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Performance is trumped by expenses
Old 03-15-2008, 11:26 AM   #1
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Performance is trumped by expenses

I love this article by Scott Burns.

Over 15 years, the difference in returns between funds in the lowest quartile versus the highest quartile are between 1 and 1.5%, roughly (depending on the type of index).

That difference is almost always less than the fees charged by advisors. If you have any doubts about skipping an advisor (at least for optimizing returns), you need to read this. (I still see the value for some people - setting up asset allocation, tutoring on planning basics, tax-wise decisions, etc. Just not for returns.).
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Old 03-15-2008, 12:13 PM   #2
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Sadly, I have had first hand experience with the damage a FA's fees can do to a portfolio. In the past 5 years, my self managed-portfolio has performed much better than what is being managed by my FA, even though my self-managed portfolio is far more conservative. In years when the stock market does well, I beat his returns because his large fees eat a huge chunk of his returns and when the market goes south, then the fees just compound the losses (how do you like paying huge fees on an investment losing money?). It doesn't help that he insists on investing only in the "proprietary" funds his firm proposes (all loaded, all very expensive, all in the bottom half of their respective category). Let's not even talk about the 1% ER I paid on stupid, underperforming bond funds.

Using a FA has been, hands down, the worst financial mistake I have ever made. Over the years I have transferred my assets to Vanguard (and I have been able to enjoy a vast improvement in my returns), but I've got to wait another 3 years to be able to break the VULI contracts he got us into... Can't wait...
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Old 03-15-2008, 02:33 PM   #3
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Does anyone have a sense what the trend has been for FA fees? Have fees (as a percentage of managed assets) gone up, down, or stayed the same over the last 50, 30, and 10 years? Just curious.
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Old 03-15-2008, 03:16 PM   #4
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Does anyone have a sense what the trend has been for FA fees? Have fees (as a percentage of managed assets) gone up, down, or stayed the same over the last 50, 30, and 10 years? Just curious.
Thirty years ago FAs were just coming into being. Fifty years ago they did not exist in the modern sense of being a front-end for mutual funds and other separately managed assets.The 1% fee has always astounded me, as quality individual stock selection can be had for this or even less, depending on one's invested assets.Ha
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Old 03-15-2008, 05:28 PM   #5
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The scary part is people will always go with financial advisor's as they don't want to spend a weekend learning the very basics. Even some of my close friends where 'almost' talked into some of the military specific financial predators.
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Old 03-15-2008, 09:13 PM   #6
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Let's not even talk about the 1% ER I paid on stupid, underperforming bond funds.

Using a FA has been, hands down, the worst financial mistake I have ever made. Over the years I have transferred my assets to Vanguard (and I have been able to enjoy a vast improvement in my returns), but I've got to wait another 3 years to be able to break the VULI contracts he got us into... Can't wait...

What is 1% ER and what are VULI contracts?
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Old 03-15-2008, 09:15 PM   #7
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It is a good article - I'm pleased that I have taken the time to study, take some classes and manage to do without a FA. I used to be very tempted, but no more.
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Old 03-15-2008, 09:20 PM   #8
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It is a good article - I'm pleased that I have taken the time to study, take some classes and manage to do without a FA. I used to be very tempted, but no more.
As some of the older members here may realize, I started out with one (Bernstein) and fired them a few months later. It all became so clear through my readings, here, and other forums.

It was like a coming of age.
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Old 03-15-2008, 09:24 PM   #9
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The scary part is people will always go with financial advisor's as they don't want to spend a weekend learning the very basics. Even some of my close friends where 'almost' talked into some of the military specific financial predators.
Do remember that the majority of people had a vcr blinking "12:00" for most of the 80's and 90's...
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Old 03-15-2008, 09:27 PM   #10
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Do remember that the majority of people had a vcr blinking "12:00" for most of the 80's and 90's...
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Old 03-15-2008, 09:33 PM   #11
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What is 1% ER and what are VULI contracts?
ER is expense ratio. 1% is very high, especially for a bond fund that may return 5% on average. That means that 20% of your return goes to pay the mutual fund company each year. Compare that with a typical VG fund charging about 0.2-0.3% a year and you can see how your returns can be affected in the long run.
VULI contracts are Variable Universal Life Insurance contracts. Very very high fees (I think mine are about 2.5% per year). It's very hard to have decent returns when your 8% average returns are amputated each year by 31% due to fees.
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Old 03-15-2008, 09:38 PM   #12
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thanks for the explanations - sometimes the acronymns overwhelm me
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Old 03-15-2008, 11:00 PM   #13
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Do remember that the majority of people had a vcr blinking "12:00" for most of the 80's and 90's...
Mmmm ya.. Fortunately for me I don't remember VCRs!
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Old 03-15-2008, 11:57 PM   #14
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That difference is almost always less than the fees charged by advisors. If you have any doubts about skipping an advisor (at least for optimizing returns), you need to read this. (I still see the value for some people - setting up asset allocation, tutoring on planning basics, tax-wise decisions, etc. Just not for returns.).
Most folks don't hire advisors for returns, or to "beat their Vanguard funds", but that's a whole different thread.................

Many of my clients have complex estate planning, tax, and philanthropic situations that they don't feel comfortable handling themselves with software, an Internet connection and an 800 number, then again I do not expect anyone on here to agree or believe me that 99.9% of Americans, wealthy or not, are not like the folks on here............. And no, I am not an expert on all these matters, I am a resource.
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Old 03-16-2008, 12:30 AM   #15
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Most folks don't hire advisors for returns, or to "beat their Vanguard funds", but that's a whole different thread.................

Many of my clients have complex estate planning, tax, and philanthropic situations that they don't feel comfortable handling themselves with software, an Internet connection and an 800 number, then again I do not expect anyone on here to agree or believe me that 99.9% of Americans, wealthy or not, are not like the folks on here............. And no, I am not an expert on all these matters, I am a resource.
Please don't take it personally (I am not judging your competences here, I am just talking about my own experience), but if I wanted estate planning I would go see an estate attorney and if I wanted to seek advice about taxes I would talk to a CPA. I would never trust my FA with such matters, he is just not qualified enough for that. But maybe our FA is just not a very good one (and I suspect he is not the only one out there). You on the other hand might be providing a much more comprehensive and valuable service to your clients, I obviously can't judge your competences as I said before.

But I believe that most people hire FA based on nothing more than promises of higher than average returns (they're supposed to be investment experts after all). That's exactly how our FA sold us his services, with promises of 12% annual returns on our money. The "estate planning" and "tax" advices he provides are basically generic gimmicks spewed by a computer and they have never saved us a dime. It is of no practical use to us.

I feel like most people hire a FA either because they don't want to deal with their finances (maybe because they feel overwhelmed) or because they are too busy (or lazy) to educate themselves about financial matters.
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Old 03-16-2008, 06:35 AM   #16
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I learned that lesson the hard way... not only the added expense... but trying to get bigger returns with more risk. This education cost me more than the expense of my grad degree.

Fortunately, I did learn the lesson. Now I index with low cost funds. I am satisfied that I am doing about as well as I am able to do.

DW and I visited a Financial adviser when she took her ER package. The advisor manages the MegaCorp retirement assets and provides the service free. The adviser is the biggest fin institution in America. He looked at what we were doing and our plan and our target portfolio. He did not find any fault with it... but he did share his bias. Which was:

I think you could get better returns with actively managed funds. Then he proceeded to shared a large-cap fund that he claimed had done better than the S&P 500 index by about 1+%. (It was an American Fund). He indicated that it had a low fee also. My opinion is that his story (if true in the past) is likely to not be true over the long haul. Plus, if they bested the index, it was likely to be done with a risk reward trade-off (or insider info).

I am just fine with a low cost indexing strategy. That is my story and I am sticking to it.
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Old 03-16-2008, 07:13 AM   #17
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i use both, my managed funds hold up better in down markets or when sectors are troubled and those sectors dominate major indexes.. my etf's have no chance ever of making money in a down market, my managed funds stand a small chance and if not the damage control is better.....

up markets usually my etf's win. however they need come back further than my managed portfolio. overall thru the years my managed porfolio has beaten my index etf's
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Old 03-16-2008, 07:57 AM   #18
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...But I believe that most people hire FA based on nothing more than promises of higher than average returns (they're supposed to be investment experts after all) ...
I feel like most people hire a FA either because they don't want to deal with their finances (maybe because they feel overwhelmed) or because they are too busy (or lazy) to educate themselves about financial matters.
I'm a recent convert to do-it-yourself investing. Before that, I knew that putting money in my 401k was a good idea, but anything extra just went in savings accounts and CDs. I was completely ignorant to the fact that investing in mutual funds was something you could easily do on your own. I did work with an FA for a couple of years recently, because like you said "they're supposed to be an expert, after all". Basically I was gullible, and fell for the FA's sales pitch. Now I realize that was a big mistake.

Maybe some folks grew up in circles where basic investing skills were taught, but I bet a lot of people were like me and just had no idea that it's not only possible, but it's also pretty easy to make some good investments on your own.
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Old 03-16-2008, 08:35 AM   #19
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i use both, my managed funds hold up better in down markets or when sectors are troubled and those sectors dominate major indexes.. my etf's have no chance ever of making money in a down market, my managed funds stand a small chance and if not the damage control is better.....
Some fund managers do a pretty good job of going defensive in a down market, whereas indexes can't.

But that shows why, with indexing, proper asset allocation with appropriate rebalancing is crucial. Year to date, with the S&P 500 down 11.7% YTD (as of 3/15/08 ), I'm down 6.30%. I have 4% allocated to GDX (gold) which is up 23%, as well as 25% in bonds and TIPS which are, overall, up a bit.

My rollover IRA (from a previous employer) is all in ETFs, and my 401K with Fidelity is mostly in managed funds (except for a portion in FUSEX). My IRA is outperforming the 401K this year, but that's mostly because I don't have anything equivalent to a gold fund in the 401K.
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Old 03-16-2008, 09:34 AM   #20
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Most folks don't hire advisors for returns, or to "beat their Vanguard funds", but that's a whole different thread.................

Many of my clients have complex estate planning, tax, and philanthropic situations that they don't feel comfortable handling themselves with software, an Internet connection and an 800 number, then again I do not expect anyone on here to agree or believe me that 99.9% of Americans, wealthy or not, are not like the folks on here............. And no, I am not an expert on all these matters, I am a resource.
I agree with Rich and FD...

I have never used an FA and I never would. But I'm interested in investing, constantly reading/learning and very comfortable with all that's involved. So I agree with Rich.

But I have 80 employees, most with 401k's and about half with legacy pensions (frozen 15 years ago). And very few of them devote any attention whatsoever to investing and sadly many of them could never figure it out anyway. I don't know if it's 99.9%, but it's close. The incredibly stupid things I've seen/heard them do first hand point clearly to the dire need for FA's. I have watched a few of them destroy their own nest eggs/retirement plans (market timing, getting behind and taking on excessive risk, all in one asset class, etc.). We provide basic information constantly, but we will not make recommendations and we invariably tell them to consult an FA. Whether they do or not is not my concern. So I wholeheartedly agree with FD.

Just my 4 (2 before investing)...
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