Are excessive financial fees eating your returns?

[dtbach]

There are however some actively managed funds that have beaten their benchmarks for a considerable time and also have low fees. I'm thinking of Vanguard's Wellington and Wellesley funds in particular. Some Fidelity funds have done it too.

 

[aim-high]

He's probably got a gig like that. He just takes some small retail clients as a way to pay back society for all it has given him. He'd charge them nothing at all, but then they wouldn't appreciate the fantastic value of what they are getting.
The generosity of some people is heartwarming.

 

[Ready]

There are however some actively managed funds that have beaten their benchmarks for a considerable time and also have low fees. I'm thinking of Vanguard's Wellington and Wellesley funds in particular. Some Fidelity funds have done it too.

I would be curious to know if those funds would have beat the index funds if you had to layer an additional 1.5% in advisor fees to access them, versus doing it yourself and buying index funds without an advisor.

 

[InParadise]

Interesting question. A search of "actively managed funds vs. index funds" came up with this:

Actively managed mutual funds fall short again — and investors notice - latimes.com

Interesting link. Thanks.

 

[dtbach]

I would be curious to know if those funds would have beat the index funds if you had to layer an additional 1.5% in advisor fees to access them, versus doing it yourself and buying index funds without an advisor.

If you layered an additional 1.5% they would of course not come close to beating the indexes. They beat the indexes by less than 1%. Both however were less volatile which made the 2008-09 plunge a bit more bearable.

 

[InParadise]

In Paradise, you may be assuming that everyone on the forum *only* uses index funds, when that may or may not be the case.

Not at all.

I totally understand the DIY drift, having managed our portfolios through individual stocks and mechanical investing for 17 years before going through a FA. DH could not handle my risk tolerances anymore, and as we approached retirement it was necessary to tone it down.

Everyone makes their own decisions, though, and if you are happy, then that's it. But there are plenty of folks who enjoy the research element of DIY, and aren't likely be dissuaded from their own ways.

I really don't understand the seemingly automatic correlation between wanting to discuss a topic and it being viewed as trying to dissuade someone from their own POV. The only horse I have in this race is pursuit of a good discussion that leads to the possibility of learning new things. What people choose to do with their own money is up to them. Who knows, maybe down the road when things get less hectic I may decide I have the time to go back to managing our funds. After all, what is the point of being on a discussion board if you don't have an open mind?

It is also interesting to note that I am the one who has not tried to convince others to change their investment approach, but took quite a bit of heat for simply professing that it is net return that counts, more than just focusing on minimizing expenses, and citing the example of what has worked for us in this vein. This does not preclude the minimizing expenses from having the best net return!

 

[dtbach]

Not at all.

I totally understand the DIY drift, having managed our portfolios through individual stocks and mechanical investing for 17 years before going through a FA. DH could not handle my risk tolerances anymore, and as we approached retirement it was necessary to tone it down.



I really don't understand the seemingly automatic correlation between wanting to discuss a topic and it being viewed as trying to dissuade someone from their own POV. The only horse I have in this race is pursuit of a good discussion that leads to the possibility of learning new things. What people choose to do with their own money is up to them. Who knows, maybe down the road when things get less hectic I may decide I have the time to go back to managing our funds. After all, what is the point of being on a discussion board if you don't have an open mind?

It is also interesting to note that I am the one who has not tried to convince others to change their investment approach, but took quite a bit of heat for simply professing that it is net return that counts, more than just focusing on minimizing expenses, and citing the example of what has worked for us in this vein. This does not preclude the minimizing expenses from having the best net return!

Well said. Some on this board apparently think every FA is a wolf in sheep's clothing I guess. I'm sure that many FA's were worth their fees with "hand holding" folks during the last few "plunges". I'll never forget the first time it happened to me in '87. I was just starting out and I was freaking out, but I had an FA who calmed me down and told me to "hang in there". The rest is history. How many folks were "saved" in 08-09' who didn't pull all their assets out because their FA "held their hand"??

I don't have an FA now as I am confident in my investment abilities. But many others aren't and perhaps having an FA works best for them.

 

[target2019]

A nice article in today's edition of USA Today. It summarizes how excessive fees can become over time, and how overpriced financial advice really is. I know this is not new information to the members of this forum, but I thought it was nice to see an article with such a strong opinion published in a mainstream newspaper. Hopefully it will catch the attention of those who don't think about this stuff and allow others to make far too much off their retirement savings.

Are excessive financial fees eating your returns?

"He's a nice guy." Oh boy, that is mentioned in every story and thread about FAs, isn't it? The important question to ask is, "What's the benchmark?" I'm going to an FA dinner tonight. Gonna ask that question and bring the answer back here.

Some investors need advisors. But this question is always on the table: Can the advisor deliver results that exceed the benchmark + the advisor costs and all fees?

 

[Sarah in SC]

I think the "heat" offered up on this board comes from the collective experience of seeing lots of people come here for help extricating themselves from parasitic relationships with stockbrokers. This may give the appearance of piling on when it is just that they've seen it all.

You might not have had time to look at my profile, but I'm a Certified Financial Planner, one who actually does manage people's money, for money.

 

[dtbach]

I think the "heat" offered up on this board comes from the collective experience of seeing lots of people come here for help extricating themselves from parasitic relationships with stockbrokers. This may give the appearance of piling on when it is just that they've seen it all.

You might not have had time to look at my profile, but I'm a Certified Financial Planner, one who actually does manage people's money, for money.

Well said.

 

[brewer12345]

Not at all.

I totally understand the DIY drift, having managed our portfolios through individual stocks and mechanical investing for 17 years before going through a FA. DH could not handle my risk tolerances anymore, and as we approached retirement it was necessary to tone it down.



I really don't understand the seemingly automatic correlation between wanting to discuss a topic and it being viewed as trying to dissuade someone from their own POV. The only horse I have in this race is pursuit of a good discussion that leads to the possibility of learning new things. What people choose to do with their own money is up to them. Who knows, maybe down the road when things get less hectic I may decide I have the time to go back to managing our funds. After all, what is the point of being on a discussion board if you don't have an open mind?

It is also interesting to note that I am the one who has not tried to convince others to change their investment approach, but took quite a bit of heat for simply professing that it is net return that counts, more than just focusing on minimizing expenses, and citing the example of what has worked for us in this vein. This does not preclude the minimizing expenses from having the best net return!

You are no doubt aware that every forum has certain tenets which represent the overwhelming majority view, and in the case of this place that is indexing. You are up for a heavily engaged discussion if you want to argue for other ways of investing, but minority opinion is tolerated here. A number of us engage in everything from market timing index ETFs, to trading options, to trading junk bonds, to real estate, etc. on out to Venezuelan Beaver Cheese futures. To the extent people talk about it, there is a subforum for such things.

If what you are doing for you works, via con Dios. I personally think you are probably either taking risks you do not appreciate or have the wrong benchmark, but life is all about choices. Its hard to ignore decades of scholarly research that shows conclusively that a rebalanced index portfolio that focuses on low costs and tax efficiency is highly efficient and probably the best choice for 95+% of retail investors. As I switched to ESR I rejiggered my portfolio from individual securities often highly concentrated to increasingly index vehicles. This reduces my risk materially, which is of most importance, and keeps me from blowing myself up. I still have some individual security positions that I manage, but it is down to about 1/3 of my portfolio and will decline as a proportion of the total as time goes on.

 

[ERD50]

...

I really don't understand the seemingly automatic correlation between wanting to discuss a topic and it being viewed as trying to dissuade someone from their own POV. The only horse I have in this race is pursuit of a good discussion that leads to the possibility of learning new things.
....

I totally support that 100%. I listen and discuss investments outside of my current 'style', as I may find that I'm missing something. Discussion is good, IMO.

It is also interesting to note that I am the one who has not tried to convince others to change their investment approach, but took quite a bit of heat for simply professing that it is net return that counts, ...

I'm not sure anyone is giving you any 'heat', it's just that this group has reason to be skeptical about claims like : " Our FA beats benchmark every time."

I think it was Carl Sagan(*) who said "Extraordinary claims require extraordinary evidence.". Now, maybe your claim doesn't quite reach the level of 'extraordinary', but the data says it is at least a rare thing, maybe even an outlier (even an overall positive approach may not beat the benchmarks every time). And of course you don't need to provide any 'evidence' if you don't want - but if you really want to engage in a serious discussion, then people here are going to want some data to understand those claims. Some of those questions were about the benchmark, performance net of fees, etc.

W/O some background, I suppose many here may look at your statement as bragging (you and FA are smarter than everyone else), rather than a serious discussion of active versus passive fund investing.

So, can you tell us about those benchmarks, and how the FA performed in up and down market cycles? And how would an individual go about finding an FA with benchmark beating performance?

(*) edit/add: Sagan popularized the phrase, more on the origin here: http://en.wikipedia.org/wiki/Marcello_Truzzi

-ERD50

 

[target2019]

I really don't understand the seemingly automatic correlation between wanting to discuss a topic and it being viewed as trying to dissuade someone from their own POV. The only horse I have in this race is pursuit of a good discussion that leads to the possibility of learning new things. What people choose to do with their own money is up to them. Who knows, maybe down the road when things get less hectic I may decide I have the time to go back to managing our funds. After all, what is the point of being on a discussion board if you don't have an open mind?

We never had a financial advisor, but in-laws have had two, maybe three, firms since 2000 or so. Our path has been to read and re-read books, articles, and discussions. In addition we venture out to FA dinners to get the free food and act as filters for what we hear. We pass this info along to AARP. We are content with index funds and what the market delivers. I have one major question for any FA, which is, "How did you help your clients mitigate the great recession?" There is never an answer.

In-laws had a poor experience. The first FA was a nice, older guy. Then the nice, younger guy stole their business. About 2005 they asked me to get involved. It was a mess. For instance, they paid the advisor to do their taxes, and he handed them the tax forms to send to IRS. Problem was that the forms were marked "self-prepared." In-laws are now partially managed by a well-known management company. The fees are too high, IMO, but there are some adjustments we've made to partially correct for the fees.

I could go on, but the point to be made with anyone so situated is that there are costs and implications when you do business with an FA. For instance, I'm sure you've done this analysis yourself, but what is the bottom line delivered by an FA? If a 60/40 fund like VBINX delivered 17.91% (vs. benchmark 18.25%), then what was the return of a specific FA-managed portfolio?

 

[daylatedollarshort]

I think it was Carl Sagan(*) who said "Extraordinary claims require extraordinary evidence.".

A 1% fee on an average of $1M portfolio over 50 years would be $500K in fees alone. Statistically that is a pretty high hurdle to overcome let alone beat "every time." Even Warren Buffett has his not so great years.

 

[Midpack]

I get zero benefit from trying to convince you guys, and have zero desire to do so. After all, I know how hard I was to convince and that is way more work than I care to do.

But the one thing I just don't understand is the desire to put your funds in an index fund. I've never been a fan of them and never used them when I was handling our investments. The result was that when the market plunged, acerbated by all the lemmings who had thrown their retirement accounts into these well publicized funds panicking and pulling their assets from the market, my account was not badly impacted. IMO index funds are the McDonalds of investing. Everyone knows about them, and many eat there for convenience.

Please realize that I am not calling you a lemming for using these funds, but it seems to be the investment tool of choice for the general public who has not yet learned what else they can do with their money. And when so many people who don't realize the market doesn't only go up, nor understand that panic selling can be the very worst thing own this investment vehicle, they can trigger irrational declines. So if you invest primarily in index funds, how do you protect yourself from the actions of the lemmings throwing themselves off the cliff when the volatility got to be too much for them?

So you've found one of the elusive advisors who can consistently beat the averages, congratulations - seriously. Are you going to give us his/her name so we can get in on the action, or tell us how to find our own above average FA beyond any shadow of a doubt? If not, what's the purpose of your post #3? Few if any of us are concerned with convincing you of anything either, it's your money. But newbies do come here to learn, so if you're going to make a claim they're naturally going to want to believe, maybe give them any basis to support it.

The subsequent quote above suggests you don't understand the fundamentals of passive investing which include the discipline to avoid panic selling/market timing. While it's clearly a major hurdle in successful investing, lack of discipline is not exclusive to passive investors to my knowledge, happens to DIY investors, pros and everyone in between all the time as well. Do you have something that shows otherwise?

And investors usually come to full on passive investing precisely because they do "realize the market doesn't only go up."

Just one study re: index investing picked somewhat at random, out of hundreds. Study: Only 24% of Active Mutual Fund Managers Outperform the Market Index | NerdWallet Investing

• Only 24% of professional investors beat the market over the past 10 years
• Index funds outperform actively managed funds by 0.80% annually, but active managers have lower risk
• Active managers outperform the index by 0.12% before fees, but charge more in fees than the value they create

The study looked at more than 24,000 mutual funds and ETFs available to U.S. investors for the ten-year period ending on December 31, 2012. Of these, only 7,943 were in existence for the full ten years.

The asset-weighted average return of the actively managed mutual funds over this period was 6.50% while the passively managed index products averaged 7.30%. Similarly, for equity funds the average return was 7.19% for active managers and 7.65% for passive funds. Index funds outperformed actively managed funds regardless of whether returns were measured by asset-weighted average, median, or a simple average.

 

[ducky911]

I had UBS come look at my investments. He came to my office three times from an hour away wearing a nice suit.

He said that my main problem was I was averse to fees.(problem?)

He wanted to sell all my holdings without asking me about taxes I might owe. (?)

At the time I had a MF for the s & p 500 that had an expense ratio of .5%, his recommendation was to buy a whopping 40% of my portfolio in s&p 500 MF with an expense ratio of 1.5% (not including his 1%).

I asked why would I want to pay more and his answer was maybe his 500 MF emulated the index closer....

I showed him the door.

 

[Chuckanut]

how do you protect yourself from the actions of the lemmings throwing themselves off the cliff when the volatility got to be too much for them?

I protected myself in the last down turn by keeping to my Asset Allocation and not panicking. I bought more stock index funds when they were low and have reaped the rewards as the market has climbed. I also buffer my stock index funds with bond index funds. And I keep a few years cash in the bank so I don't have to sell low. In other words, I do what most of us here do.

 

[Ready]

I think it was Carl Sagan(*) who said "Extraordinary claims require extraordinary evidence.". Now, maybe your claim doesn't quite reach the level of 'extraordinary', but the data says it is at least a rare thing, maybe even an outlier (even an overall positive approach may not beat the benchmarks every time). And of course you don't need to provide any 'evidence' if you don't want - but if you really want to engage in a serious discussion, then people here are going to want some data to understand those claims. Some of those questions were about the benchmark, performance net of fees, etc.

Well stated ERD50. Having a discussion about a subject where a member posts a position that is controversial to the general mindset of the forum (and virtually every investment book I've ever read) is great, as long as it is presented logically with appropriate facts to support the position. If InParadise chooses to present these facts, I'm sure it will generate a very intelligent discussion.

 

[Ready]

Just one study re: index investing picked somewhat at random, out of hundreds. Study: Only 24% of Active Mutual Fund Managers Outperform the Market Index | NerdWallet Investing

Excellent point Midpack, and I'll add one thought. If you were to take the 24% that did outperform the index, and then layer on 1.5% in advisor fees, I suspect the 24% would quickly approach a number very close to zero.

 

[Chuckanut]

Just a thought. In every group we have some outliers. We have one who invests almost exclusively in annuities and CD's. So why not a person who has found a good FA?

But....

If I line up 256 people, give them a fair coin and tell them to flip heads 8 times in a row, one of them will probably succeed. That doesn't mean that I should try to make a living as a gambler flipping heads 8 times in a row.

So I congratulate anybody who has found a system/FA/chant that really does produce financial success. But, I can't earn it back, so I will stay with what works for me.

 

[gozer]

I really don't understand the seemingly automatic correlation between wanting to discuss a topic and it being viewed as trying to dissuade someone from their own POV. The only horse I have in this race is pursuit of a good discussion that leads to the possibility of learning new things. What people choose to do with their own money is up to them. Who knows, maybe down the road when things get less hectic I may decide I have the time to go back to managing our funds. After all, what is the point of being on a discussion board if you don't have an open mind?

Personally my responses to you come from the fact that you have been asked which benchmarks your FA was using and what your top holdings are. In both cases you have avoided answering and responded with this:

I get zero benefit from trying to convince you guys, and have zero desire to do so. After all, I know how hard I was to convince and that is way more work than I care to do.

It seems quite obvious you are the one who is not actually willing to engage in the discussion. You have ignored and diverted the discussion away from those very obvious core questions at every turn. Perhaps you should consider why you are doing this.

The other topic that you actually seem to want to discuss is index vs managed fund. I believe the first index fund was the Vanguard Index Trust starting in 1975. Research on Index vs Managed fund goes back at least that far.

I started paying attention about 30 years ago while taking finance classes in college. I watched FA's argue that index funds had to earn less than active funds because there was no human making decisions. That hasn't panned out over the last thirty years according to actual published return data that takes fees into account. I saw FA's argue that index funds were less tax efficient than managed funds. Turns out index funds are usually more tax efficient because they trade less frequently.

Personally, I do not believe index funds are a total solution to everything. I believe index funds are best when applied to broad markets like the entire US market. Narrow focused sector index funds would require you (or an FA) to manage them. Or at least to hang on for a wild coaster ride if they are not being managed.

I do primarily invest in index funds today. 70% of my invested net worth is in index funds, the rest is in actively managed funds and cash.

The only fund managers I can name, that beat the indexes for more than 5 consecutive years once fees are factored in are Warren Buffett and Peter Lynch. When Peter Lynch turned over management of the Magellan fund it had become too big to manage, and today it's a typical fund that under performs both the S&P 500 and the Large Cap Growth Stock benchmark that Fidelity tracks it against. It also has an expense ratio that is 10 times higher than the expense ratio of my S&P 500 index fund. (0.51 vs 0.05). Today Magellan has a high 70% turnover rate. Like an aging rock star, it's day has long past. The investing landscape is littered with other aging rock stars. We can discuss any you would care to name.

 

[MichaelB]

There are good financial advisors, as there also are investors needing professional help. If that is the case, more power to the investor. Calling people "lemmings" because they invest in index funds, however, isn't helpful and invites responses of similar ilk. Perhaps if we avoid characterizing one another a more useful discussion will result.

 

[REWahoo]

Perhaps if we avoid characterizing one another a more useful discussion will result.

How soon you forget where you are:

I'm checking out of here for a better place,... Didn't realize these are the lumpen slums of cyberspace.

 

[ocdokie]

Our FA beats benchmark every time.

Volume? He only does business by word of mouth. We are in our third year with him after friends recommended him. It's nice not to have to deal with investments anymore.

These remarks raised the hairs on the back of my neck. They are startlingly like things that people said when they "invested" with Bernie Madoff, as reported in "No One Would Listen" by Harry Markopolos, the analyst who sounded the alarm on Madoff years before the Ponzi scheme collapsed.

Sorry if this sounds like an inappropriate comparison to your FA, but that book make me paranoid about financial "advisors" whose returns are better than everyone else's, and who only accept money from the chosen few.

 

[brett]

We reviewed our investments, our investment strategy, the people we dealt with, and the management fees that we paid (including rooting out some of the hidden fees) four years ago prior to retiring.

It took six months to find a fee for service wealth management firm and advisor that we were happy with and who had the right level of expertise that we desired. I am happy to let this firm manage the portfolio. We pay just under 1 percent. Our four year returns have been very good given that we repositioned the portfolio for retirement.