Another Financial Advisor Question

[CoolRich59]

I know financial advisors are not real popular here, but we use one.

The reason (stated briefly) is that I do not have much expertise in this area. So, I worried constantly if I was making the right investment choices. Compounding my anxiety was constant worrying that, even if the initial choice was correct, were market or other changes that I was not aware subsequently dictating changes that I was not making?

So, a little more than 2 years ago we put our $$ with a small CFP financial services firm so I could quit worrying so much. We've been reasonably satisfied with their work, and I like not having to think about our $$ constantly. But now, I would like to "audit" their performance to determine if I am, in fact, getting a good 'bang for my buck'.

I have a nephew-in-law who is a financial advisor for Citibank, but I don't want to ask him. Is there a way to have our account's performance assessed? Is this something I could ask, say Vanguard or Fidelity, to look at?

 

[Sunset]

Can you not simply compare how much your account went up over the past 2+ years compared to a standard 70/30 investment mix of stock & bonds ?

How much if you had put your money into: 50% in VTI, and 20% in VEU, and 30% in BND, would it be worth now.

Just look at the price of the three 2 years ago compared to today and add in the dividend for each paid yearly.

Compare that number to your account balance to see which is higher. This way in both cases you are comparing the after fees/expenses cash value.

 

[ERD50]

.... I like not having to think about our $$ constantly. ...

Once you determine an AA (asset allocation) you are comfortable with (and this should have been part of the conversation with your current FA), you can just split your money across some ( 2-4 will do it for most people) low-cost, broad-based index funds and forget about it. Even rebalancing has been shown to not be important, just forget about it.

But now, I would like to "audit" their performance to determine if I am, in fact, getting a good 'bang for my buck'.

I have a nephew-in-law who is a financial advisor for Citibank, but I don't want to ask him. Is there a way to have our account's performance assessed? Is this something I could ask, say Vanguard or Fidelity, to look at?

That can be kind of tricky, depending. If your FA has maintained a specific AA, you could compare what they did versus a simple portfolio of that mix.

But why bother? Every study I've found shows that there is no magic mojo, and an FA cannot be counted on to consistently beat the market (especially after fees).

we put our $$ with a small CFP financial services firm so I could quit worrying so much.

And yet, you are now worried about how they are performing! If you go with the broad based index funds, you will know what you are getting. I have yet to see any of these major, low-cost, index funds stray from their theoretical index by anything significant.

Doing it myself is my recipe for not worrying! I don't have to worry about how someone is investing my money!

As we often say here - by the time you have learned enough to evaluate your FA, you have learned enough to just DIY.

-ERD50

 

[ERD50]

Another comment -

So what would you do if you found your FA outperformed the past 2 years? Does that really mean anything? How will he do in the future? Or even if he under-performed?

Has he been 'tested' in up and down markets? So many ways to look at this. But it goes back to "no magic mojo".

-ERD50

 

[Red Badger]

Once you determine an AA (asset allocation) you are comfortable with (and this should have been part of the conversation with your current FA), you can just split your money across some ( 2-4 will do it for most people) low-cost, broad-based index funds and forget about it. Even rebalancing has been shown to not be important, just forget about it.




That can be kind of tricky, depending. If your FA has maintained a specific AA, you could compare what they did versus a simple portfolio of that mix.

But why bother? Every study I've found shows that there is no magic mojo, and an FA cannot be counted on to consistently beat the market (especially after fees).

And yet, you are now worried about how they are performing! If you go with the broad based index funds, you will know what you are getting. I have yet to see any of these major, low-cost, index funds stray from their theoretical index by anything significant.

Doing it myself is my recipe for not worrying! I don't have to worry about how someone is investing my money!

As we often say here - by the time you have learned enough to evaluate your FA, you have learned enough to just DIY.

-ERD50

+1 on each point from ERD50. Set it, and for the most part, forget it.

 

[CoolRich59]

Thanks for the responses so far.

Can you not simply compare how much your account went up over the past 2+ years compared to a standard 70/30 investment mix of stock & bonds ?

Unfortunately, it's not that straightforward. Since we started with this firm, I have left my former j@b, rolled over my 401k into a new account with them, deposited the proceeds of my stock options, and have continued to make contributions to the accounts.

But why bother? Every study I've found shows that there is no magic mojo, and an FA cannot be counted on to consistently beat the market (especially after fees).

-ERD50

Not the answer I started out looking for, but I think you are right. These guys are doing OK, but not blowing away the returns I see other people getting.

For the fees I am paying, they really do need to be doing significantly better. They aren't and I think (more than) 2 years is enough time to have demonstrated it.

Thank you for your input. I very much appreciate it.

 

[RobbieB]

My guys are beating the market but they don't do it with funds, they do it with stocks. About 70 different companies that get bought and sold constantly. There are no trading fees, just the annual fee.

I don't know why anyone would hire a FA to select funds. Then you get to pay twice.

 

[OldShooter]

Can you not simply compare how much your account went up over the past 2+ years compared to a standard 70/30 investment mix of stock & bonds ? ...

I actually have an equity-only benchmark that I maintain for just this purpose. It is approximately 65% in a total US market fund and 35% in a total international ex US fund, interest and dividends reinvested. Here are some total return numbers the OP can use:

12/31/2015 99,895.34
3/31/2016 99,565.42
6/30/2016 100,884.54
9/30/2016 106,155.75
12/31/2016 108,555.36
3/31/2017 115,492.81
6/30/2017 119,895.45
9/30/2017 125,602.50

Now two years is not a long time, but assuming the OP's portfolio is well diversified it is long enough to say whether the FA is adding value net of fees. (A non-diversified portfolio of, say, less than 40 stocks can require a longer testing period. But IMO a non-diversified portfolio is not A Good Thing anyway.)

@RobbieB I would be interested to know how your stock pickers did, net of fees, against this benchmark too. The statistical evidence overwhelmingly says that stock picking is a losing strategy.

 

[Sunset]

....
But why bother? Every study I've found shows that there is no magic mojo, and an FA cannot be counted on to consistently beat the market (especially after fees).
.....-ERD50

So true.
All studies and the Warren Buffet bet all have shown over 10 yrs or less you win by a lot by investing in low cost index funds.

Even Warren Buffet who beat the stock market for many decades is doing a bit less than the S&P500 for the past 5 years.
Difference is:

• He admits it.
• He doesn't charge a fee to own his stock (if you think of his stock as a fund).

 

[ERD50]

I actually have an equity-only benchmark that I maintain for just this purpose. It is approximately 65% in a total US market fund and 35% in a total international ex US fund, interest and dividends reinvested. Here are some total return numbers the OP can use:

12/31/2015 99,895.34
3/31/2016 99,565.42
6/30/2016 100,884.54
9/30/2016 106,155.75
12/31/2016 108,555.36
3/31/2017 115,492.81
6/30/2017 119,895.45
9/30/2017 125,602.50

.....

Not sure these are the same exact funds, but the two I chose (VTSMX Vanguard Total Stock Mkt Idx Inv ; VGTSX Vanguard Total Intl Stock Index Inv) come pretty close in this analysis ($127,813 vs your 125,602.50):

https://www.portfoliovisualizer.com...ocation2_2=100&allocation2_3=35&symbol3=VSMGX

enter your own data:

https://www.portfoliovisualizer.com/backtest-portfolio

-ERD50

 

[OldShooter]

... Unfortunately, it's not that straightforward. Since we started with this firm, I have left my former j@b, rolled over my 401k into a new account with them, deposited the proceeds of my stock options, and have continued to make contributions to the accounts. ...

Your monthly statements should have at least a YTD rate of return figure. If not, ditch the FA without further thought. Ask the FA or check your Dec. 2016 statement for the 2015 full year number.

If you have fixed income and equities, take a guess at the fixed income return (2-3% probably) and % allocation. Use these to calculate* the straight equity return. This can be compared to the benchmark numbers I provided above or to any other benchmark you like. Be sure you're looking at total return of the benchmark including interest and dividends.

* Equity Return x Equity % of portfolio + Fixed Income Return x % of portfolio = Portfolio Return

 

[OldShooter]

... https://www.portfoliovisualizer.com/backtest-portfolio ...

That's a great site for people willing to make the effort to learn it, but I tend not to recommend it to beginners. Too overwhelming.

 

[ERD50]

That's a great site for people willing to make the effort to learn it, but I tend not to recommend it to beginners. Too overwhelming.

Agreed, I only offered it if the OP really did want t go through the exercise.

But I'll stand by my "Why Bother?" comment - it just isn't reasonable to expect some FA to consistently outperform the market. It's possible of course, odds say that some will for some time, even if they are just throwing darts. But will they do it consistently? That's not a bet I'm willing to take, especially when it is my skin in their 'game'.

-ERD50

 

[OldShooter]

... I'll stand by my "Why Bother?" comment - it just isn't reasonable to expect some FA to consistently outperform the market. ...

True enough but the OP made it clear, I thought, that not having an FA was not an option on the table.

But you are absolutely right, the statistical data make it very clear that average advisor/stock picker performance can only be the market average before fees and that after fees it is a losing proposition. The way I read the OP, though, is that he/she is willing to pay some fees in order to obtain peace of mind. He/she just wants the FA's performance to be somewhere in the ballpark of average market performance. Maybe the OP can comment?

 

[Chuckanut]

But I'll stand by my "Why Bother?" comment - it just isn't reasonable to expect some FA to consistently outperform the market. It's possible of course, odds say that some will for some time, even if they are just throwing darts. But will they do it consistently? That's not a bet I'm willing to take, especially when it is my skin in their 'game'.

-ERD50

+1

If I line up 256 people, give them each a quarter and tell them the goal is to flip 'heads' eight times in a row, one of them will probably do it. What a genius!

 

[savory]

My guys are beating the market but they don't do it with funds, they do it with stocks. About 70 different companies that get bought and sold constantly. There are no trading fees, just the annual fee.

I don't know why anyone would hire a FA to select funds. Then you get to pay twice.

I follow a similar approach. I would be with an FA that purchased funds. My FA does not trade much but I like that he will employ a bit of market timing by changing the stock/bond ratio.

Asking your FA for a comparative market analysis is more than appropriate. I get them without asking but sometimes want to check their numbers. I check their numbers using Vanguard Wellington. That would likely be my fallback if/when I feel the FA is falling below performance, which is measured after fees.

 

[ERD50]

Originally Posted by ERD50 View Post
... I'll stand by my "Why Bother?" comment - it just isn't reasonable to expect some FA to consistently outperform the market. ...

True enough but the OP made it clear, I thought, that not having an FA was not an option on the table. ...

I had to re-read the OP, thinking I missed that.

But on a re-read, I don't see it. Only that he felt "that I do not have much expertise in this area. So, I worried constantly". OK, so it won't take much to learn that a very simple portfolio is all he needs to know, and then he can stop worrying.

What made you think not having the FA was not an option?

-ERD50

 

[CoolRich59]

True enough but the OP made it clear, I thought, that not having an FA was not an option on the table.

But you are absolutely right, the statistical data make it very clear that average advisor/stock picker performance can only be the market average before fees and that after fees it is a losing proposition. The way I read the OP, though, is that he/she is willing to pay some fees in order to obtain peace of mind. He/she just wants the FA's performance to be somewhere in the ballpark of average market performance. Maybe the OP can comment?

Thanks for the add'l comments. Since I'm not getting any younger ( ), I spent some time this afternoon opening an account with Vanguard. Once the account is funded and set up, I will be parting ways with the financial advisor and transferring my accounts to Vanguard. (My current 401k is with Fidelity, so that obviously needs to stay put.)

While I like the "peace of mind" of having someone else watching my $$, I was only willing to do so if they are outperforming the market enough that it offsets the fees I'm paying. That's not happening from what I can tell (but, as you suggest, I will be pulling out the statements tonight to check).

In exploring Vanguard, I see I have a couple of options. I can structure my own portfolio using their tools which suggested different mixes based on my age, risk tolerance, etc. Or, I can engage a Vanguard advisor to do so.

I'm kind of embarrassed to admit that the fee Vanguard charges is a lot less than the fees I'm paying. But, my thinking is coming around to where I may even skip the Vanguard advisor.

Despite what you may think from reading my posts, I'd like to believe that I'm not a complete doofus when it comes to money (I at least know how to make money ). More significantly, I'm now motivated to learn.

Before, I didn't have the knowledge and didn't want to spend the time. Now, while I still don't have the knowledge, I'm willing to get educated if it means doing away with the advisor's fees and so be able to keep and invest more $$.

 

[joeea]

So, a little more than 2 years ago we put our $$ with a small CFP financial services firm so I could quit worrying so much. We've been reasonably satisfied with their work, and I like not having to think about our $$ constantly. But now, I would like to "audit" their performance to determine if I am, in fact, getting a good 'bang for my buck'.

Is there a way to have our account's performance assessed?

You could always go to a CFP (fee-only) and ask for an assessment/second opinion. Many would offer one for a small fee.

Remember that they will likely find something that could be better. With anything as complex as financial planning, there are always differing opinions. The specifics of your situation (the complexity, the size) will probably factor into their ability to find something worth considering.

If nothing egregious shows up, then you can decide to stick with your "peace of mind" advisor. If something big and/or obvious shows up, you'll have to decide if you should move on.

Many folks find that they can handle their investments on their own. But many others either don't want to, or need some help. I have a financial advisor (a CFP) that I believe earns their money well. They come up with suggestions I wouldn't have thought of. While I consider myself reasonably savvy, I also know that my wife is not. If I'm no longer around, I value the continuity in financial aspects that my advisor will provide.

I've recently uncovered some health issues that might require changes in my financial plans. Once my treatment plan is set, my wife and I will go meet with the financial advisor and start them thinking about that and coming up with some recommendations. I am completely comfortable with them both for investment advice as well as related life advice.

 

[RobbieB]

@RobbieB I would be interested to know how your stock pickers did, net of fees, against this benchmark too. The statistical evidence overwhelmingly says that stock picking is a losing strategy.

Just got my ML statement. I am up 17.9% YTD. I looked up the S&P 500 and it is up 15.5% YTD. So net of fees (fees already deducted) my stock traders are up 2.4% compared to the "500 index"

They beat the index last year too.

 

[OldShooter]

... Now, while I still don't have the knowledge, I'm willing to get educated if it means doing away with the advisor's fees and so be able to keep and invest more $$.

Well, good on you! Sorry I misunderstood your objective.

Since you are looking for some hand-holding, you might want to talk to Schwab and Fidelity as well as Vanguard. If you bring at least $250K to Schwab or a similar amount (don't remember $$ exactly) to Fidelity, you will get permanently assigned an actual fiduciary person to talk to and help you with your investing. No charge for that as a basic service and, depending on your location, probably face-to-face. These days all the high quality houses sell almost the same stuff, so it really boils down to finding the personal relationship that works best. You might even interview a couple of people at each house.

And, actually, many here will advise you to simply buy one fund, a total world stock fund, and one bond fund, a total bond fund, in proportions that you are comfortable with. A slightly more complex equity-side portfolio would be one total US market fund and one international total market fund in about a 70/30 split. And on the fixed income side for a little more complexity, ladders of government bonds and high-grade corporates instead of bond funds. If you go in asking about these options you will probably kick off a very educational discussion.

Re education, a book I recommend a lot is "The Coffee House Investor" by BIll Schultheis. It's a very readable, not too long, introduction to IMO a very sound philosophy of investing. There are other good books, but I met Bill on a trip evaluating investment advisors for a nonprofit I was helping and can confirm that he is the real deal. What other investment book includes a recipe for pumpkin pie?

 

[braumeister]

Just got my ML statement. I am up 17.9% YTD.

That's marvelous. All equities, right?

 

[RobbieB]

Yes, the Merrill guys only do my equities. I have my bonds with Fidelity and Morgan Stanley.

They are all large cap dividend stocks, mostly US but a few foreign too. I just let these guys run. I get an envelope of buy /sell trades about every other month. They stick my dividends in my checking account as they arrive so I can blow more dough.

It's the typical 1% AUM deal but I get a lot of benes like a half mill credit line free and someone to talk to and meet with from time to time. Not to mention they send me Christmas presents too. Last year it was a basket of exotic chocolates -

 

[OldShooter]

Just got my ML statement. I am up 17.9% YTD. I looked up the S&P 500 and it is up 15.5% YTD. So net of fees (fees already deducted) my stock traders are up 2.4% compared to the "500 index"

They beat the index last year too.

I monitor just quarterly. For three quarters to 9/30 my simple 2-fund benchmark was up 15.9% and the ACWI All cap (worldwide all stocks) was up 17.7%. The market was up in October roughly 2%, so those numbers would go to 18.2% and 20%.

So your guys are pretty much doing what a passive portfolio would do, which is actually quite good considering the fees and the fact that most stock pickers can't even be competitive net of fees.

 

[RobbieB]

Thanks. I think so too. I've been with a few firms and lots of brokers and these guys are worth their salt.