Good News; They're Profitable

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Includes: WFC
by: Roger Nusbaum

ETF Trends had a post covering the growth of new all ETF portfolio solutions being offered, based on the article, by large banks. The article excerpted a MarketWatch story that had a lot of quotes from someone at Wells Fargo (NYSE:WFC) about its product suite and the extent to which it wouldn't offer the products if they were not profitable.

These might be a tough sell after a VP of something or other brags about the profit being made off of $25,000 accounts.

I don't know anything about the specific portfolios that Wells Fargo offers but I have seen similar portfolios from other firms and from what I have seen they target broad asset classes only using broad index funds. They are easy for the client-contact person to implement as about all they do is select one of some number of possible portfolios and then the rest of the process is automated.

The portfolios aren't necessarily bad in and of themselves. Some folks are better using only the broadest funds and if history repeats and the market has an up year 72% of the time then these portfolios will do just fine at least 72% of the time. They may or may not beat the market but they will be close either way and that can be good enough most of the time for people who are good savers. I realize the last decade or so works against this argument but I believe select global markets will have normal decades going forward as they did over the last 10 years.

Obviously if the portfolios are unmanaged then they will feel every bump in the road during years like 2008.

The issue tends to be the fee involved what is often an unmanaged portfolio. A systemic rebalance is not really active management. Paying 150 or 200 basis points for active management could turn out to be worth it, if a manager averages a net 400-500 basis points per year of alpha I'd say the fee would be worth it, but that is up to the end user to decide. But if portfolios like this are not actually being managed and the fee is more than 150 basis points, then it is easy to see how the portfolios can be profitable to the firm.