Who REALLY is better off with an advisor?

[Which Roger]

When having this discussion, we should keep in mind that the typical person on this forum knows more about investing than probably 99% of the population. Sitting down for a few hours with a pay-as-you-go advisor would be invaluable for a lot of people I know who are well educated, but I'm not sure even know the definition of "stock" and "bond" and certainly would not be able to explain concepts like "rebalancing bands", "tax loss harvesting", and "risk tolerance".

 

[ERD50]

When having this discussion, we should keep in mind that the typical person on this forum knows more about investing than probably 99% of the population. Sitting down for a few hours with a pay-as-you-go advisor would be invaluable for a lot of people I know who are well educated, but I'm not sure even know the definition of "stock" and "bond" and certainly would not be able to explain concepts like "rebalancing bands", "tax loss harvesting", and "risk tolerance".

And my position is, you can understand a "couch potato portfolio", and implement it in less time than it would take to interview three advisors, and determine which, if any, you feel 'comfortable' with.

Rebalancing may be over-rated. Do it or don't do it. And if you do, a once a year calculation is pretty darn simple, as is the concept. One can get feedback on tax loss harvesting (if needed), as well as risk tolerance here (historically, portfolio safety seems pretty insensitive to a wide range of AAs - anything from about 45% to 100% has similar results). One could certainly hire a tax specialist by the hour to deal with specific tax issues as they arise.

-ERD50

 

[Which Roger]

And my position is, you can understand a "couch potato portfolio", and implement it in less time than it would take to interview three advisors, and determine which, if any, you feel 'comfortable' with.

Rebalancing may be over-rated. Do it or don't do it. And if you do, a once a year calculation is pretty darn simple, as is the concept. One can get feedback on tax loss harvesting (if needed), as well as risk tolerance here (historically, portfolio safety seems pretty insensitive to a wide range of AAs - anything from about 45% to 100% has similar results). One could certainly hire a tax specialist by the hour to deal with specific tax issues as they arise.

-ERD50

I agree that a couch potato or three-fund portfolio or everything in a single target date fund is simple and probably the best option for someone with little knowledge of or interest in investing. And probably even for many knowledgeable investors. But the hard part is for that person to understand why those are better options than buying the "highest-rated fund" or "the fund with the best performance" and to understand that there are no guarantees, and even if the value of your assets drops 20% in the first year after you put everything into a couch potato portfolio, it doesn't necessarily mean you did the wrong thing or got bad advice.

As I said in an earlier post, investing is simple, but understanding that investing is simple is complex.

 

[ER Eddie]

But how has she done versus a 'Couch Potato Portfolio" or similar typical DIY approach. I have no idea what your self-invested approach is, but it may not be typical of what is generally promoted here for DIY, so that may be a factor.

It definitely is a factor, yes. I spent about a year stumbling around, doing the best I could with what I knew, and my returns no doubt suffered for it. That's my point. My FI did better than I did, because she knew more than I did. It is only within the past few months that I have reached minimal competence with investing and gotten my portfolio into good shape.

Whether she will continue to outperform my newly optimized portfolio, I don't know. But I was just saying that, over the past year, while my knowledge was lagging, she outperformed me.

As far as help with "what I need to be considering, potential pitfalls, etc.", try asking at a forum like this, the FAQ and Bogleheads and their wiki - see how those free answers compare. Another option is a pay-by-the-hour advisor for specific tricky situations.

Oh yes, I understand all that now. But at the time, it was not so simple and clear. My dad died, I inherited a bunch of money, and I was overwhelmed with dealing with my normal stresses plus all of the estate duties (I was administrator, and it was a multi-state mess, with lots of people involved and relationships to keep in balance). I knew little to nothing about investing, taxes, estates, inheritance, real estate, ctc. I really benefitted from the help.

I'm not saying it's a long-term, permanent arrangement. But for the interim between ignorance and minimal competence -- during that time of "crisis" and overwhelm -- I was supremely grateful to have someone who knew what they were talking about helping me through it.

 

[jollystomper]

It can't hurt to have a second set of eyes to look at what you are doing. I think it wise to at least once have a fee based investor look over what you are doing and make recommendations. You can freely ignore them if you desire. I am fortunate to have access to financial advisors through Megacorp, but I only consult with them once every few years. Iif I didn't have access to them I pay since it is infrequent and I'm able to resist their temptations fairly well.

But as was stated above, the big difficult most people have is discipline. If a financial advisor helps with that, that is goodness. But I suspect that a lot contribute to folks not being disciplined... since many times discipline means "don't do anything different, just stay the long for the long term", which doesn't generate a lot of revenue.

 

[target2019]

I say it worked out reasonably well for me because her returns have outperformed my own self-invested ones, even after subtracting the fee. She's done better with her chunk of the money than I have with mine. She's also given me useful advice about a variety of things, including how to educate myself, what I need to be considering, potential pitfalls, etc.

There are two themes in your approach which I believe are part of the success: 1) it is not all under FA management, and 2) there is advice coming to you that is valued.

These are common elements in situation(s) where I see external management working.

 

[Katsmeow]

Interesting article on the topic:

The True Role Of An Investment Adviser

This is a good summary. But I think he missed one (or perhaps is just being polite...)

He says:

1. To put space between you and your investments so that you don’t make emotional decisions.
2. To do detailed research on asset allocation or index funds because you would rather spend time doing more enjoyable things.
3. To provide help to a spouse or family member who isn’t inclined to do it on their own.
4. To provide help to a spouse or family member when you’re no longer able.
5. For legal purposes to reduce your fiduciary responsibility such as a charitable trust account.

What I think he missed is to provide help to yourself if you aren't capable of doing it yourself. Not everyone is capable and not everyone is knowledgeable. One might thing that those who have sufficient assets to hire a FA would be. However, that isn't always the case. Also, some people were capable at one time but due to illness or changes with aging are no longer capable.

 

[Willers]

Although I don't use an advisor (I'm a very happy DIY'er), I definitely have an example of who is better off with one.

My parents retired with two reasonable pensions and a decent sized nest egg that existed because my DD didn't know it was there. Left to his own devices he's had a tendency to speculate in precious metals and buy and sell every hot stock he sees mentioned in USA Today. This cycle has repeated itself numerous times with the money to which he's had access and he's lost every time.

My DM insisted that they have an advisor for that reason (once she finally told him how much they had saved). They had one bad experience with a clueless advisor at Raymond James, but now have a stable one at Edward Jones. I've met with him and reviewed his handling of their account. He seems like an honest capable guy.

Is he worth the commission? For them...every penny. In the last 5 years he's helped them stick to the plan they set and:
1) kept them from selling everything in 2009.
2) convinced my DD (who wanted to "ride the wave") not to buy gold at its last peak since it didn't fit their plan
3) provided a small set aside for my father to "play" the market and leave the rest alone. He has, of course, lost more than 1/2 of it so far.

For most on this forum all an advisor would provide would be a reduced SWR. For my dear parents, the difference is portfolio growth instead of emotional buying and selling (and the chance of a wiped out account). When emotions can't be controlled, they can provide a valuable safety check.

I also do take advantage of the offers to review my portfolio. I always go in with it clear that I'm happy on my own, but they usually want the chance anyway. Each time I have come out with at least one idea that I've researched (kind of like the seminars I attend for work). Most haven't panned out, but a couple have been helpful.

 

[mathjak107]

But Money Magazine assembled a team for you. I would assume they picked some pretty sharp people. What are the odds of a naive investor getting any single advisor as good as any of the people on that team, let alone an entire team of them?

And just maybe, the team, put in a little extra effort, knowing the results would be published, and their name would be attached? I know I would if I were in their shoes.

I think your experience, while interesting, has almost zero relevance to the typical naive investor.



But how has she done versus a 'Couch Potato Portfolio" or similar typical DIY approach. I have no idea what your self-invested approach is, but it may not be typical of what is generally promoted here for DIY, so that may be a factor.

As far as help with "what I need to be considering, potential pitfalls, etc.", try asking at a forum like this, the FAQ and Bogleheads and their wiki - see how those free answers compare. Another option is a pay-by-the-hour advisor for specific tricky situations.


-ERD50

you are correct , they had some pretty sharp advisors.. however my point is that as good as i thought i did there was room for improvement in areas i was not that knowledgeable in.

 

[Rustward]

<snip> Wouldn't that take some understanding of how to measure the performance of this advisor against some benchmark? What is that benchmark? And when you have determined that benchmark, why not just invest directly and save the fees? Something like the "couch potato portfolio". <snip>
-ERD50

The benchmark would be what the DIY investor would have done without an advisor.

So many here focus on financial performance, but that is only one facet of ones' financial life.

It would be interesting, if it were possible, to get an objective measure of all DIY investing results vs all advised investing results. It is simply not possible, though. Many DIY investors -- well, advised ones also -- who do poorly do not want to admit it. You have to remember that the DIY investors in these forums do not, I believe, represent all DIY investors -- what you have here is the top tier, and I would bet that tier is pretty thin.

A lot of DIY investors do not know what they are doing. I used to be one myself.


This topic is always so entertaining. You have some minority of posters who will say "Do whatever turns your crank.", and usually some majority who wiggle around and get their shorts all wadded up because somebody talks about using an advisor, and they think that minority needs to be "saved" from the evil advisors.

Here is what I think everybody should do: If you want to use an advisor, then use an advisor. If you want to DIY, then DIY.

But don't try to convince me that one is better than the other.



Edit to add: When an individual buys a VA from an insurance agent, I consider that DIY.

 

[Animorph]

And my position is, you can understand a "couch potato portfolio", and implement it in less time than it would take to interview three advisors, and determine which, if any, you feel 'comfortable' with.

Rebalancing may be over-rated. Do it or don't do it. And if you do, a once a year calculation is pretty darn simple, as is the concept. One can get feedback on tax loss harvesting (if needed), as well as risk tolerance here (historically, portfolio safety seems pretty insensitive to a wide range of AAs - anything from about 45% to 100% has similar results). One could certainly hire a tax specialist by the hour to deal with specific tax issues as they arise.

-ERD50

But that's just the "easy" part.

Heck, it might be worth it even to me to have an FA handle my Roth conversions up to the AMT tax hit, sell to raise cash every year, find places to keep that cash until I spend it, and do my tax planning and returns. Heaven forbid DW has to do it by herself any time soon. I'm looking forward to simplifications in the future when our fully taxable accounts finally run out.

 

[ER Eddie]

This topic is always so entertaining. You have some minority of posters who will say "Do whatever turns your crank.", and usually some majority who wiggle around and get their shorts all wadded up because somebody talks about using an advisor, and they think that minority needs to be "saved" from the evil advisors.

Here is what I think everybody should do: If you want to use an advisor, then use an advisor. If you want to DIY, then DIY.

But don't try to convince me that one is better than the other.

lol, I like the way you put that.

I also agree with your thoughts on the subject. This isn't a "one size fits all" or "one right answer" type issue. There are a lot of valid possibilities.

 

[ERD50]

The benchmark would be what the DIY investor would have done without an advisor.

....

A lot of DIY investors do not know what they are doing. I used to be one myself.

Sure, a totally uninformed investor might well be better off with the kind of average FA that an uninformed investor might pick.

But I think that is not a useful way to look at it - a DIY home repair analogy:

A) Say I take a totally uninformed approach to some DIY project at home. Being uninformed, I screw it up, and it ends up costing me more to have a pro fix my mistakes plus do the original job than if I just called a pro at the start.

B) I go to the Internet, and find some simple DIY approach to the project. It is within my capabilities, and has a few precautions, and armed with this knowledge I complete the DIY and save $$$$.

Now, does scenario A tell us we should not tackle DIY? Or does it say, try to learn a little first, and then see if DIY makes sense for you?

When I Googled "simple DIY retirement portfolio", the first hit was to a BogleHeads wiki on a three-fund portfolio. This isn't rocket science.

Here is what I think everybody should do: If you want to use an advisor, then use an advisor. If you want to DIY, then DIY.

But don't try to convince me that one is better than the other.

Of course anyone can do what they want. But a lot of people on this forum try to help others out, and we get help in return. And I think it is fair to say there are very few cases where an FA is going to really help someone. An uninformed person will most likely end up with an FA charging 1%, and get put in some higher fee funds.

If they are looking to draw $35,000 for themselves, at a 3.5% "SWR", then an added 1% annual fee requires ~ $1,300,000 versus $1,000,000 for DIY.

Saving an additional 30% in NW is a big deal - that is going to be tough for an FA to overcome. Or cutting spending from $35,000 down to $25,000 to support that $10,000 to the FA is a big deal. We are not talking small potatoes, and I was conservative by not adding the typical added .5%, .75% or more for the expenses on those FA recommended funds.

-ERD50

 

[samclem]

"Who REALLY is better off with an advisor?" Well, not somebody who would like to be able to open a position in Wellington Fund (at least not if the FA is doing the actual buying and selling for you).
Of course, to be fair, if you want access to DFA, you have to pay the [-]troll [/-]toll.

 

[urn2bfree]

"Who REALLY is better off with an advisor?" Well, not somebody who would like to be able to open a position in Wellington Fund (at least not if the FA is doing the actual buying and selling for you).
Of course, to be fair, if you want access to DFA, you have to pay the [-]troll [/-]toll.

Nice "nightman cometh" reference.
But DFA IS available for no fee thru some 529's and for very low fees thru some flat fee advisors.

 

[obgyn65]

My only advisor is the contact at Edward Jones who helps me buy CDs. Thanks to her, I always get the best rates for the maturity needed to build a 10-year ladder. I could not find these CDs on my own because of lack of time - so my answer is 'yes' to the OP's question.

The only other advice I read is here and Bogleheads.

 

[Katsmeow]

When I Googled "simple DIY retirement portfolio", the first hit was to a BogleHeads wiki on a three-fund portfolio. This isn't rocket science.

For many of the people here that is true. But - you make some assumptions. You assume the person has a computer, knows how to do internet searches, would understand the wiki, and has the ability and willingness to follow the advice and to hold to it for the long haul.

Not everyone has a computer. Sure, the people here have one. My mother wouldn't have a clue on doing the above. She isn't stupid, but she is almost 90 and the computer revolution passed her by (no, that isn't true of everyone that age, but I know many people over the age of 80 who don't have a computer). She doesn't have internet access, doesn't know how to use a browser and couldn't do this. (40% of Americans over 65 aren't online).


Even of the people who do search online, not everyone is all that smart. No, it isn't rocket science. But, not everyone is average. Plenty of people wouldn't understand this to any degree.

Further, what about the person who would have understood it fine at age 60 but at 85 or 90 can't manage it?

Also, what about those who understand it, but can't emotionally handle it. The person who bailed out of the market in 2008 and kept everything in cash until last week and now thinks it is time to get back into the market might well have done better with an advisor.

 

[Animorph]

Not everyone has a computer. Sure, the people here have one. My mother wouldn't have a clue on doing the above. She isn't stupid, but she is almost 90 and the computer revolution passed her by (no, that isn't true of everyone that age, but I know many people over the age of 80 who don't have a computer). She doesn't have internet access, doesn't know how to use a browser and couldn't do this. (40% of Americans over 65 aren't online).

OT:

My mom wouldn't touch the computer, even though she has one in the house. However, she jumped on the iPad, which wasn't hers, and seems to love it. She's searching the web for Chihuahua puppies and football news. A big surprise to us. Turns out she couldn't read the computer screen well enough to use it! The iPad she can hold close enough to use comfortably. You think we would have heard complaints about this before now, but that's Mom I guess...

And on topic, she's had the same old broker at Stanley Morgan for forever. He's probably older than she is. But she's used to him, she's in OK stock investments, and she hardly ever taps her portfolio, living instead off of SS and pensions/annuities. Probably does charge too much, but it won't matter to her. If that guy ever quits, we'll probably take a shot at getting her into a simple index fund at Fidelity.

 

[ERD50]

For many of the people here that is true. But - you make some assumptions. You assume the person has a computer, knows how to do internet searches, would understand the wiki, and has the ability and willingness to follow the advice and to hold to it for the long haul.
....
Even of the people who do search online, not everyone is all that smart. No, it isn't rocket science. But, not everyone is average. Plenty of people wouldn't understand this to any degree.

Further, what about the person who would have understood it fine at age 60 but at 85 or 90 can't manage it?

OK sure, if someone really is just not capable, then they need some kind of help. But going back to my home project DIY analogy, I said I looked at the info, and determined "It is within my capabilities...". So there is that caveat.

But in this thread, I think we were talking about the kind of people who were trying to DIY (and maybe failed because they didn't find the "Couch Potato" or equiv), and think they can determine that their FA is doing a good job, etc. Not people who are not capable, maybe just , IMO, under-informed of the simplicity and power of B&H, a simple AA and index funds.

Also, what about those who understand it, but can't emotionally handle it. The person who bailed out of the market in 2008 and kept everything in cash until last week and now thinks it is time to get back into the market might well have done better with an advisor.

Juts tell them to give me a call, and I'll whump some sense into their noggins!

-ERD50

 

[brett]

We are very happy with our advisor. Took us a few months to shop in order to find the right one for us. Among other things, he is a CPA (tax). We are very pleased with the results net of his firm's fee.

I have no issue paying for a service as long as the service is good and the results are at or above expectations. In our case, they are.

 

[clifp]

Oh yes, I understand all that now. But at the time, it was not so simple and clear. My dad died, I inherited a bunch of money, and I was overwhelmed with dealing with my normal stresses plus all of the estate duties (I was administrator, and it was a multi-state mess, with lots of people involved and relationships to keep in balance). I knew little to nothing about investing, taxes, estates, inheritance, real estate, ctc. I really benefitted from the help.

I'm not saying it's a long-term, permanent arrangement. But for the interim between ignorance and minimal competence -- during that time of "crisis" and overwhelm -- I was supremely grateful to have someone who knew what they were talking about helping me through it.

I think advisers make sense in the situation you outlined. I also have no problems with fee only advisers and I think they would make sense in many situations. However as has been discussed before. by forum member who are financial advisers, the economics of being a fee only adviser are challenging. This means most FA charge a percent of assets under management. These typically run about 1%/year which become big money once a portfolio hits 100K and huge money once you get to $1 million+.

As ERD50 says the difference between having a regular FA and DIY is probably 20-30% larger portfolio. Since one of the common goal of the forum is to achieve financial independence as early as possible. Become a DIY investor is one of the best investment you can make.

As far as capabilities I think the are relatively modest. If you managed to pass Algebra in high school without a huge struggle and you have the patience to read a couple hundred page non fiction book you are well on your way. You'll spend 30 minutes a week reading this forum and read 2 or 3 of the books on the forum you'll have spent 40 hours or one work week.

Those 40 hours well reduce the time to FI by many years for most of us or provide 20-30% boost in income for those of us retired.

 

[ERD50]

....
Those 40 hours well reduce the time to FI by many years for most of us or provide 20-30% boost in income for those of us retired.

Or roughly, .....mmmmmm...... $5,000 per hour!

Ongoing, you might (optionally) spend 1 hour a month checking your portfolio, and maybe a full 8 hours of analysis and implementing a re-balance (on the high side, and all pretty much optional, and maybe better off to skip it!). So that 1% fee, divided by 20 hours is $500/hour on-going.

Of course you have to come to this realization. But I really think that if you are going to research advisors, you will stumble across this info.

-ERD50

 

[Midpack]

No need to take offense, but both qualifying assumptions (below) may have been lost as the thread has developed, resulting in debating the same old concepts once again? I know it is tough for DIY investors, self included as I acknowledged, to see them from another's POV? Beyond simple methodology and beyond the obvious cases - about investing discipline and folks in the middle regarding financial literacy.

Q1 That said, many/most people might be better off with a good*** financial advisor. Though long term investing methodology isn't rocket science at all (and what most replies here address), having the discipline to stick with a plan is probably where most amateur investors fall short (and is often overlooked in replies here).

A1 Many replies focus on the methodology once again, when the discipline is often the issue with folks in the "gray area."

Q2 Yes it's pretty easy to recognize the willfully/obviously investing novices who would be better off with an FA. I am not asking about those cases.

But in the interests of a better response, how do you recognize when/if an investor is better off with an advisor - that big gray area between the obvious yes or no? Those folks who are their own worst enemy, where "a (too) little knowledge" is dangerous?

A2 Many replies seem to use the obvious black and white cases to make a case, successful DIY vs clearly not capable of DIY, and not the gray area mentioned in post #1. Financial literacy seems to be on a continuum, not a yes-no situation in all cases. The gray area was the intended focus.

 

[REWahoo]

Another article on the perils of selecting a financial advisor:

We sent more than 40 trained mystery shoppers on multiple visits to more than 100 different financial service providers, including retail firms, banks, and independent advisers throughout the greater Boston area.

The sadly unsurprising results:

First, we find that self-interest played a key role in the quality of advice provided. The majority of financial professionals were particularly supportive of investment biases that helped them maximize their commissions and fees while being less encouraging of strategies recommended by textbook finance research for maximizing returns.

Most strikingly, the professionals were particularly discouraging of low-fee investment strategies like index funds, which finance research has found to be a superior investment option. In fact, many of the financial professionals encouraged clients to move money out of low-cost index funds into higher-cost alternatives.

How to get financial advice worth your money - MarketWatch

 

[clifp]

The quality of the advisor is the huge variable. In answer to the original question: There's >nobody< that is well served by paying a high fee, being put into load funds, and having their account churned.

If we assume that there's an FA / company out there that charges low rates and hews close to the Bogle/Bernstein/Ferri principles, then I'd feel good recommending that firm to anyone who didn't have the time and temperament/discipline and interest in doing things themselves. But I don't understand such people (some of whom, like my DW, are wonderful). And I wonder why they'd take our advice on the matter: having no ability on their own to judge "smart" from "stupid", they will be susceptible to every radio advertisement and "suggestion from a friend" that comes along, forevermore.

Ok to get back to your original question MidPack, I agree with SamClem.

I'd also that add that many people could benefit from a fee only FA on temporary basis when they are new to investing or they have a special situations, college savings, estate planning, new ventures like rentals, marriages, inheritances etc.

However Midpack you have to be aware that reasons you will always get resistance to FAs, is that it requires a lot of work and knowledge evaluate an FA.

ER Eddie is one of the few people on the forum in recent years that even had an objective measurement of his FA. "The FAs investment returns were better than mine". But even that is only a B- answer.

I have yet to hear a single person person say. "I know my FA is good because he has delivered positive alpha over the last 5 or 10 years."

Simply understanding Alpha (risk adjusted return) requires a high level of sophistication and requires way more work to measure Alpha than setting up a coach potato return.