Friday Reading: The Market For Financial Advice

By Harry Sit

Stocks are up; time to think about rebalancing by Brent Hunsberger at The Oregonian

Unless you rebalanced when the market was down last fall, it’s probably not time to rebalance again just yet in the opposite direction, because it takes a good 20-25% gain to move your weight in stocks up by 5%. If you are 80% in stocks, it will take a 40% move in stock prices to get you to 85% in stocks.

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NCUA’s Interest Rate Concerns and Possible Impact to Savers by Ken Tumin at DepositAccounts.com

A good behind-the-scenes peek at what credit unions, and to some extent banks, are worried about (7’30" into the video). I hope they are smart enough not to hang on to low fixed rate mortgages.

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Would Financial Planning Be More Valuable If It Focused On The Short-Term? by Michael Kitces at Nerd’s Eye View

Financial planners would be more useful if they help with more short-term tasks such as getting organized, paying down debt, and saving more. I just wonder whether enough people are interested in paying $1,000 or more year after year for that kind of help and whether enough financial advisors are interested in doing one-off work for a few hundred dollars.

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And if people are looking for help on investments, chances are they will be exploited. That’s what an audit study found. Three professors sent trained auditors to over 200 visits to financial advisors at different places. Results are not that good. Read their presentation: The Market for Financial Advice: An Audit Study. The shocker is that after unknowingly getting bad advice, 70% the auditors would go back to those advisors with their own money.

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That’s because people can’t tell bad advice from good advice. Financial advisor Allan Roth explains in Two Sides of a Financial Planner:

"We financial planners are masters at persuading ourselves that what’s in our best interest also happens to be the moral thing to do. By and large, we’re good people, which is why we can be so convincing — and so potentially dangerous to your money."

So what are people supposed to do? Wing it themselves? Brave the shark infested waters? The more I think about it, the more I like Vanguard’s flat fee financial planning service. Investing $50,000 with Vanguard gets you a financial plan for $250. It may not be as comprehensive as other advisors can provide, but you know you are not being taken advantage of and the price is very reasonable.

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Posted on April 13, 2012 under News. Keywords: , , , .

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3 Comments on Friday Reading: The Market For Financial Advice

  1. KD on April 13, 2012
     

    Alright, time for confession! I rebalanced in fall last year. I overbalanced in last week of March, i.e., rebalanced from stocks to bonds beyond my asset allocation, so that the bonds are now 1% more than what my asset allocation calls for. For the first week of April, the ploy seemed to work as stocks went down. I do not know about this week though. It has been all over the place.

    To be honest, I do not like doing this – clearly because it lacked strategy. I do not even know if 1% is consequential at all. I wanted to dip my toes so I did.

    Do you folks try out things like this at all? TFB didn’t you try something similar in much larger sense in the big down turn – like buying more equities than the asset allocation calls for?

  2. TFB on April 13, 2012
     

    KD – I would say 1% is inconsequential. I overbalanced in 2008-2009, in 5% increments. I unwound it in April 2011. It worked out well in the end but it was probably a little too aggressive. If I do it again, I would do 5% over for every 20% down, like this:

    Start -> 60% in stocks
    20% down lowers it to 55% in stocks -> overbalance to 65%
    another 20% down lowers it to 60% -> overbalance to 70%
    a 3rd 20% down lowers to 65% -> overbalance to 75%

  3. White Coat Investor on April 25, 2012
     

    I love the chart on rebalancing, and in my fact may steal it for a post at some point in the future. One point to keep in mind about it is that many investors are continually adding money to their portfolios and if it is all going into one asset class automatically, you get to the point where you need to rebalance much faster. For example, my 401K contributions all go into a TSM index fund. 3 months worth of contributions PLUS this year’s run-up in equity prices got me to the point where I needed to rebalance. YMMV.

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