to Morgan

Stanley, for the Morgan Stanley brokers to then recommend it.

You know, the Morgan Stanley brokers are saying, Oh, I did 5%

over the last five or seven years, I'm going to recommend

this my client, well, if you know practically, it makes no no

sense to own this. So I see this a lot. You know, most advisors,

most independent registered investment advisors have

business structures that have fees that are far less

egregious, you know, starting between point eight, five, and

typically not too much more than 1%. You know, and so that's

better. You know, I would look at that and say it's still

probably a, you know, again, for lack of a kinder way to say it

is still probably a rip off when they're the net investment

deliverable is likely simply just following some sort of

benchmark. So this piece is about 22 pages. And and then at

the end, it's got two pages of kind of definitions, which is

helpful. And then it's worth kind of noting that there is one

too 3456 pages of disclosures, you know, part of that is linked

to the potential things that they might recommend that

aren't. But at the same time, the amount of complexity here is

immense. And you know, the I don't know that many people that

use Morgan Stanley but clearly I looked up their, their

financials from last quarter I think they generated 4.5 their

wealth management business land generated 4.5 billion in

revenue. So clearly, they have lots of clients and lots of

people who use services like this.

But I you know, honestly, if you have a portfolio from Morgan

But I you know, honestly, if you have a portfolio from Morgan

Stanley broker, I'd be more than happy to take a look at that and

Stanley broker, I'd be more than happy to take a look at that and

share some thoughts but really regardless at their fee

share some thoughts but really regardless at their fee

structure, there Faced with incredibly difficult decisions

structure, there Faced with incredibly difficult decisions

and trying to build portfolios, fees, force risk taking, and

and trying to build portfolios, fees, force risk taking, and

lead to inefficiency. And there's a bunch of compounding

lead to inefficiency. And there's a bunch of compounding

that has happened here in, in, in what I'm seeing from

that has happened here in, in, in what I'm seeing from

organizations like this. And you know, I've I've chosen this

organizations like this. And you know, I've I've chosen this

Morgan Stanley piece because it was available to me, I would

Morgan Stanley piece because it was available to me, I would

expect to see something substantially similar from most

expect to see something substantially similar from most

of the large national well known brokerage firms, as well as the

of the large national well known brokerage firms, as well as the

private banking world. Wells Fargo, UBS, Merrill Lynch, these

private banking world. Wells Fargo, UBS, Merrill Lynch, these

sorts of business models are, are all the same. They are

sorts of business models are, are all the same. They are

generally the same and concept and

generally the same and concept and you know, investors It

should get and can do significantly better. So that's

it for my analysis of this Morgan Stanley piece. I hope you

found it useful and hope you enjoyed it. Thanks

The Description of Review & Reaction: Morgan Stanley Investment Proposal