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What a financial advisor offers is hand-holding first and foremost
Old 10-02-2015, 05:55 PM   #1
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What a financial advisor offers is hand-holding first and foremost

Interesting to see Vanguard themselves stating "Behavioral Coaching" is far and away the biggest value an advisor provides (est 1.5%) to an uninterested novice investor, and half the total long term value added (est 3%).

Who wants or needs behavioral coaching might only become evident at market peaks and troughs.

And they attempt to quantify the relative value of several services an FP/FA can provide (vs an I advised novice or uninterested investor). I found this an interesting read FWIW.

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Because investing evokes emotion, advisors need to help their clients maintain a long-term perspective and a disciplined approach—the amount of potential value an advisor can add here is large. Most investors are aware of these time-tested principles, but the hard part of investing is sticking to them in the best and worst of times—that is where you, as a behavioral coach to your clients, can earn your fees and then some. Abandoning a planned investment strategy can be costly, and research has shown that some of the most significant derailers are behavioral: the allure of market-timing and the temptation to chase performance.
http://www.vanguard.com/pdf/ISGQVAA.pdf
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Old 10-02-2015, 08:28 PM   #2
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I would agree with that, based on my own experience. And even with that form of behavioral coaching, there are still those that panic, when they'd be better off holding firm. Human nature is a powerful force and our fears come from a place that is hard to reach with reason.
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Old 10-02-2015, 08:58 PM   #3
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This is often described as a "value" that advisers provide, and maybe the Vanguard advisers do that or are trained enough that they likely to. But many friends with advisers were the ones who panicked in the last big downturn, in part because some of them were getting suggestions from their advisers to bail out. I don't think you can say that a steadying hand in down markets is a benefit of advisers in general. Among people I know who tell stories of their misadventures, getting wrongheaded advice to sell from advisers seems fairly common.
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Old 10-02-2015, 09:54 PM   #4
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This is often described as a "value" that advisers provide, and maybe the Vanguard advisers do that or are trained enough that they likely to. But many friends with advisers were the ones who panicked in the last big downturn, in part because some of them were getting suggestions from their advisers to bail out. I don't think you can say that a steadying hand in down markets is a benefit of advisers in general. Among people I know who tell stories of their misadventures, getting wrongheaded advice to sell from advisers seems fairly common.
Right. The Vanguard paper seems to be the potential advantage a high quality adviser could provide a novice investor. It doesn't appear (at least in my quick read) that this is the actual advantage that typical real advisers add.

This is currently a political issue. This Vanguard paper got referenced in Congressional testimony regarding the Labor Dept proposal to make certain IRA advisers "fiduciaries".

Here's another interesting piece of psychology. Imagine an ordinary worker rolling a $400k 401k plan into an IRA. If Vanguard's numbers are correct, he gets
$1,400 per year of value from having an adviser rebalance for him,
$1,800 per year of value from having the adviser put him into, and keep him in, low cost funds, and
$4,000 per year of value from having the adviser hold his hand in the once-per-decade occurrence of a major downward move.

I wonder if that worker would be willing to cut an annual check of $3,600 to cover half the value of those services.
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Old 10-02-2015, 10:26 PM   #5
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This is like the "jobs saved" numbers.
If my friend tells me not to eat rat poison, does he get credit for saving my life? How much is >that< worth? Lots!

At least Vanguard admits that the figures are approximate and didn't pretend that they added up precisely. But I'd like to see the controlled study that led to the 3% estimate.
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Old 10-03-2015, 06:16 AM   #6
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This is like the "jobs saved" numbers.
If my friend tells me not to eat rat poison, does he get credit for saving my life? How much is >that< worth? Lots!

At least Vanguard admits that the figures are approximate and didn't pretend that they added up precisely. But I'd like to see the controlled study that led to the 3% estimate.
Yes, I thought 3% seemed optimistic, but I gather that was for an uninterested novice investor. And to further say half, 1.5%, comes from (in essence) just not letting an investor buy high, sell low? I can imagine they could save a novice investor much more than 1.5% at market peaks and troughs, but that would average down over the long term, so I can imagine 1.5% for all investors long term.
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Old 10-03-2015, 06:18 AM   #7
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This is often described as a "value" that advisers provide, and maybe the Vanguard advisers do that or are trained enough that they likely to. But many friends with advisers were the ones who panicked in the last big downturn, in part because some of them were getting suggestions from their advisers to bail out. I don't think you can say that a steadying hand in down markets is a benefit of advisers in general. Among people I know who tell stories of their misadventures, getting wrongheaded advice to sell from advisers seems fairly common.
I don't doubt it from what I've read, very sad. I wonder how those advisors live with themselves...
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Old 10-03-2015, 06:43 AM   #8
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It's a "study" which shows you can get 3% additional performance from their advisor service. I'm not signing up. Maybe when I'm gone someone else will...

I'll have to look for the Bogle quote about how much is added by rebalancing.
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Old 10-03-2015, 08:29 AM   #9
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It's a "study" which shows you can get 3% additional performance from their advisor service. I'm not signing up. Maybe when I'm gone someone else will...

I'll have to look for the Bogle quote about how much is added by rebalancing.
I was only highlighting someone quantifying what hand-holding might be worth, I had not seen that before. I think most advisors would never quote anything specific...

And I take 3% as the most value-added possible, the case of a good advisor helping a uninterested investor who could be expected to be his/her own worst enemy at market peaks and troughs who knows little to nothing about asset allocation or selecting assets. There's a whole continuum of investors who would get all or (less than) none of a good advisors value add.

This one?
Quote:
We’ve just done a study for the NYTimes on rebalancing, so the subject is fresh in my mind. Fact: a 48%S&P 500, 16% small cap, 16% international, and 20% bond index, over the past 20 years, earned a 9.49% annual return without rebalancing and a 9.71% return if rebalanced annually. That’s worth describing as “noise,” and suggests that formulaic rebalancing with precision is not necessary.
22bps which could be noise as he states - compared to 35bps in the article linked above, same order of magnitude at least.
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Old 10-03-2015, 08:38 AM   #10
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It's a "study" which shows you can get 3% additional performance from their advisor service. I'm not signing up. Maybe when I'm gone someone else will...

I'll have to look for the Bogle quote about how much is added by rebalancing.
When we read things like this, it's important to remember that most of us on the ER forum are in the top 1% of investment knowledge. So the "3% additional performance" doesn't apply to us; it's geared toward the average Joe.
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Old 10-03-2015, 09:01 AM   #11
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The 3% seems possible to me if the comparison is with an individual that invests in active funds, chases performance, and tries to time the market. Hasn't M* shown many times that most investments in high return mutual funds don't benefit from high returns because the out performance is in the early years with few AUM? I couldn't find the charts but recall seeing this analysis many times.
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Old 10-03-2015, 09:33 AM   #12
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There is a lot said in this page by Mr. Bogle. The page dates back to June 2007, but I don't think his position has changed.

http://johncbogle.com/wordpress/category/ask-jack/

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My personal conclusion. Rebalancing is a personal choice, not a choice that statistics can validate. There’s certainly nothing the matter with doing it (although I don’t do it myself), but also no reason to slavishly worry about small changes in the equity ratio. Maybe, for example, if your 50% equity position grew to, say, 55% or 60%.
Maybe the statistics and studies show different results in 2015.

What I am questioning is the addition of grey areas and coming up with a nice, neat 3% (or more) advantage for an FA or robo-FA service.

I really can't see the other 99% (non E-R.org folks) reading a 28-page paper and properly digesting it. It will probably take me a few weeks.
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Old 10-03-2015, 11:14 AM   #13
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There is a lot said in this page by Mr. Bogle. The page dates back to June 2007, but I don't think his position has changed.

http://johncbogle.com/wordpress/category/ask-jack/

Maybe the statistics and studies show different results in 2015.

What I am questioning is the addition of grey areas and coming up with a nice, neat 3% (or more) advantage for an FA or robo-FA service.
Like others here, I rebalance using the 5/25 methodology ***. I look at my AA quarterly (rarely more often), and don't consider any changes unless any asset class is 'greater than either an absolute 5 or 25 percent of the original target allocation, whichever is less.' Even then, I may not if the tax consequences suggest waiting.

Looks like Mr Bogle might approve.

*** The Larry Swedroe 5/25 Rule - A Wealth of Common SenseA Wealth of Common Sense

And from original linked paper
Quote:
Note that the goal of a rebalancing strategy is to minimize risk, rather than maximize return.

The bottom line is that an investment strategy that does not rebalance, but drifts with the markets, has experienced higher volatility.
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Old 10-03-2015, 11:34 AM   #14
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Vanguard is VERY structured and offer very little advice except what is canned and demanded that they say from "above". It is much better than the expensive financial companies and brokers trying to sell you everything at 1.5%. I'd use them if I had no knowledge, no interest, and let average play out. They were big into international, big loser,they aren't insisting in as much today as a couple years ago. They are honest, know they have the cheapest expenses.....not for me until I'm incapable of handling my own money....then they got it.
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Old 10-03-2015, 06:10 PM   #15
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The 3% seems possible to me if the comparison is with an individual that invests in active funds, chases performance, and tries to time the market. Hasn't M* shown many times that most investments in high return mutual funds don't benefit from high returns because the out performance is in the early years with few AUM? I couldn't find the charts but recall seeing this analysis many times.
I looked up the returns for VFINX, Vanguard S&P 500 Index Fund.

For the past 3 years investors gained 13.14% (annualized) while the fund made 12.23%. Don't think I've ever seen the investors beat the fund, but DCA or withdrawals can do it if it's moving in the right direction.

For 10 years investors made 4.97% and the fund gained 6.68%. So maybe investors screwed up a bit in 2008-2009.

For 15 years investors made 1.36% and the fund made 3.84%. That's almost 2.5% worse, though through two tough periods.

3% doesn't sound too far fetched.
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Old 10-03-2015, 06:44 PM   #16
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I look at my BIL as an example of this. He panics whenever there is a market downturn. Big time. He asks me - and I tell him to stay firm. Then he asks his adviser and that guy pitches him *another* variable annuity. I've told him he's being taken advantage of.... doesn't matter. With every market fluctuation he's getting more and more annuitized.

So - if the adviser is a good one (Like Sarah!!!) he'd be getting a real benefit from getting advice to stay the course. Instead he's got a shark who takes advantage.
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Old 10-03-2015, 11:18 PM   #17
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I look at my BIL as an example of this. He panics whenever there is a market downturn. Big time. He asks me - and I tell him to stay firm. Then he asks his adviser and that guy pitches him *another* variable annuity. I've told him he's being taken advantage of.... doesn't matter. With every market fluctuation he's getting more and more annuitized.

So - if the adviser is a good one (Like Sarah!!!) he'd be getting a real benefit from getting advice to stay the course. Instead he's got a shark who takes advantage.
Along these lines, I was thinking this is all very circular.

If an individual investor can't choose and maintain an investment strategy, how does he/she go about choosing and maintaining an advisor? It just pushes the problem out a level, rather than solving it (with a bit of education).

I recall a poster here who went through dozens(!) of advisors. He kept expecting something that wasn't reasonable, but wouldn't take the time to educate himself as to what was reasonable, and just do it himself.

Until there is some effective, and well known "Good Housekeeping seal of approval" for advisors that provide the basics for a tiny fee, so that any new investor would by default go that route, I suspect the problem will remain.

-ERD50
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Old 10-04-2015, 01:12 AM   #18
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Someone above wrote it, but I think most Americans don't have much or any financial expertise. Advisors, or good ones, can benefit them.
I don't most of the ER clientelle would benefit too much, but self-selection. . .
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Old 10-04-2015, 03:46 AM   #19
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Along these lines, I was thinking this is all very circular.

If an individual investor can't choose and maintain an investment strategy, how does he/she go about choosing and maintaining an advisor? It just pushes the problem out a level, rather than solving it (with a bit of education).

I recall a poster here who went through dozens(!) of advisors. He kept expecting something that wasn't reasonable, but wouldn't take the time to educate himself as to what was reasonable, and just do it himself.

Until there is some effective, and well known "Good Housekeeping seal of approval" for advisors that provide the basics for a tiny fee, so that any new investor would by default go that route, I suspect the problem will remain.

-ERD50
Reminds me of the adage 'by the time you know enough to choose a good advisor, you don't need one.'

I don't make recommendations re: advisors as a rule, but I do know who will advise DW if that ever becomes necessary, only two choices. While she has zero interest in investing, I believe she does know enough to not panic sell or chase returns from our experience, so she wouldn't override the advisor I'd put her with. During the 08-09 meltdown, she never asked 'are we OK?' once.
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Old 10-04-2015, 04:20 AM   #20
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What a financial advisor offers is hand-holding first and foremost
If investors can't help themselves from selling low and buying high then they need to pay some advisor 1% per year to hold their hand.
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