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]
Say No To Management Fees
If you are paying an advisor a percentage of your assets, you are paying 5-10x too much. Learn how to find an independent advisor, pay for advice, and only the advice.
KD says
Sorry to be a nag. But the first part explaining domestic stocks, international stocks and bonds can be illustrated with a graphic. Emphasis on behavioral mistakes aka “Simple does not mean easy” may drive home the point of fee-only financial plan.
I personally have been toying about trying the Vanguard financial plan now that my assets are in six figures.
Laff says
Please let us know if you decide to use an advisor. I’d love to know who you choose and what your experience is.
Random Poster says
I’d hate to spend the money for an investment advisor, only to be told “your portfolio looks perfect and you are totally on track to reach your goals.”
In any event, with regard to the Vanguard “one time fee,” what does that mean exactly? You pay the $250 and you get one financial plan? You pay the money and get one plan per year?
Harry Sit says
@Random Poster – You pay $250 and you get a financial plan. If you have $500k or more with Vanguard, the plan is free and you get to ask a CFP any financial questions throughout the year. I don’t think it’s necessary to get a plan every year. Maybe every five years or when there’s a life event (marriage, divorce, child birth, new job, …).
Sammy_M says
I agree with practically everything you said above, but am surprised that *you* are considering hiring an investment advisor. What are your primary motivations?
I also feel Vanguard’s planning service is a solid option, but would caution people that a good plan is worthless if you don’t have the discipline to follow it. Discipline is the product of education. if you’re not willing to invest in your financial education, go with a fee-only AUM advisor.
Of course if people are reading these comment they’re on your blog so have already displayed that they’re investing time in their fin education.
Harry Sit says
@Sammy_M – My motivations are:
* Recognize that I’m not immune to behavioral biases. There’s that old saying “A doctor who treats himself has a fool for a patient.” By using an advisor, I would put a firewall between myself and my money.
* Validate if I’m on track for my goals. See if it’s necessary to make some adjustments.
* Create a relationship between family members and an advisor. In case I’m incapacitated my family has somewhere to go. Let them participate in the process with me so it won’t be too overwhelming without me.
Choy says
This is a catch-22 to me. If you’re diligent enough to be able to find a good advisor, you’re probably able to create a basic asset allocation for yourself and might need even need one. If you’re one of those average joe investors around the camp fire that would benefit from an advisor, I doubt you’d have any interest in even looking up what qualifications makes a good one or ponying up the $250 to get one time advice from Vanguard.
Steve says
to Random poster:
We go to investment free lunches or dinners and follow up with a complimentary look at our portfolio. We have done this about 5 times and NOT ONE adviser said that our portfolio is fine and that there is nothing I can do. Sure they have something to sell to pay for the free lunch, but everyone wanted to sell us something because of our bond holdings are at risk. OH PLEASE, we already took care of that with short and intermediate term bonds and know the risks.
Rick Ferri says
Full disclosure, I am an investment advisor and have been for about 23 years.
Here’s my take on this issue:
1) Everyone has the ability to do-it-yourself (DIY). Creating a portfolio of low-cost index funds and ETFs is not difficult once the principals of diversification, rebalancing, fees and taxes are understood. There are many websites and books that tell you how to do this, including website and my own books (pardon the plug).
2) An advisor cannot add value (excess return) over what you can do on your own, providing you actually going to get it done. I fact, the amount you pay an advisor subtracts from return, and many advisors subtract a lot more because of a beat-the-market mentality among most advisors that almost always fails.
3) The KEY is ARE you going to get done what needs to be done in an efficient manner so that you capture the returns your deserve? This is were most people are tripped up. They have good intentions of doing all the right things at the right times, but it doesn’t get done. In fact, many people never really get started by fully implementing their plan.
4) If the answer to #3 is “that sounds like me”, then you should seek out an investment advisor to help. Choose an advisor of ‘like mind’, meaning who believes in what you believe, has acceptable fees, and who has a reputation in the industry for quality service.
Rick Ferri
Danny Hill says
Rick
I don’t know if you will ever see this e mail or not but if u do please email me on my email i listed, i have a portfoilio that is way out of whack and a Large amount or it is to me anyway, in the 7 digits, i would love to discuss this with you.
littlhill2003 at yahoo dot com
Thanks
danny
Jonathan Crossley says
Although 90, my cardiologist states my good health gives me many more years. My assets are securities in a 11m Fidelity brokerage acct. with Breckinridge Advisors running 2m in its municipal bond portfolio and me the rest. Kindly advise roughly your fee for managing the whole portfolio. I prefer fees to %. I am deaf and would not phone or correspond oftem. Regards, Jonathan Crossley
V5 says
Great article TFB. This has been on my mind lately as well. After implementing a Boglehead philosophy myself over the past two years, I agree it’s not very complicated, but it is an abstract task. I forget where I read it, but most people have trouble starting and completing abstract tasks compared to concrete tasks. Plus, most people are too wrapped up in their lives to monitor their portfolio. I know, a portfolio shouldn’t take a lot of work, but are they going to be able to TLH and rebalance when necessary?
Secondly, I think most families would actually benefit more from a financial planner looking at their finances in a holistic way than just a pure investment advisor. It’s great to invest a client’s portfolio in a low-cost indexed approach, but if the client doesn’t have enough life insurance, still has credit card debt at 15% APR, and doesn’t have their family budget under control, then what’s the point. I bring this up because I love talking about investing and have broached the subject with many friends. But it always becomes clear early on in the conversation that what 95% people really need is not an investment advisor, but someone to help them budget and manage their debt effectively. Just my 2 cents…
Portfolioist says
Great post and comments.
When reading, I thought, “that Vanguard deal sounds really interesting.” Why did I think that? Because I trust them as a company of sound judgment and fair treatment of their customers.
The Portfolioist series wasn’t about blind trust, but rather about being able to sleep at night. To me, believing in your advisor’s strategy is a component of trust. But I take your point . Failing to focus on strategy would be serious mistake when evaluating your options.
Cheers,
Nanette Byrnes, author of the 3-part series.
PDX_investor says
With the Vanguard personal advisor services, I would like to put part of my assets under management by the PA, and with the remaining assets, ‘shadow’ the allocation and any moves that they make. This way, I can both reduce the fees I pay (the PA is salary based, not fee/commission based), as well as keep some ‘flexibility’ in how I choose to follow the recommended mix or tilt based upon that.
I feel this is perfectly reasonable, and something that is fair. Comments?
Harry Sit says
PDX_investor – You can certainly do that. Vanguard’s allocation isn’t a secret. The value in the service is primarily in actually performing the moves consistently without second guessing. If you are going to shadow, be sure you can really shadow and not chicken out when the noise level gets high.
DIY Investor says
I agree with Rick Ferri. A couple of additional points though: (1) I’m not sure how his is deemed an abstract activity. For example, if you go to Schwab (et.al.)you’ll see they have several well defined models. Choose a model. It is spelled out exactly how to do this. It depends on the usual stuff: age, risk tolerance etc. You will this with or without an advisor. And here is a little secret: you know your risk tolerance better than an advisor! Then you have commission free funds or any others that you may want that you can invest in to meet the model specifications for the various asset classes. If the asset weighting gets 5% out of range rebalance. (2) I think there is some confusion between a financial plan and investment management. These are two separate activities. Typically a good plan will cost around $2,500. It will run Monte Carlo studies and tell you how much you need to save to reach your retirement goals, the insurance you need, how to tax efficiently save for your children’s education etc.
I would urge everyone who is on the fence to take a weekend and read Ferri’s our many thers of the same ilk before making up your mind.
Bob S says
I can attest to the Vanguard financial planning as I have just completed the process. Actually with $100,000 invested, the Plan is free (I believe once per year). I was very impressed with all parties that I interacted with. The approach was good. As expected you do the legwork of identifying all of your financial assets, your risk appetite, retirement target dates, etc. I am ecstatic to have gotten away from Merrill Lynch, their fees, loads, etc. I wish I had done it 5 years ago. For folks with a decent investment background, I think Vanguard can provide an understandable diversified recommendation that can be pretty easily implemented.
A "medium fee" advisor says
A good article with some glaring flaws: will the lowest cost fee only advisor always be the best solution? No.
Most investors need more than a “once a year” checkin/email. In many instances, I’ve heard first hand that the ultra-low cost/fixed fee advisors struggle to do even that! One in particular has over 4,000 clients! Assuming you can conduct 2-3 reviews every working day (which, over a year is tough to do), you need 10 advisors dedicated soley to conducting reviews. That ain’t happening!
Further, most of these “low touch/low cost firms” are worried about a short stint of market tracking error that they have significant overweights to the “market” and large growth stocks they miss out on the potential for an additional 1% to 2% per year of portfolio growth. To make up for this deficit, they take additional risks by buying longer term or lower quality bonds and overweight riskier sectors like REITs or commodities.
Still others have tried to get cute with their fixed income allocations, getting tripped up on auction rate securities in the meltdown, costing investors YEARS of higher fees via underperformance.
Finally, I see most stick with 4-6 model portfolios that are almost never deviated from. In the extreme, I saw one model index approach that seemed to base it’s entire allocation decision on the last 5-7 years, with over 65% of the equity allocation in international, emerging, and commodities. Sure, that backtests well starting in 2000, but good luck getting through the 90s with such a remote policy.
Also, I’d love to know what percentage of these investors were rebalancing back to stocks in the Fall of ’08 and Spring of ’09 when it looked like the world was coming to an end. At a 0.2% fee or $2,000/year, you simply cannot afford to spend the time necessary to keep ALL their clients disciplined and on track. It is much easier to give in, postpone what needs to be done until the dust settles, and pay the huge associated costs of bad behavior (which is much larger than small advisor fee differences).
No, most investors are better off with a fee-only advisor who stresses passive investing but builds custom tailored allocations and works closely with clients to educate them and keep them on track with multiple reviews PER year. This costs a little more than $2,000 per year, but is worth every penny.
1% should be the maximum fee charged, with rates declining to 0.75, 0.50, and 0.25% based on larger amounts or where the investor is so busy working/living that they can only commit to 1 review a year (and of course more in ’02 or ’08).
Harry Sit says
@medium fee advisor – Thank you for your comments. There’s no direct link between the FUD you raised and low-fee advisors. A low-fee advisor can do a poor job. So can a high-fee advisor, or a medium-fee advisor. Maybe Rick Ferri should add your allegations to his 8 Bad Excuses for High Advisor Fees.
Let’s use your numbers for the moment. If an advisor performs 2 reviews per working day, one advisor can do 500 reviews in a year. With 4,000 clients, a firm needs 8 advisors, not 10. Meanwhile, at $2,000/year per client, this firm receives $8 million in revenue. Allow a 50% overhead and owner’s profit, there is still $500k per advisor. It looks like a viable economic model to me.
Rick Ferri says
TFB,
Thanks for your comments. You are correct in that “medium fee” advisor makes many allegations about lower fee advisors that are far from reality and should go on the list. Like other higher fee advisors, the assumption is made that low fee means low service. Nothing could be further from the truth. Technology has advanced to the point where an advisor can managed 5 times the number of clients with 1/2 the staff than we could just 20 years ago. Productivity gains have happened in all other industries, and it has happen end in the advisor industry. So why are so many advisors still charging 1% or more? It’s unnecessary.
Very low fee advisors exist because the owners make a conscious decision to earn a much lower personal income than medium fee and higher fee advisors. I often joke that in my next life I’m going to be a 2% + 20% hedge fund manager because I deserve it!
Ev Luecke says
Very good commentary. DIY investor for 25+ years – by darn good luck I did well – over time lost interest, decided I wasn’t as smart as I thought I was, feared making mistakes as I approach retirement and wanted a passive asset class investing approach. Got overwhelmed/paralyzed in trying to make the change of philosophy myself.
I am happy with my choice of advisor – Buckingham Asset Management (Larry Swedroe’s firm). I know your article focuses on mid-sized portfolios – what I wanted to point out is chosing an advisor is a very personal thing – the Rick Ferri firm did not suit my needs, nor did the pre-set portfolios offered at Asset Builder. For me there was more than cost. My suggestion is the cheapest isn’t necessarily the one that is going to meet your needs. Chosing an advisor is not easy – it takes time, thought, and consideration in deciding what your expectations are, and why your need one in the first place.
I saved and keep handy what Wm. Bernstein noted in Investor’s Manifesto ( which will be controversial with those that practice DIY investing and are confident they know what they are doing):
<<
Thanks for the energy and thoughtfulness you put into your blog – very informative.
Ev
DK says
Ev – I just read a lot of your posts on the “financebuff” website/blog — one said you got overwhelmed — another that it took a while to find the right advisor — another that you were out of the market in 2008 and lucky — I was out too but unlucky – I am still out – no advisor and can’t decide on one and can’t figure how to get back in by myself – market now at highs I am afraid with all the Fed manipulations etc. it will go down as soon as I invest — and I am 59 – don’t know if should wait two years or just bite the bullet and go in — I too think I need a financial advisor – but paying 1% is that much less to compound if it is going to just be buy and hold — that makes me lean to Vanguard – but as someone said – they will probably just recommend 3 different funds……any advice — I see your posts are from 2011 and it is now 2014 so you might not even see this — but if you do — would appreciate hearing from you soon. I am so depressed and I think I need to do something…..d
Ev says
Yes DK I saw your response to one of my posts in this thread – reason I saw it was I subscribed to email notices when a post was added to the discussion.
I will bring you up to date since my 2011 posts – time passes by quickly.
From 2009 until Dec. 2013 I was very satisfied with BAM advisor services – not one complaint. My goals were accomplished beyond the portfolio that was developed and maintained over the time. Things BAM helped me accomplish: advisor went with me to the estate attorney twice to provide support for putting the trust together (keep in mind I am single and no family member to turn to on these things), helped me organize my retirement which will be in about 10 weeks (woo-hoo!), The adviser’s research found a strategy I would have never, ever on my own thought of – had to do with buying back some yrs. of service; calculated out I could not do better investing this money so I needed to buy years. Added a good amount to my pension. Any number of other things I could go into.
I appreciated everything they did for me – it was far more than managing the portfolio.
In Dec. I decided to explore a possible lower-cost fee only advisor. I was not paying 1%; but it was still a considerable amount each year. You are correct the fee takes away from your return.
I now work with this small firm: http://www.purposewealth.com/
I have been happy with Derek’s service albeit it has been a very short time – one thing I wanted to do was simplify the portfolio some – my portfolio was well organized in relationship to my need, willingness and ability to task risk – so a few changes were made not many. Derek patiently answered all questions, communicated promptly and got the portfolio adjusted quickly. I did not have to change brokerage firms so no accounts needed to be set up. I did not need a plan put in place – I have that; but Derek will develop one for a separate fee.
I’m not really qualified to give advice, but fwiw I know the feeling about kind of having a paralysis and just can’t move – its not fun. That was the way I was for a good long period of time when I went almost totally to cash thinking I was going to going with Vanguard and manage it myself. I feared making mistakes.
I believe might be helpful for you to forget worrying about the ups and downs of the market – you can not time it to get in at the “right” time or for that matter get out at the right time.
Seems like first step is to develop a written plan – that plan will drive how your portfolio is structured.
These two boglehead posts are about the best I’ve seen on the topic of plans – this takes time to put together, but will be needed even if you chose to work with an advisor. When a good advisor develops a portfolio they have to know YOUR overall financial situation – your goals, history, etc.
http://www.bogleheads.org/forum/viewtopic.php?f=1&t=6211
http://www.bogleheads.org/forum/viewtopic.php?f=1&t=6212
Going through the process of an itself will serve you well.
Keep in mind it will not cost you anything to explore a Vanguard advisor, or any other advisor. You can explore advisors – as you do it may come clear to you, “yep I need this, or shoot I can just do this myself.”
Each person’s financial picture and needs is different – one advisor does not fit all, no way, no how. Nor is DIY investing suited to everyone.
Hope this helps – ask any questions and I will try to answer the best I can.
Ev
Harry says
Thank you @Ev for mentioning Purpose Wealth as another low-cost advisor. At a fee of 0.25% capped at $6,000 it may be considered as a flat-fee advisor once your portfolio goes over $2.4 million. I’m adding Purpose Wealth to the main article.
Ev Luecke says
Sorry in my previous comment – I may have exceeded the limit – but the William Bernstein notes I referenced – these were like ah-hah moments for me:
I have come to the sad conclusion that only a tiny minority will ever succeed in managing their money even tolerably well. Successful investors need four abilities.
#1 – an interest in the process
#2 – more than a bit of math horsepower, far beyond simple arithmetic and algebra, or even the ability to manipulate a spreadsheet. Mastering the basics of investment theory requires an understanding of the laws of probability and a working knowledge of statistics.
#3 – a firm grasp of financial history, from the South Sea Bubble to the Great Depression.
#4 – the emotional discipline to execute their planned strategy faithfully, come hell, high water, or the apparent end of capitalism as we know it.
I expect no more than 10 percent of the population passes muster on each of the above counts. This suggests that as few as one person in ten thousand (10 percent to the fourth power) has the full skill set.
DIY Investor says
re: EV I understand exactly where you are coming from. What i question is the need to understand. Most of us don’t understand how the combustion engine works. Most are clueless in understanding what happens when we turn the ignition on. Yet most of us can drive a car.
There is very strong evidence that if you put your age percentage in bonds and he rest in stocks, using low cost funds, that after all fees and costs an indexed strategy will outperform 70% to 80% of advisors over the longer term.
For those who are slightly more sophisticated they can do a bit better by mimicking a lifestyle fund which reallocates over time.
So, you’re 40 years old buy 60% SPY and 40% AGG and that’s the simplified version. Actually a bit conservative for my tastes but anyways…
For the investor who insists on knowing why this works there are great books out there explaining the fees advisors charge and the hidden costs of trading etc. The same books detail the evidence on stock pickers and market timers. Granted learning all this requires a mathematical background and time.
Steve says
Self filling prophecy is a principle that if you think that 90% of the public is too stupid to learn investing for whatever reason, then it will be true. I was sorry that Bernstein had to go in that direction. He didn’t have to. I love everything else he said. The problem is that we don’t know how many people are doing it themselves and are successful because they don’t talk about it publically. We only hear of the victims and the horror stories. Of course the people, who come for help, don’t know, thats why they come for help. But to announe that 90% of the public are too stupid to learn or don’t have the motivation or courage is just an opinion. We don’t know.
One New Voice says
I like the post. A lot of info. I would have to say that I think that there needs to be more personal learning going on. Financial education is the key to true freedom. Don’t get me wrong, I think everyone need a financial advisor, but people need to know more about what they are getting one for. To say I am getting an advisor for retirment is to vague. We need to know why we are getting an advisor because their job is to give us suggestions. If we don’t know what they are talking about how can we tell if they don’t know what they are talking about.
Anthony DuBon says
I agree that something like 10% of investors have the interest and capability to manage their own money. 90% need an advisor. I say this as a partner in a company that sells information on mutual fund investment capabilities. We have individual investors and advisors subscribing to our service. The individual investors self=select. They meet most of the criteria listed by Ev Luecke in comment 18:
#1 – an interest in the process
#2 – more than a bit of math horsepower, far beyond simple arithmetic and algebra, or even the ability to manipulate a spreadsheet. Mastering the basics of investment theory requires an understanding of the laws of probability and a working knowledge of statistics.
#3 – a firm grasp of financial history, from the South Sea Bubble to the Great Depression.
#4 – the emotional discipline to execute their planned strategy faithfully, come hell, high water, or the apparent end of capitalism as we know it.
I happen to think that #4 is most important of all. Without discipline the best strategy will fail. How many people bailed out of the market in 2008, as it hit bottom and failed to regain losses by being present for the recovery. I do think that the industry could make it easier to find good investments. The tangled relationships between the large investment firms, brokers, other advisors, mutual funds complexes can be difficult to navigate. Independent sources of information need to be made available to deliver the information needed by investors. Advisors with integrity (many but not all of the advisors out there) add a lot of value in helping to sort through the confusing oversupply of information. My firm and others that provide analysis on the web also help individuals and advisors to find the investments that are likely to outperform.
Anonymous says
Excerpt from a Vanguard (former?) employee review on glassdoor.com:
“Oh, and that certified financial plan that you may have paid a fee for at a price tag of $250 or $1,000 for; notice that the only real advise you received was to buy into the Vanguard total stock, total bond and total international index fund and tell you to hold onto them forever. Are you really doing what’s best for your clients or what’s best for your bottom line?”
– http://www.glassdoor.com/Reviews/The-Vanguard-Group-Reviews-E4084.htm
Only reason I post this is I was thinking of working for Vanguard and happened across your post and the glassdoor review in the same day.
Personally, the advice I’d be most interested in would be their recommended asset allocation percentages and whether I’m holding the right funds in the right places, but the review didn’t go into that …
Steve says
“Oh, and that certified financial plan that you may have paid a fee for at a price tag of $250 or $1,000 for; notice that the only real advise you received was to buy into the Vanguard total stock, total bond and total international index fund and tell you to hold onto them forever. Are you really doing what’s best for your clients or what’s best for your bottom line?”
Absolutely, over the long term, that $1000 advice will pay off in low fees and its elegant. But I did not even have to pay for any out of pocket for that advice. The only part that is always left out in this very simple plan is the REBALANCING. I have owned those three funds for years. I am an uncomplicated by nature and I like the simplicity, the diversification and the extreemly low costs. Go Vanguard!
Ev Luecke says
DIY investor noted: <<>>
You’re correct I really don’t understand how the engine works – but what I do need to have is an understanding of what I need to do to keep the engine working properly for many years and awareness of safety issues – a plan for basic maintenance scheduling – keeping the finish polished and clean, tire checks, correct pressure, rotations, front end alignment, regular oil changes, longer term transmission fluid change, radiator flush, injector cleaning, timing belt change and so on. Behind all this it won’t happen correctly without a trusted mechanic that will provide excellent value for the money. No, I don’t need to know or do I really want to know all the details and ins and outs of the mechanics of the engine – but I sure need to pay attention to my car and see that the preventive maintenance is attended to properly.
That said, my search and due diligence for a fee-only advisor was not a matter of understanding exactly everything about MPT and how it worked. It was certainly not plopping down my money in a couple of Vanguard Index or ETF funds – it was like the car maintenance – I needed a financial plan – not just a portfolio allocation – there was in my mind a big picture. As a financial advisor yourself (I peeked at your website) I’m sure you’ll agree.
That big long term maintenance included things like transitioning to retirement, when to reitre, how much do I do I need, how much to withdraw from the portfolio and from what funds do I take the money, do I pay off the mortgage, what about long-term insurance, direction on a trust.
Transitioning that thinking to the portfolio – frankly it became overwhelming: What type of passive instruments – index vs. etfs, how did the rebalancing work, can I do the rebalancing at the right time and in the rights amounts. How do I figure our a risk profile, and the needed asset class allocations – do I need commodities, REITS, foreign bonds. Had several active managed funds – do I sell them, all at once, or few at a time – what are the tax implications. I haven’t even touched on fixed income portion of the portfolio – should I have bond funds like V-guard Total Bond Market – or some combination of TIPS, CD’s.
Plain and simple I was not confident in my ability to get it right. FIrmly convinced for ME the importance of planning, executing, and preventing mistakes pays for the advisor fee – and finally peace of mind. I’ve also discovered that my advisor encourages me to be knowledgeable and involved.
I digressed from the Bernstein points and will address them on another post.
Evelyn
Steve says
Folks, you don’t have to be a math genius to know about investing. The constant reference to math only continues to intimidate people from learning investing. Is that what we want?
Reference to the auto mechanic or any other profession I always find hilarious. The problem with comparing the mechanic and the financial adviser is that the adviser gets paid the entire time the investor is with him or her, sometimes for years and years and never sees the adviser. The mechanic charges a flat fee and is done. The mechanic is a great example of a fiduciary.
Always use a fee only adviser, but the problem is that the investor still needs to know what their adviser is doing. Also the investor needs to know that advisers don’t “get it right.” No one knows future performance and advisers make mistakes too, lots of them. Case in point: Did you read all of the horror stories during the 2008 crash in the newspaper when 80 year old people had 90-100% equities and lost half of their money and they had advisers!!! A simple bond allocation could have saved them, now does that take a math genius to know about asset allocation with a bond allocation equal to ones age? I don’t think so.
DIY Investor says
@ Ev Hey, if you’re convinced that it is too difficult, that actively managed funds add value, that managing the funds as you move to retirement is too complicated to figure out then by all means hire an advisor.
Do note however that I totally agree that people need a financial plan and that they should pay for it – on average a good plan will cost $2500. Note also that I’m not talking about estate planning. Actually as you know a planner cannot draw up a will or set up trusts etc. so that’s a whole different ball game in itself.
An outcome of a financial plan is a recommended asset allocation. Once that is in hand I believe that the way to go is to use low cost, well diversified, index exchange traded funds.
I realize it isn’t for everyone.
Ev Luecke says
DIY –
I did hire an advisor – Buckingham Asset Management (Larry Swedroe’s firm) – and have accomplished all that you noted. No, it isn’t for everyone that is for sure.
My portfolio is DFA funds and TIPS /CD’s on fixed income side. BTW, I thought the DFA funds were a nice little plus to working with BAM – I’d never hire an advisor to get access to DFA funds for sure.
For ME a burden lifted.
About those 4 items Bernstein listed.
1 – I was losing interest in diy investing
2. – Math horsepower – about none. I don’t think you really need to get factor loads, optimizing sharpe ratio and all the minutia – but I have trouble with the basics – understanding rates of return for example.
3. A grasp of financial history – sort of get it.
4. Emotional discipline to execute and stay the course – I think I have this – in 2007 I sold the vast amount of my holdings to Vanguard MMK – I knew I wanted passive asset class investing – but it took me until mid-2009 to get it organized. I also became paralyzed as I saw the market tumble and tumble – missed out on all that by pure luck. Prior to that over 25 yrs. thru up and down I sold little.
Evelyn
DIY Investor says
@ Ev I’m a fan of Swedroe so I think you’re in good hands. I’m a fan of Bernstein as well.
On the 4 points:
1. It doesn’t take long so a whole lot of interest isn’t required IMHO. It’s nothing like picking stocks for example where you need to be very passionate and willing to spend a lot of time at it.
2. Math – Schwab does the performance numbers and for the performance numbers for the benchmark model you choose and they are up-to-date. For example, those clients of mine that use Schwab know their performance through Friday relative to the index! Most people have no idea how they are performing year to date or for the last 12 months.
3. financial history- important but even more important is a sense of economics IMHO. People don’t understand that when prices rise forces come into play bringing them down. Example: housing prices a few years ago. People acted as if they would rise forever. Closer to home: watch how people act as oil prices go higher.
4. Emotions – this to me is key. For those who can’t be unemotional hire an advisor. I will say though that something that I’ve not seen mentioned is the inability to get hold of your advisor in stressful times. Markets plunge and advisors don’t return calls! This exacerbates the situation greatly.
I’ve enjoyed the dialogue and hope others have gained from your experiences and insights. It is a big advance when investors find what works for them.
This whole topic and exchange has been one of the best I’ve come across in a while. Kudos to TFB!!!!
Ev Luecke says
Yes absolutely a good topic and exchange – perhaps something to be said for those that follow discussion on TFB, Oblivious Investor, bogleheads.org more than likely are in that 10% that Bernstein refers to as being successful.
My brokerage is Schwab as well – would you mind explaining how the client views their portfolio relative to the index benchmark. Is this something separate you set up within the account to view performance compared to a benchmark? You said:
“performance numbers for the benchmark model you choose and they are up-to-date” I don’t understand what you mean by “the benchmark model you choose…”
I don’t see this anywhere in the accounts section?
BAM created a personalized benchmark that compares my performance to the portfolio return -which I think is important. BAM also reports the portfolio Internal Rate of Return in my quarterly performance report – whereas the brokerage performance is reported as Time Weighted Return – which if I understand correctly is how an index or benchmark should be compared to.
Seems to me like IRR is important to have – “IRR as the personal rate of return they received for their particular investments, since it accounts for the timing of their buy/sell decisions, and/or portfolio withdrawals or deposits that affected the realized return. This gives the investor an indication of what factors were at play that caused the IRR to differ (positively or negatively) from the benchmark rate of return. ” Larry speaks about these differences:
http://www.investmentadvisornow.com/investing-articles/259-time-weighted-return-internal-rate-of-return-larry-swedroe.html
Anyway, thanks for explaining how your client has this index benchmark set up.
Evelyn
Ev Luecke says
Just to note – if interested my customized benchmark the composition, which is proportionately the same as the portfolio but less value oriented.
Russell 1000 – 11.7%
Russell 1000 Value – 3.7%
Russell 2000 Value – 11.0%
MSCI EAFE – 9.8%
MSCI EAFE Small Cap – 5.6%
MSCI Emerging Markets – 2.2%
Dow Jones UBS Commodity (total return) – 3%
Dow Jones REIT Index – 3%
Barclays Interm Govt/Credit – 25%
Barclays TIPS – 25%
Evelyn
DIY Investor says
Hi Ev,
Read
http://rwinvesting.blogspot.com/2011/01/how-can-i-calculate-performance-of-my.html
If you’re still a bit fuzzy on it email me at my site and I’ll give you more detail.
I assume you’re in retirement or close to it or were burnt badly in the market previously because of the 50% bonds allocation. If so I like the allocation because you are well diversified. I would probably reduce TIPS and put 5% in JNK, a high yield fund, and possibly 5% in PFF, a preferred trust etf. I also would maybe put 5% or so in the equity portion in a dividend etf like DVY. But all of these are changes around the periphery and who knows if they would end up adding value.
Ev Luecke says
No I wasn’t burnt at all – especially the 2008 crash – I was by luck 80% out of the market. The 50 % fixed income is due to risk tolerance – the willingness, ability, and need to take risk. I don’t need to take a lot of risk in order to reach my objectives.
I am close to retirement. For me the piece about NEED was the most important in terms of deciding on the risk tolerance.
I will read your article referenced. – Thanks.
Evelyn
V5 says
^^
Well said Ev.
Munir says
Thank you for this informative and timely thread. I’m a retired Boglehead who has reached an age where I’m considering handing things over to an advisor primarily because I’m worried about what will happen when I “kick the bucket”. In addition to a passive, index, & fee only (e.g. using Vanguard & DFA funds), I want an adviser who will get along with my spouse and will maintain personal contact with her after I move on. I also want continuity from that firm and would be interested in how they address that issue if the main manager moves on, retires, or dies.
Are these basic questions that don’t merit much discussion in these conversations because they are dealt with on a one-to-one basis during the setting up of a relationship with the adviser? To me this is the area where personal trust and reationships really count.
Thank you.
"medium fee" advisor says
What always gets me with these “low fee” guys is they aren’t the LOWEST fee firm. And if advisor fees are all that matters when hiring a professional, why would anyone hire a firm at 0.25% when there are plenty of options at 0.2% or 0.15%?
If advisor fees were all that mattered, then a firm charging 0.25% (let alone 0.5% or 0.75%) would be out of business. Far from that being the case, both my firm and Buckingham are larger than Portfolio Solution, clearly not out of business. And this is without me advertising my firms’ name or services on Internet chat sites.
The reality is, low (but not lowest) fee advisors will tell you there is VALUE in hiring them and paying more than the lowest fee firms. I am simply taking their argument and applying it to our (medium fee) advisory firms. Are we really supposed to believe there is really something magical about 0.25% whereby anything less is “insufficient” but more than 0.25% is highway robbery?
Please. 0.25% is based on the 12b-1 takedown these guys used to get in their brokerage days. My guess is, after years of disappointing active fund results, most people wouldnt stay on board with a new startup firm for more than 0.25% and they just got painted in that box.
"medium fee" advisor says
I also find it interesting that no discussion ever takes place about how different advisors develop portfolios and how firms that meet with or review their client portfolios more frequently can afford to diversify more fully between market risk and return factors. Are we to assume all firms achieve the same returns simply because they use indexes? Far from it.
Lets look at 2 examples:
The first firm charges 0.2% annually, develops a 60/40 stock bond allocation for their new client and plans to call them once per year for a review. The stock allocation has a heavy Total Stock Index tilt, with only 30% in small and value asset classes (this works out to about a 15% size tilt and a 15% value tilt). On the bond side of the portfolio, they hold longer term and lower quality debt arguing for “better diversification”.
The second firm charges 0.75% annually, determines a 60/40 stock bond allocation is also appropriate but prefer to meet with their clients 2-3 times per year. This advisor believes in more overall diversification between market, small cap, and value risk and return factors on the stock side. They also prefer to keep bond allocations shorter term and higher quality to provide better risk reduction.
We will model firm 1s allocation since 1928 (longest period available) using a 60% combination of DFA US Core 1 Index (the same size/value loadings as their model index portfolios) and 40% Ibbotson Long Term Corporate Bonds.
Firm 2s allocation is instead 24% DFA US Core 1 Index, 36% DFA US Targeted Value Index, and 40% Ibbotson 5YR t-notes.
Net of both advisor’s fees from 1928-2010, we saw returns of +8.9% and +9.6% respectively. Furthermore, neither portfolio showed any meaningful difference in downside risk.
So what we find is that differences in portfolio construction (which are possible because more frequent reviews = more opportunity to “coach” investors through short periods of market tracking error regret) are far more important than small differences in advisor fee.
In this example, the opportunity cost associated with investing with the lower fee advisor was about -0.7% per year, for a total cost of about 0.9% total, or close to the 1% fee they seem to despise so much.
The irony here seems to be that investors/advisors are so concerned with advisor fees (which never vary by more than a few tenths of basis points) they completely ignore huge differences in portfolios taking varying degrees of market, size, and value risk. Here we are talking about several hundred basis points of performance difference! And it is just those firms that charge a bit more, allowing for more client face time and more education and discipline, that are able to prescribe these more diversified allocations without living in fear of temporary market underperformance.
Aaron says
@medium fee advisor,
I have personally nothing against medium or high fee advisors. It’s really about what someone is looking for, and if the adviser provides a value in return for said fees charged.
That’s really what this is about. To broadly characterize the categories is fair, but it’s categorically unfair to then judge one adviser in any of the groups based on what most in the group does. With that said, you’re also categorically throwing out how medium fee firms are better than low fee firms, virtually always, or that low fee firms are inevitably inferior to medium fee firms.
The question is what does the customer want? If they’re wanting someone to determine an asset allocation, rebalance for the customer as time goes on often, etc., then they probably should have a medium fee adviser. If they want instead someone to simply help them determine an appropriate allocation, and then the customer will take it from there, how could it possibly be in the best interests of the customer to pay a medium fee adviser?
Very simple: it isn’t.
Not everyone is looking for an adviser to do all your firm is doing. I certainly am not. I’m completely comfortable with rebalancing my portfolio, and do so often. However, I definitely see the value of talking to a reputable low fee adviser. But that’s me. I wouldn’t say anyone turning to a medium fee adviser is wasting their money just because they cost more than the low fee adviser I chose.
"medium fee" advisor says
aaron,
All good points. However, I would argue we should apply the same logic to low fee firms who constantly pound the table about how anybody who charges more is ripping investors off.
The reality is, I have some clients at these lower fee levels. Most firms do, and we acknowledge there are clients out there like this that we are happy to work with. Low fee firms, on the other hand, are completely unwilling to admit some investors require more attention and it costs more to service them and meet their demands.
Lowell Herr says
In Daniel Goldie and Gordon Murray’s little book, “The Investment Answer,” decision one is to decide whether or not one should manage their own portfolio. G & M recommend seeking a fee based advisor, just as this article advocates. It is probably the right choice for many investors in the market, but I prefer to watch over my investments as I don’t think any advisor would have the patience to measure some of the risk factors I consider extremely important.
For example, most advisors still use standard deviation or mean-variance to measure risk while SD is now considered to be outmoded as it penalizes a manager for volatility to the upside, something we all desire.
Lowell
Ev Luecke says
Munir,
Your questions are in my mind very important to establishing your advisor relationship. What I found as I went through the process is the more information I had written down (so I don’t forget ) related to my overall financial situation the easier it was first to compare apples to apples, knew what I wanted, and made things clear for the advisor. So it wasn’t a matter of waking up one day and saying, “I’m going to get an adviosr today.” It was a process that took time.
Key in my mind to having a successful for YOU relationship with an advisor is exactly what you are talking about – the personal trust and relationship you establish is the very most important part of having an advisor.
Any firm that is not interested in your wishes when you pass on and establishing a good relationship with your wife is not worth their salt. The discussion will and should be as lengthy and as often as necessary so you and your wife are comfortable. In my case I am single but had questions like yours – actually the advisor approached the subject before I had time to ask in our first meeting. My advisor has established a relationship with my sister related to questions about my taxes (I just don’t get taxes period). My sister has someone to contact about the taxes and the advisor knows I don’t get it so she will phone my sister.
Establishing the foundation of an advisor relationship is not a ten minute phone call in my opinion.
About succession of advisors – this is important question – your advisor should be able to explain how this is handled. I’m going to ask my advisor about this – good thinking.
Let me know if I can answer any questions for you based on my experiences. Its a big step to hire an advisor for sure. evluecke at gmail dot com
Evelyn
Munir says
Hi Evelyn,
Thank you for the response. It has helped me think matters thru more clearly. To elaborate on what I’m looking for, and asking others’ opinions about, is how realistic and feasible is my request. My issue is that I believe with the knowledge I currently have as a Boglehead, I don’t need much “care” but only want someone to suggest & execute an asset allocation, and then rebalance maybe no more than once or twice a year. I suppose a “low-fee” advisor would be fine for this role. But I also want this person to be able to explain finances more fully and spend more time (at more cost) with my widow when I’m gone. I also want him/her to assure me that my widow will receive a monthly or quarterly check from my investments for her living expenses. How can I judge at the initial interview that the advisor I’m conversing with can serve this dual before-my-death and after-my-death role?
Ev Luecke says
I believe your request is not only reasonable Munir; it is for you an expctation that has to be met period. These advisors are there to meet our needs – if one can’t do it, there is someone else who will be happy to. I can’t tell you if a low-fee advisor can meet your expectation, or you will require a more which I call full service one. I believe your gut will tell you with reasonable certainty if the advisor will meet your needs as you begin speaking with advisors.
Perhaps when you do the initial interviewing/question asking your wife should be a part of this too – and she will get a feel for who she is comfortable with. And can support you as you both make an advisor decision.
I was also thinking perhaps because your wife will require as I understand it, more hand-holding perhaps an advisor in your local area that you and she can visit with face to face would create a good atmosphere in establish the relationship. My advisor is local and I have had several face to face meetings and it was a good thing for me.
I don’t know if this is helpful or not – if I wrote it confusing just ask again.
Ev
DIY Investor says
@Munir Let me throw a couple of ideas at you. First, you may want to seek an hourly, fee only registered investment advisor. He or she will sit down with you and come up with an asset allocation, make sure your investments are located correctly and overall make sure you are positioned to reach your goals.
Some people have the goal of leaving an inheritance, some are fearful of running out of money and some want to ensure (as you do) that their spouse is taken care of.
One thought on the latter is to consider putting a portion of your assets (maybe at your death) in a single premium immediate pay annuity. This will provide your spouse with a paycheck for as long as she lives. Be careful that this is handled by someone who knows what they are doing. Insurance product sales people sometimes talk the unwary into products that aren’t appropriate. Believe me – this is a huge understatement.
When you sign an agreement with your advisor make sure it clearly specifies the investment approach that will be used. I’m currently involved with a client who lost a lot of money. The advisor went into the church, signed up about 20 people, traded on margin and for some of the clients lost all of their money. Now the advisor can’t be found and, for sure, he’s no longer going to that church.
Munir says
Thank you for the helpful responses. I feel I am hogging this conversation, and so I’ll be brief.
I have researched the local advisors in my area and none of them meet my criteria of a passive low cost indexing style. I may end up with someone initially on an hourly-basis advice, but that does not meet my longterm needs. Including my sposue more into this whole process is a valuable suggestion.
I do have one SPIA, and plan on purchasing more within the 100K limit each of the state guarantee rules- hopefully when interest rates rise a little. Currently I’m focusing on one of the California “low-cost” advisors mentioned in the article referenced at the beginning of this thread.
This dialogue has helped further my thoughts in this area, and galvanized me into taking a more assertive search. Thank you.
"medium fee" advisor says
The one time fixed fee route probably isn’t a good one, or at the very least insufficient. Setting up a plan is the easy part. The value of financial advice comes from ongoing support. In 15 minutes we can google appropriate allocations for our age. Staying with them over the next 20 years is something else entirely, and because of this, you should pay for advice that makes this possible.
Lowell Herr says
If one is looking for a 20-year advisor relationship then it is important to seek out a firm where it is not just a one person shop but there is some plan of sustaining the company for years.
Lowell
Rick Ferri says
I’ll say this one more time and maybe it will stick. The BIGGEST difference between a medium/high fee advisor and THIS low fee advisor is size of our paychecks. I take home a MUCH lower amount per assets under management than advisors who charge higher fees. The pseudo-excuses you’re reading above about medium/high fees is a cover-up for a fat profit margin.
Jeff says
I’d like to see a study of how effective advisor hand-holding is at keeping jumpy clients from fleeing the market during a downturn. I hear a lot of how this is the big bonus to having an advisor vs. not, and it sounds good in theory, but I wonder how much of one it really is. I also wonder how many advisors bailed in the last downturn.
DIY Investor says
@ Jeff Interesting question. I think advisors do a good job keeping clients from bailing as long as they themselves believe that bailing is the wrong thing to do. I had 26 clients and 2 bailed. One was down 19% in ’08 when the S&P 500 was down 37%. She had said on a questionairre that if stocks were down 20% she would buy more! Get this – she’s a psychologist!
But a bigger problem I think, that you alluded to are the brokers themselves who try to time the market, got out (for emotional or whatever reasons) and never got back in. This is actually a big source of business. When I ask people why they are seeing ny services and they say “the advisor I have now has messed me up” I pretty much get the picture.
It is interesting that FINRA, the Financial Industry Regulatory Authority maintains no performance data on brokers and advisors. People are flying blind when they go with the “market beaters”.