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Financial advisor performance concerns
Old 03-19-2014, 04:33 PM   #1
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Financial advisor performance concerns

Would like some advice from folks that have been in a similar experience. Our portfolio has been focused between moderate to aggressive risk level. Feel like are results could have been much better and could have better for lower if we invested in index funds. Below are my results compared to the S&P. I am currently 45, married with two kids and plan to be FIRE at 55. Would like opinions on the following questions I have struggling with:

1- are my results poor, would they be concerning to you?

2- should I leave my advisor?

3- would it be better to simply take the vanguard approach and invest in index funds?

3yr
Me 4.5%
S&P 15.4%

5yr
Me 13.1%
S&P 20.2%

10yr
Me 5.4%
S&P 8.2%

Thank you!
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Old 03-19-2014, 04:38 PM   #2
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Is the S&P an appropriate benchmark?
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Old 03-19-2014, 04:43 PM   #3
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IMO, it would simplify things to take the vanguard approach and invest in index funds.

That said, there will be years when investing in an index trails an active fund. At those years, to truly be an index investor, don't give into the temptation to switch over to active.
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Old 03-19-2014, 04:49 PM   #4
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I assume your advisor has you in balanced funds - not 100% equity. You need to figure out what your asset ratio is with the advisor - and compare the various sectors.
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Old 03-19-2014, 04:58 PM   #5
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Unless you are 100% in large cap stocks/funds for the entirety of the periods, the S&P index is probably not an appropriate benchmark. What is your AA? Also, do you reinvest dividends and is the benchmark based on reinvested dividends?

You might do an Instant X-Ray analysis of your holdings.
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Old 03-19-2014, 04:59 PM   #6
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Advisor provides the following as benchmark comparison:
MSCI EAFE Developed Markets (TRN)
3 yr 8.06%
5 yr 15.13%
10 yr 6.76%
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Old 03-19-2014, 05:10 PM   #7
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3- would it be better to simply take the vanguard approach and invest in index funds?
Your post indicates you already know about index funds and risk tolerance. And you are already at this board, so you have some useful resources at hand. If you are willing to read up a bit and spend a few hours building a portfolio of your own, and spend about an hour a year rebalancing it, then the answer to question 3 is undoubtedly "YES."

Your FA's performance might be fine for a very low-volatility portfolio with a high allocation of CDs, short-term bonds, etc. But that's not a portfolio consistent with the risk tolerance you specified.

I think if you take a look at what he charges you, what the costs are for the funds/investments he has put you into (expense ratio, 12b1 fees, any loads, commissions, taxes due to excessive trading, etc, etc), and if you recognize that neither he nor any other FA you can pick right now will be able to reliably outperform the market, then you'll have your answer. But, I think you know it already.
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Old 03-19-2014, 05:11 PM   #8
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I think Brewer asks the correct question: is the s&p an appropriate benchmark?

Frankly, I doubt it would be unless that is how you are invested. In other words, you likely have some ratio of stocks to bonds plus international/emerging markets etc.

You likely would not equal the return of the s&p, especially given the performance of the bond market and emerging markets doing poorly.
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Old 03-19-2014, 05:45 PM   #9
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Quote:
Originally Posted by Pharmmgr View Post
Advisor provides the following as benchmark comparison:
MSCI EAFE Developed Markets (TRN)
3 yr 8.06%
5 yr 15.13%
10 yr 6.76%
Is your entire portfolio invested in MSCI EAFE Developed Markets? If not, that's also not the right benchmark (just as the S&P500 isn't a legitimate benchmark unless you're fully invested in that). Something may be very wrong here...and we can't help without knowing more about what your asset allocation looks like.
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Old 03-19-2014, 10:48 PM   #10
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At a minimum we need to separate the equities from the bonds. Your stats might make sense if you're 40% bonds, though I wouldn't call that aggressive.
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Old 03-19-2014, 11:46 PM   #11
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Item 4 of this blog post explains blended benchmarks.

http://latticeworkwealth.com/2013/08/17/important-list-of-questions-to-ask-when-selecting-a-financial-advisor-in-brief/
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Old 03-20-2014, 07:14 AM   #12
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The short answer to your question is yes your adviser is almost certainly under performing index funds. To answer the question by how much is he lagging, does depend on the percentage of your assets are in stocks vs bonds, and with within stock how much is domestic vs international and how much large cap vs small cap.

Beyond the S&P returns which you posted here are the 3,5, and 10 years of various Vanguard Index funds
Vanguard Total international Stock Market 4.77%, 14.88%, 6.71%
Vanguard Total Stock Market 16.07%,22.84%, 8.16%
Vanguard Total Bond Market 3.32%, 4.69%, 4.39%

It is hard to come up with moderate asset allocation that would perform as badly as your adviser. So if we take say 40% domestics, 20% international and 40% bonds
Your 3,5, and 10 year returns (not including any rebalancing) is
3 year 9.1%
5 years 13.99%
10 years 6.36%

Now I suspect that periodic re-balancing would boost those returns a modest amount.

If we compare the 10 year returns of this portfolio 6.36% vs yours of 5.4% you'll notice they are about 1%. This is just about equal to the typical management fee charged by an adviser.

Now reading a bit of the website you linked, I don't think your adviser is an idiot, he/she just doesn't appear to be smart enough to overcome the management fees he charged you..

It is important to point out the difference between the 5.4% 10 years returns you achieved and the 6.36% a vanilla allocation of couch potato portfolio doesn't look like much. However if you started $1 million portfolio ten years ago you ended up with $1,692,000 the couch potato portfolio ended up with $1,852,000 a $160K difference.
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Old 03-20-2014, 07:36 AM   #13
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Now reading a bit of the website you linked, I don't think your adviser is an idiot, he/she just doesn't appear to be smart enough to overcome the management fees he charged you..

It is important to point out the difference between the 5.4% 10 years returns you achieved and the 6.36% a vanilla allocation of couch potato portfolio doesn't look like much. However if you started $1 million portfolio ten years ago you ended up with $1,692,000 the couch potato portfolio ended up with $1,852,000 a $160K difference.
Every academic study says that active management can not consistently outperform a diversified index fund portfolio. The typical bias is the difference in fees between the two approaches.

You're the latest new member asking if their FA is earning their fees. The answer is "NO." Move your money ASAP to Vanguard (my choice) or the index fund provider of your choice -- Fidelity and Schwab are the other biggies.

If your adviser was smart enough to consistently beat the comparable index portfolio, they wouldn't be wasting their time with your portfolio. They'd be managing one of the big endowments or state pension funds. Of course, many of the big endowments and state pension funds are moving towards indexing so they've also given up on active management.
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Old 03-20-2014, 08:36 AM   #14
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One argument I've heard in favor of assets under management by an advisor is better 'protection' during down markets. Yet I suppose if the benchmark is composed of total returns for 3, 5 and 10 year intervals then what counts is that total amount on your statement.
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Old 03-20-2014, 09:04 AM   #15
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One argument I've heard in favor of assets under management by an advisor is better 'protection' during down markets. Yet I suppose if the benchmark is composed of total returns for 3, 5 and 10 year intervals then what counts is that total amount on your statement.
This "protection" is supposedly to keep you from selling out in the midst of a massive market drop. I know several people that told their adviser to sell everything in 2009 and the adviser did it. Panic is panic and if someone doesn't have the buy-and-hold discipline the adviser won't change them. I think you are better protected by understanding the concept and being willing to take the hit. An appropriate asset allocation is also important.
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Old 03-20-2014, 09:28 AM   #16
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I know several people that told their adviser to sell everything in 2009 and the adviser did it.
I also know people who were told by their adviser to pull out of stocks in the last big decline and did so. At least two are still waiting for the next big dip to get back in. There is no guarantee that the much promised protection against overreaction will apply to your adviser or to your account except in retrospect.
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Old 03-21-2014, 01:41 PM   #17
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2- should I leave my advisor?
Yes.

Quote:
3- would it be better to simply take the vanguard approach and invest in index funds?
Yes.
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