Fee for Financial Advisor

[leyland]

I am the OP. I dont have a FA. I realize I need a better asset allocation and I am trying to decide how to accomplish that. Using a FA (who charges a % of the assets) is one option.

I am not the advisor, it appears from context of other posts, the OP has an allocation with a FA.



Not sure if my reply was to another poster or yourself.

If you believe you can DIY, then DIY. The value of an advisor is in getting advice about situations you may not be familiar with (as you indicated in this response)





And this was posted by me- if you do not see these situations arising, the value an advisor brings (to you) is minimal



If you intend to research every decision before you make it, then DIY. If you want immediate answers from someone which knows "everything" going on financially, you want a FA.

 

[chinaco]

Was that

1) Fee for Adviser

Or

2) Flee from Adviser?

Given a choice I choose number 2.

Here is the definition.

1.one who gives advice.
2.a teacher responsible for advising students on academic matters.
3.a fortuneteller.

I suspect definition #3 would be more accurate if it stated: FortuneTaker

 

[FinanceDude]

I just had a review completed by Vanguard (at no charge) IMHO, good place to start. They really push their index/lost cost mutual funds

Its the only ones they can tell you to purcahse...........

 

[M Paquette]

Some more numbers. Based on past records, the FA estimated that his recommended portfolio (of which he will charge 1.25% per year as his fee) will deliver 1.5% better performance than my current portfolio. My current portfolio has 15% in cash right now and his recommended portfolio has 2% in cash. Simply moving money out of cash would likely close the 1.5% difference (along with changing the currently skewed asset allocation). It isn't clear to me that he is likely to generate returns that are enough to cover his fee based on what was presented to me (assuming, of course, that I change the asset allocation to something more reasonable).

Don't forget. "Past performance does not necessarily predict future results."

You are guaranteed to pay out 1.25% in fees and expenses, of course, but there is no guarantee that you will receive 1.5% or better improvement in performance than your current portfolio. (And if the advisor IS guaranteeing that level of performance, RUN! That's a red flag.)

Start here: Bogleheads :: View topic - Investing: For Beginners
This should give you enough information on investment basics and planning to at least let you ask good questions of potential advisors, if not give you the confidence to manage your portfolio on your own.

 

[FinanceDude]

Don't forget. "Past performance does not necessarily predict future results."

See my disclaimer.........

 

[73ss454]

See if the advisor will agree to get paid by performance. He will earn the higher ER if he earns the extra money for you. But if he doesn't he gets nothing. That conversation should put this to rest.

 

[dizzy]

I always wondered why FA fees are a percentage game... Is it really 10x harder to manage a spreadsheet if you move the decimal point one digit to the right?

 

[braumeister]

Just to toss out a data point. My uncle uses an advisor. At his advanced age, he no longer has the energy to do his own research, so it makes sense for him. The advisor uses a sliding scale based on amount of assets, but he's paying somewhere between 0.6 and 0.7% and his return has averaged well over 5% for years. Makes sense to me.

 

[FinanceDude]

See if the advisor will agree to get paid by performance. He will earn the higher ER if he earns the extra money for you. But if he doesn't he get nothing. That conversation should put this to rest.

It doesn't work that way but not for the reasons you think. FINRA and the SEC do not allow advisors to do that, so that's the place where you start............. Easy to blame the advisor, but not understand the hand they are dealt by regulation. Heck, we can't even highlight the expenses a MF charges in the prospectus and send that to a client.......

 

[kumquat]

See my disclaimer.........

I see it.

................... Past performance is no guarantee of future results (love that one).......

Please tell us, does the "(love that one)" part mean you believe it or is it a substitute for a sarcasm font?

 

[califdreamer]

Well since the poor FA is overburdened by government regulation I would suggest buying a copy of Rick Ferri's "All About Asset Allocation" and take his advice to choose an allocation based on your risk tolerance and situation, buy a broadly diversified portfolio of equities and fixed income securities and keep your costs to a minimum by sticking to passively managed funds with low ERs. You can probably do this over the weekend.

 

[keegs]

Work forty years scraping together enough money and acquiring enough assets that you think will get you through your golden years and you're now discovering that all the saving and the scraping...well that was the easy part.

It's a daunting task this investment management stuff. There's your health, your taxes, your budget, your debts, your investments..the sharks, the hawkers, CNBC.. what's going on in Brazil, China, Saudi Arabia, Toledo, Mumbai... ..Oh..and did anyone mention...they're coming after your Social Security??

Well don't worry...there's this great book out now, written by this wall street expert...

We're 8-10 years away. I'm trying to run through investment / budget / lifestyle scenarios using the assets I think will still be with us over the course of our retirement. Good luck.

 

[FinanceDude]

Well since the poor FA is overburdened by government regulation I would suggest buying a copy of Rick Ferri's "All About Asset Allocation" and take his advice to choose an allocation based on your risk tolerance and situation, buy a broadly diversified portfolio of equities and fixed income securities and keep your costs to a minimum by sticking to passively managed funds with low ERs. You can probably do this over the weekend.

Again, why pay a guy 25bp a year to buy you Vanguard funds? Sheesh, you guys always say FAs offer no value, now you want to hire one?

 

[califdreamer]

Again, why pay a guy 25bp a year to buy you Vanguard funds? Sheesh, you guys always say FAs offer no value, now you want to hire one?

I never suggested hiring Rick Ferri or any FA for that matter. If you read my post you would see I suggested his book All About Asset Allocation. That'll set you back all of $14.93 for a new copy on amazon.com.

Sheesh, do you ever bother reading the posts?

 

[Emeritus]

It doesn't work that way but not for the reasons you think. FINRA and the SEC do not allow advisors to do that, so that's the place where you start............. Easy to blame the advisor, but not understand the hand they are dealt by regulation. Heck, we can't even highlight the expenses a MF charges in the prospectus and send that to a client.......

[FONT=Verdana,Arial,Helvetica]Performance Fees[/FONT]

[FONT=Verdana,Arial,Helvetica] Section 205(a)(1) of the Advisers Act prohibits an investment adviser (whether SEC-registered or not, unless exempt from registration under Section 203(b)) from receiving any type of advisory fee calculated as a percentage of capital gains or appreciation in the client's account ("performance fee arrangement"). The Advisers Act contains exceptions from this prohibition for contracts with: (1) registered investment companies and clients having more than $1 million in managed assets, if specific conditions are met; (2) private investment companies excepted from the Investment Company Act under Section 3(c)(7) of that Act; and (3) clients that are not U.S. residents. In addition Rule 205-3 under the Advisers Act permits investment advisers to charge performance fees to: (1) clients with at least $750,000 under management with the adviser or more than $1,500,000 of net worth; (2) clients who are "qualified purchasers" under section 2(a)(51)(A) of the Investment Company Act; and (3) certain knowledgeable employees of the investment adviser.

I don't actually see any mention here of a provision that prevents the adviser from sharing losses as opposed to gains
[/FONT]

 

[BTravlin]

Why agree to share the losses if you can't also take a cut of the profits?

 

[dizzy]

I never suggested hiring Rick Ferri or any FA for that matter. If you read my post you would see I suggested his book All About Asset Allocation. That'll set you back all of $14.93 for a new copy on amazon.com.

Sheesh, do you ever bother reading the posts?

$14.93 is the price only if your portfolio is < $10k
For 5 figure portfolios, you need the $149.30 version where all the dollar amounts in the book's examples are multiplied by 10.

 

[simas]

a lot of confusion here

a lot of confusion on this thread - people confuse financial advisors with portfolio/investment managers. Financial advisors are helpful to build/review/maintain plan, come to a specific decision when complex situation is encountered and best used when where are minimal conflicts of interest (i.e. in fee only model where you pay for experience and training ). Investment managers run money for a fee, usually not interested in smaller accounts and require significant commitment with lock in for the money invested. DIY is all great (I do it myself) but unless you are
a) very rich
b) professionally trained
c) want to make it your profession
large scale investment management/private equity is the job of the pros. the ones I had experience with invested in start up companies that are in specific stage of their lifecycle and directly participating in company management and development do it for 100% of the time, traveling internationally, hiring/reviewing management, doing deal due diligence, negotiations, serving on company boards, arranging financing ,etc. High stress, very high hours, constant pressure cooker type of job if you think you can do it as individual investor , are you either (A),(b) or (c) above. Trying to trivialize this to "picking Vanguard funds" would not be correct. Trying to simplify what Rick knows (how many people on this threat have passed their CFA creds?) into picking Vanguard funds is not true either, it is enough to open his book for few minutes and learn from it to figure it out.

My my DW and me , we do not use either as we have no need in additional complexity and I like running my own portfolio. After working with private equity money managers and seeing their workload, my engineer job is a vacation- so no interest in that either

 

[brewer12345]

Actually, I am a CFA charter-holder (and I passed all three exams on the first try). For the vast majority of retail investors, it IS as simple as picking a reasonable set of index funds given one's return requirements and risk tolerance. IMO, most of the hard stuff is figuring out your risk tolerance and some of the other details (tax issues, estate planning, etc.). The actual investing stuff should be pretty simple for retail investors, and those that try to get cute and color outstide the lines frequently get badly burnt.

 

[Sarah in SC]

Thanks, Brewer for the succinct explanation of what is really the hard part. And once again, I gotta say "wow" to that "passed all three on the first try for the CFA". Talk about separating the wheat from the chaff.

I agree that for many folks, the hardest part is determining their risk tolerance and also (though not so much here on the board) there is a serious need for simple hand-holding in volatile times.

 

[brewer12345]

there is a serious need for simple hand-holding in volatile times.

Absolutely. Hand-holding in tough times and discipline in the good times. Even if you get the perfect investment allocation, giving into excessive fear or greed will wreck your performance, as many people have found.

 

[Bestwifeever]

People who use FAs probably don't post here and many who do, probably have done as well financially as many here who DIY have. The people I know who use others to handle their money don't question their decision. If they question their FA, they would find a different FA before they'd do it themselves because either they just don't want to DIY for whatever (valid or not) reason, or it simply hasn't occurred to them. So they're not researching making their own financial decisions in retirement and not find e-r.org as a result.

I admit sometimes I envy them (and even people who have annuities)--they probably don't second guess themselves or follow the markets daily or feel like they have to know that a TIP isn't just what you leave for the waiter. But you can't unring a bell and once you learn enough about investing to help make your decision on choosing an FA, you're already on your way to DIY and the FA fee becomes irrelevant.

 

[Emeritus]

Absolutely. Hand-holding in tough times and discipline in the good times. Even if you get the perfect investment allocation, giving into excessive fear or greed will wreck your performance, as many people have found.

Oh good grief
the right wing Ayy Rand "lets destroy social security" crowd decry the "Nanny state" and Paternalism and insist that every Jeffersonian Yeoman farmer can take care of him or herself. Kill those pensions and go to 401 ks At the same time the vultures are circling the poor unfortunates with claims that they need external hand-holding and discipline

Or is it just that the poor bastards are told they need privately paid FAs instead of that nasty old social security system ?

If we need to look after people since they might make wrong choices nothing does it cheaper than social security.

 

[FinanceDude]

Oh good grief
the right wing Ayy Rand "lets destroy social security" crowd decry the "Nanny state" and Paternalism and insist that every Jeffersonian Yeoman farmer can take care of him or herself. Kill those pensions and go to 401 ks At the same time the vultures are circling the poor unfortunates with claims that they need external hand-holding and discipline ]

Or is it just that the poor bastards are told they need privately paid FAs instead of that nasty old social security system

If we need to look after people since they might make wrong choices nothing does it cheaper than social security

Do we really need a political tie-in on this?

 

[Sarah in SC]

That'd be a negative, Finance Dude.
And weren't you supposed to be using your secret decoder ring? <grin>