Do you have a financial planner?

[samclem]

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Originally Posted by EvrClrx311 Here is a great way to find out just how in tune your financial planner is with your financial well being. Ask him/her if they'd be willing to adopt the following payment structure: In years when your investment advice beats the market index it is categorized with, you keep commissions plus I'll pay you 0.1% of every percentage point over the market you get, but in years when you trail the index, you must forfeit your commission for whatever products you sold me to be added to my account. I still have yet to find a planner willing to go for it. Seems if they are all above average they'd all be jumping at the opportunity. If they just beat the average market return of an index 6 out of 10 years they'd be ahead by my model... so I wonder why they run from it

If they accepted your offer (notwithstanding FINRA prohibitions), you might be very sorry. You've built in a very perverse incentive here. The planner would be incentivized to pick a wildly aggressive and highly leveraged portfolio for you. Example: Say the market in equities is flat the next year--zero return across all equity indices. If he takes your offer and, say, buys options on a single stock for your portfolio and it goes to zero value in 75% of his attempts, he's lost nothing (but his time) but you'd be broke. If it doubles in value the other 25% of the time (terrible odds), he'd make $30,000 (which is 1.5% of $2 million, the "regular commission you offered him if he beat the market) + $200,000 (the sweetener you offered him (right?) 100 x .001 x $2 million) = total compensation of $230,000.
He'd be sending 75% of his clients to the poorhouse, but still making double the compensation he'd make if he'd stuck with the straight 1.5% commission.
Bottom line: The compensation formula you've outlined incentivizes highly risky investing behavior and wouldn't do a good job of selectively rewarding a skilled advisor. Even a coin-flipper would make out well if he chose a portfolio with sufficient risk.

[urn2bfree]

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Originally Posted by FinanceDude I use DFA myself, so I am well aware of the costs on DFA......... Evanson has way more than $2 billion under management. At large portfolios over $10 million or so, most advisor firms bid out at 20bp or so all in. I think most folks on here think thall VG funds have an ER of 10bp or less.......... You can only get DFA through an advisor. The advisor decides what to charge to get paid, DFA does not hold back a dealer concession on their funds. The advisor can charge whatever they want, 1% or even higher. However, most charge less the higher the amount to be invested. Again, you act as if I have no knowledge of anything that goes on the FA world, which is quite funny........

No- I think you know very well what goes on- so I assume that when you put forth that BS analysis of low cost fixed fee advisor and tried to tack on the expense ratio as part of the cost for it and did not for the RIA advisor you were touting that you must have been just testing...not trying to fool anyone...or BS or anything..I give the benefit of the doubt. I don't think anyone here has misconceptions about the ER on Vanguard..this is a pretty savvy lot. As for Evanson-- you claim they manage way more than $2 billion...I don't know what "way more" is but on the Evanson website they say: "EAM ...manages over $2.3 billion in assets as of Winter 2011." So maybe they are "way more" up since then.

Also on the EAM website: "In most cases, it takes little or no more time to provide services for a $5,000,000 account than for a $500,000 account."

[Onward]

The analogy between physician and financial advisor is completely false. Physicians presumably need lots of knowledge. Financial success requires only a little knowledge. It just has to be the right knowledge. And it can be summed up in 37 words or less.

[kumquat]

It has been an interesting thread. However, one question remains unanswered.

I understand the concept of being paid to do a task, whether you are a doctor, lawyer or carpenter you are paid according to what you do or produce. I also understand the concept of commissioned sales. I may not like it but I understand it.

I do not understand why anyone would expect me to pay him/her according to my net worth (or investable assetts). If you do the same task for a guy with $100K as you do for the millionaire, why would the millionaire be expected to pay 10 times as much. Can anyone who advocates this compensation model tell us why it should be so and what extra value is offerred for the extra $?

[urn2bfree]

Quote:

Originally Posted by kumquat It has been an interesting thread. However, one question remains unanswered. I understand the concept of being paid to do a task, whether you are a doctor, lawyer or carpenter you are paid according to what you do or produce. I also understand the concept of commissioned sales. I may not like it but I understand it. I do not understand why anyone would expect me to pay him/her according to my net worth (or investable assetts). If you do the same task for a guy with $100K as you do for the millionaire, why would the millionaire be expected to pay 10 times as much. Can anyone who advocates this compensation model tell us why it should be so and what extra value is offerred for the extra $?

as one who is on record here disparaging the AUM model of compensation- I would defend it to a point )with some sort of cap- IF the management required active investment picking...seeking out unique investment opportunities --the more you have the more opportunities you have to find the more work you have to do to find those new opportunities...BUT for passive investing...doing a simple Asset Allocation balance and index funds--hah! it is all about percentages--40% in equity funds break it into small and larger, value and growth , international and domestic --all INDEX funds-- a push of a couple of buttons and the math is done and you can do 4000 accounts in a flash-the same effort for $1 Million or $5Million-NO WAY should such people expect to be paid 5 x more by the bigger account holder.

[target2019]

Just random thoughts about an FA business model. Keep in mind I go for the free dinners, so they pay me!
- there is overhead, and it is easier to get the rate and fees from a wealthier client. I do this myself when I charge a healthy minimum for a business service call, and also apply the same minimum to a residential call. I get fewer residence calls I'm sure as a result. But if I do this work, I need to be paid in the same way, so I can stay in business.

I do know that the advisors I might use charge less as the account grows. Certain fees must be the same across all accounts, as laws dictate that.

My only direct experience is with USAA as advisor. Some people need the management and advisory help as they age. But anyone with the time can achieve better investing results.

[gerntz]

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Originally Posted by Nords If you have to ask then you should avoid both of them...

Not really. I have an advisor & know what he does. I don't have a planner - that I know of - & so would like to know the difference.

[gerntz]

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Originally Posted by haha Like many here I have never used a financial planner. Here is what Bill Gross says about giving away 100 basis points or today's scanty yields. BILL GROSS: If I Were An Individual Investor, This Is What I Would Do - Business Insider

Do you agree with his advice and take it? If so, isn't he your planner?

[FinanceDude]

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Originally Posted by urn2bfree all INDEX funds-- a push of a couple of buttons and the math is done and you can do 4000 accounts in a flash-the same effort for $1 Million or $5Million-NO WAY should such people expect to be paid 5 x more by the bigger account holder.

And they are not. Here's a typical breakdown:

$250,000 or less to invest - 1%
$250,001 - $500,000 to invest - 75bp
$500,001 - $1,000,000 to invest - 50bp

And so on. Bond portfolios are charged at a lower rate. A blended portfolio of 50/50 would be charged about 35bp on $1,000,000.

At $5,000,000 and above, I have seen as low as 14bp. In my example, the guy with $250,000 pays $2500 a year and the guy with $1,000,000 would pay $5000. And that is assuming 100% equities in that portfolio and full discretion and only ETFs and stocks no MF. And that does include all ticket charges......

Disparaging is fine, as long as there are relevant facts involved......

[gerntz]

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Originally Posted by Onward The analogy between physician and financial advisor is completely false. Physicians presumably need lots of knowledge. Financial success requires only a little knowledge. It just has to be the right knowledge. And it can be summed up in 37 words or less.

Knowing that summary is hardly guarantees succeessful results. You really need to be able to analyze the data.

[urn2bfree]

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Originally Posted by FinanceDude And they are not. Here's a typical breakdown: $250,000 or less to invest - 1% $250,001 - $500,000 to invest - 75bp $500,001 - $1,000,000 to invest - 50bp And so on. Bond portfolios are charged at a lower rate. A blended portfolio of 50/50 would be charged about 35bp on $1,000,000. At $5,000,000 and above, I have seen as low as 14bp. In my example, the guy with $250,000 pays $2500 a year and the guy with $1,000,000 would pay $5000. And that is assuming 100% equities in that portfolio and full discretion and only ETFs and stocks no MF. And that does include all ticket charges...... Disparaging is fine, as long as there are relevant facts involved......

FACTS: charging a smaller AUM on bigger numbers still generates ridiculous over charging...see below:
Analyzing the 'high-fee' DFA-approved advisor's sales pitch.
The difference between a firm like Buckingham and Evanson on a $5M sized portfolio in annual fees is over 10 fold higher for one vs the other. Is there an advisor in the world worth that kind of mark up in such a situation. After thirty years that is hundreds and hundreds of thousands of dollars paid out and millions of dollars different in the net worth of the portfolio.
So sticking with the facts- someone charging AUM whether it is a sliding scale or a flat rate is charging more-- the more MONEY the investor has- the more he takes home--no matter how much work he is doing...still not seeing any justification for those extra fees. Looks like a lot of hand waving and obfuscations to justify getting more but not actually earning it.
...is anybody on this thread buying this defense of AUM?

[brewer12345]

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Originally Posted by urn2bfree FACTS: charging a smaller AUM on bigger numbers still generates ridiculous over charging...see below: Analyzing the 'high-fee' DFA-approved advisor's sales pitch. The difference between a firm like Buckingham and Evanson on a $5M sized portfolio in annual fees is over 10 fold higher for one vs the other. Is there an advisor in the world worth that kind of mark up in such a situation. After thirty years that is hundreds and hundreds of thousands of dollars paid out and millions of dollars different in the net worth of the portfolio. So sticking with the facts- someone charging AUM whether it is a sliding scale or a flat rate is charging more-- the more MONEY the investor has- the more he takes home--no matter how much work he is doing...still not seeing any justification for those extra fees. Looks like a lot of hand waving and obfuscations to justify getting more but not actually earning it. ...is anybody on this thread buying this defense of AUM?

The bigger the nut generally the more complex the client's affairs and the more work they are. Is it a perfect match? Nope, but it is probably about right. I can tell you that of the three family member's portfolios I help manage, the big one is way more work than the two smaller ones. Then again, I don't get paid at all for this.

[urn2bfree]

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Originally Posted by brewer12345 The bigger the nut generally the more complex the client's affairs and the more work they are. Is it a perfect match? Nope, but it is probably about right. I can tell you that of the three family member's portfolios I help manage, the big one is way more work than the two smaller ones. Then again, I don't get paid at all for this.

I guess I am too cheap...when someone is asking me to pay $25,000 dollars instead of $2500 dollars for any service then I want it to be more than "about right." If it takes more work, charging by the hour does not cheat anyone. Charging by the hour is not "about right." It is simple and fair. The AUM model seems to me to be an anachronism that is perpetuated (perpetrated?) by those who profit from it and the fools who let them. (spoken as one who has been such a fool in the past- before I wised up- thanks in no small part to forums like this one)

[MichaelB]

I've seen threads at bogleheads that describe some things that firms such as Buckingham bring to the table, such as advantageous pricing for individual muni bonds. This could be worth part of the fee. Paying a % of AUM is probably an expensive way to go but for some it might be worth it. Some people need financial planners and some planners charge fair fees.

[urn2bfree]

--a cost difference of $22000/year better buy a lot of discounts on bonds.

[Mulligan]

Some people can certainly benefit from a financial advisor in terms of tax structure especially for people drawing pensions and working, etc. I do some relatively simple things such as HSAs, 529s, and 403bs for tax benefits to reduce AGI, to capture income tax credits in my state by staying under $85k per year, saving me thousands of dollars a year. I have similar situation friends who would benefit greatly from what I do, but I lose them with the word AGI, and I lose patience. One friend did listen, and refiled past taxes to claim a credit he didn't know he could claim until after I told him. It is amazing the ignorance of some successful people. My friends think I am some financial genius guru, when in truth I am sure I am in the bottom half of this ER forum in these matters.
Another example just a few weeks ago. One of my friends told me how he got his wife to get a second part time job since the kids were out of the home and he had one too. He said the job was paying minimum wage and she was bringing an $350 a month home. He didnt realize they were
to get smacked at tax time because there was minimal withholding. I had to explain to him they were in the 28% tax bracket (over $150k per year),
6 % state, 4% SS, 1.5% medicare, including gas she wasnt bring home $4 an hour. He then says, well that isnt worth her time. She then quit! I could tell you many stories of people who make great income,but dont understand money at all. People on this forum may not need the hand holding, but there are plenty who do!

[MichaelB]

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Originally Posted by urn2bfree --a cost difference of $22000/year better buy a lot of discounts on bonds.

All I'm saying is I'm open to the possibility it is a reasonable fee for a valuable service and therefore money well spent.

[freebird5825]

I used a fee-based CFP in 2002 for a soup-to-nuts evaluation/advisement on retirement, estate planning, investments, yadda yadda yadda. I insisted on a statement of w*rk, up front, detailing the package cost (not an hourly rate), analysis performed, and products delivered. Money well spent. I was on track in most areas but needed to execute some legal documents, re-register accounts as JTWROS, ramp up my investment rate and get out of some high expense ratio funds. I used my own attorney for the legal things. The rest I did myself, with sanity check emails flying back and forth between the CFP and myself.

When I was suddenly widowed in 2004, I hired a local "financial planner" to handle some investment account re-registration paperw*rk that I just could not bear to keep doing. Again, a written statement of w*rk to be performed for a fixed fee was struck.

After I FIREd, I was a DIYer when it came to consolidating my portfolio and get it all under 1 roof. I got my legal paperw*rk updated using an attorney.

These days, I brush my teeth every morning with my financial planner. Then we have coffee.

[FinanceDude]

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Originally Posted by urn2bfree --a cost difference of $22000/year better buy a lot of discounts on bonds.

We get, you don't like fee based advisors..........

[kumquat]

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Originally Posted by FinanceDude We get, you don't like fee based advisors..........

You don't get.

What I think he's saying, and what I think, is that the AUM model is a commission on assets. If it isn't, please explain.