Should the average investor use an investment advisor? I used to think no, but now I would say yes.
I thought no because investing well isn’t that hard on the surface. In its simplest form, you invest in a Vanguard Target Retirement fund closest to the year you will retire. Done deal.
If you can’t invest in a Vanguard Target Retirement fund because it’s not in your 401k, you can mimic it. Look at how much it invests in stocks versus bonds, and how much in the US versus international. You will end up with three mutual funds in your 401k: a US stock fund, an international stock fund, and a bond fund, like this:
How hard can it be?
However, the average investors don’t invest that way. My co-workers sitting next to me sometimes talk about their stocks. They talk about when they bought this or that stock and whether it’s time to sell. When I went camping with a group of people, a woman told the group around the camp fire she switched everything in her 401k account to money market because she thought a crash was coming.
If you ask random people at your workplace “what’s your asset allocation for your retirement?” How many do you think will be able to tell you? If you get to see the investments in their 401k and IRAs, what percentage do you think have a risk-appropriate portfolio that’s within plus or minus 10 percentage points of a Vanguard Target Retirement fund?
These average investors will be better off if they use an investment advisor. Not just any random investment advisor, but a good one at an affordable price.
That’s the other hurdle of using an investment advisor. If you don’t know where to go, it’s very easy to find a salesperson as an investment advisor. You can’t just go by who appear to be knowledgeable and trust-worthy. When you don’t know much, a good salesperson who talk a good talk will appear to be knowledgeable and trust-worthy. Their training makes them master the art of making you trust them.
You can use a robo-advisor such as Betterment or a human-robo hybrid service such as Vanguard Personal Advisor Services or Schwab Intelligent Advisory. Fees run in the neighborhood of 0.25% – 0.3%. The problem is their computers are a little too quick in coming up with a recommended allocation, based on very limited inputs. The number of questions asked before they return a recommendation is as few as two! Computers are fast and efficient but I don’t think they can know things they don’t ask.
The best model is to use an advisor who only provides advice (“advice-only”). You then take the advice and follow it. See Advice-Only: The Best Model For Financial Advice People Need And Want. If you don’t know where to find this type of advisors, I can help. See Find Advice-Only Financial Advisors.
Although most don’t like to admit, it’s very easy to be overconfident in one’s ability to resist behavioral mistakes. The hidden cost of such behavior can be many times the fees we pay to an advisor. I think most investors will be better off if they get advice from an advisor. Only the advisor has to be advice-only.
[Photo credit: Flickr user SalFalko]
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netmouse says
I have an amount with Vanguard that gets free financial plan advise. I have not gotten a new update for years. This was due in part to strong suggestions to switch to some other of Vanguard’s funds that did not do very well, like a growth stock fund (forget name). They have since changed fund management. I also never get advise on getting a non-Vanguard fund (at least not to me) so you are limited in advice to what they sell (and push). Even their tie to Financial Engines only suggests Vanguard funds. I ask FE about this, and their person said it is because Vangaurd funds are the best so that is why they pop-up in recommendations, but I’d imagine you should see once in a while a non-Vanguard fund somewhere.
Also, three items they advised for me to reduce, but I never did as I got crazy busy in life and never got to it, did extremely well weathering the recent recession and are now doing really well. So I’m glad I did not reduce these: 1) reduce amount with New Jersey (the tax free muni fund), 2) reduce company stock, 3) reduce actively managed fund with value stock. I realize they were right from a financial management 101 perspective, but my investments are soaring for many years. Now I might best rebalance a bit.
I agree with above that the Boglehead forum is an excellent place to ask questions and get lots of input from people with good and varied knowledge.
Laura says
Hi,
The comments have been very useful for this new investor.
I recently inherited money and I am overwhelmed with the choices.
I am 51 yrs old and I am interested in growth investments.
I was excited about Cardiff Park however they have a million dollar minimum.
I was wondering if anyone has heard of Creative Planning in Kansas or Baker Ellis LLC in Oregon? My father uses Baker Ellis and is recommending them to me. I was researching and saw that Creative Planning has received multiple rewards.
My sister said she is just going to keep our deceased mothers investments where they are at Schwab and let them sit.
I am overwhelmed and lost. Any help would be appreciated.
My other thought is Van Guard.
Ev Luecke says
I can’t believe how times passes – I first made a comment on this thread discussion in 2011. This discussion has to be all time most posts in the history of TFB.
I’ll gladly make a few comments – hopefully won’t be too much direct advice – I’m not qualified.
That said – for a start some ideas.
I know full-well that feeling of being overwhelmed – its not fun.
You might wish to take your project in small chunks – kind of ticking things off as you go.
– You do not need to be in a rush to make decisions – take all the time you need to feel comfortable in your decision making.
– Suggest reading this article very carefully – I’ve recommended it before. To me its priceless, timeless advice that can serve as a good guide to beginning a journey to achieving investment success.
http://www.forbes.com/sites/investor/2014/03/13/letter-to-the-grandkids-12-essential-investing-guidelines/
That said, even if you work with an advisor it is critically important that you understand and buy into the advisor’s philosophy/mission. You will feel much more comfortable if you understand the general differences in how the different firms go about their business.
I looked at the Baker Ellis website – I can’t tell exactly; website is very limited information. But I think they manage portfolios of individual stocks based on a value approach. I would discuss with your Dad how they work and importantly how much their fees are.
The Creative Planning seems to invest in actively managed funds – read # 8 from the Ellis article. I’d advise awards aren’t important.
Now turning to Cardiff Park – are you able to explain why you thought this might be a good choice. Cardiff Park is very similar in philosophy to what is presented in the Ellis article. There are many fee-only firms that follow this same philosophy that do not have the million $ requirement. This requirement has been put in effect – my guess couple years ago. Point I want to make about Cardiff Park – they are highly respected, well thought of by many; for me they did not meet my needs. Again an advisor choice is a very individual thing.
After you read and take in the Ellis article you could come back here and ask questions.
Hope this helps. Step by step it will begin to make sense and you will know what your needs are, and what you are looking for. And definitely Vanguard might be good choice – either investing on your own without an advisor or perhaps using their advisor service.
Ev
Harry Sit says
Laura – The article already listed several good options for investing less than $1 million: Vanguard, Betterment, AssetBuilder, and FPL. I would start with Vanguard.
Hank says
Hi Harry,
Thanks for a wonderful website and your pro-activeness in helping others. I really enjoy reading the articles and the excellent comment posts from your readers.
I have a question for you and others on this thread.
What low cost advisor service(s) would you recommend for someone with assets between $1.5 – 2 million? I’m currently residing in Middlesex county in Massachusetts.
I’m currently 46 years old and have been investing on my own until now. I would consider myself between average and above average investor. I haven’t necessarily been a disciplined investor following a single strategy and rebalancing etc.. on schedule but I’ve been fortunate enough to have accumulated what I’ve accumulated.
But now getting to a point where I’d like to put a wall between me and the money. Besides just the investment part, I’m also getting to a point where I feel I need advice on things like:
* Will (I have basic will but would like to discuss it with someone)
* Insurance (umbrella policy etc..)
* Long term care
* Trust accounts
* Preparing for college (Have a child who will enter college in 2 years and have a 529 plan but what happens if we don’t use up all of the money etc..).
* Backdoor Roth
* Putting away up to $52k for retirement and converting 401k to Roth etc..
Thanks.
Harry Sit says
Hank – Your wish list is quite typical. Contact any of the five I listed for above $1 million or all five of them. Ask whether their services will cover what you need. Pick one you like the best.
Nonnie says
To Hank:
I’ve been using Cardiff Park Advisors for almost four years now and could not be happier. I’ve recommended John Gorlow to half a dozen folks and they feel the same. Gorlow gives exemplary personal service, extensive *monthly* reports (not quarterly as do most advisors) and has an extensive website of information to educate folks about the firm and investing. For client conferences he uses “go-to-meeting” software so you can have the same report up on your screen as he does and this really helps with client discussions and the multi-page reports/worksheets he prepares for these discussions.
Yearly fixed fees range between $3,000 and $10,000 and are based on the number of accounts (regular, IRA, Roth) and complexity and NOT on the amount in the account/assets under management/AUM. Cardiff uses passive and index portfolio management.
Take a look at the website-there’s lots and lots of information- and then send an email or give a call and see if you think John Gorlow is right for you. (He’s highly spoken of on the Boglehead’s forum).
http://www.cardiffpark.com/home
Phone – 888 332 2238
Nonnie
Fred Wagner says
I have been talking to quite a few advisors and I do think the first one that can give me a coherent answer to the appropriate asset allocation for my XOM lump sum pension and 401k rollover associated with my September retirement from Exxon wins. So far, no winners. I do have a discussion with John Gorlow of Cardiff tomorrow coincidentally. Everyone seems to want to talk about the make up of the portfolio which is important, but where to park myself on the efficient frontier has me uptight. Do I go with the U distribution and start out high in bonds and increase stock allocation later or go conventional and start out higher equity and wind down. PS: 59 years young on my graduation date from Exxon.
chatham says
Hey everyone:
First of all, thank you for this post, TFB. We just switched our portfolio of DFA funds to FPL Capital Management based in part on information I found here and on a couple of other sites.
We had been with an adviser who charged us less than one percent of our assets under management. When we originally opened our accounts, there were no flat-fee advisers for non-millionaires.
The flat rate we pay at FPL covers everything we need (assessing risk tolerance, setting up the portfolio, couple of teleconferences a year, quarterly reports, custodian web access, etc.). If for some reason we need anything beyond that, we can pay an hourly rate for consulting.
I really love this pricing structure. We have the exact same portfolio at a fraction of the management cost. Paying a percentage of your assets can make sense at lower balances, but it can quickly get expensive beyond a certain point.
Thanks again for the post, TFB. You laid out some great options for advisory services for passive investing for the middle class. I wish that I had seen this sooner.
Roy Jones says
There is no way you would know this since we do almost no advertising, but Vanguard Personal Services is absolutely not the best deal in advice.
Many RIA firms like ours offers far more robust portfolio management for less. Our comparable service to Vanguard’s is 17% lower cost with no minimum and no transaction fee and goes down for all our clients as our assets under management increase. Our ETF portfolios are agnostic: They are comprised of ETFs selected by Morningstar, without any of the conflicts of interest at Schwab, Vanguard, Fidelity etc. We are DFA approved and compliment core passive portfolios with individual securities for tax harvesting purposes. Individual securities, while not intended to outperform the market or replace passive investments, are selected by a research process with an independently audited track record going back to 1965. 100% of our compensation comes from our clients, never from revenue sharing with financial institutions.
Our firm is profitable, debt-free, in business since 1998 and we do answer to shareholders, venture capital firms or anyone else that gets in the way of our client’s interests.
Harry Sit says
Roy – 17% lower cost as in 0.25% versus Vanguard’s 0.30%? Does the service include consultation by phone or in-person throughout the year as needed? If so, on a $50k account, you are happy with making only $125?
Roy Jones says
Harry, yes:
.25% versus Vanguard’s .3%. Once we bring in $10million on this platform the cost for all investors will go down to .24% and eventually down to 0.2%, 1/3rd the cost of Vanguard, once we hit $100mm.
Additionally, the underlying investments are likely to be equal or lower cost: Right now the majority of the ETF portfolios are comprised of Vanguard ETFs. However, we could shift some or all of the portfolio to iShares if Morningstar identifies an advantage in cost, cash, tracking error etc. That way investors can benefit from the current price war and have real protection against underlying costs going up as well.
We have a lot in common with you and many of your subscribers: We look under every rock to extract any value we can. We even stay away from index funds and investor shares since they are less diversified, have higher underlying trade costs and maintain higher cash balances.
This is an online investment-only service that includes quarterly educational conference calls conducted by CFPs with occasional CPAs and CFA guests. Clients are encouraged to email in questions for the newsletter and topics they would like addressed, and they are always welcome to call if they need account related assistance. Like Vanguard and everyone else in this space, we offer advice related services separately and/or based on account size and we are extremely competitive on price… do not get us started about quality.
We already have a sunk cost of almost $300,000 a year for our infrastructure including technology, systems, research, staff etc., so it costs us almost no additional time or money to offer this service online. We recognize that some people just want quality investment management and do not want to also pay for a comprehensive financial plan and complete wealth management they do not need. Shoot me an email and I can send you a short video demo of the technology.
There are a few catches: We are selective about who we work with. First, we offer this service to investors with the understanding they are disciplined, long term, primarily passive investors who truly understand the risks of investing. Second, to keep costs and minimums lower than anywhere else, we will penalize short term traders for any sales within 30 days after purchase. Third, we will only work with people who are a good fit for our firm ie. those with realistic expectations and are respectful of our time and staff.
This is the plan, but we are open to input.
Harry Sit says
Sounds good. A good product also needs good marketing. Give Wealthfront and Betterment a run for their money, if only you can have their ad budget.