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Old 11-26-2008, 02:52 PM   #21
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I'm frustrated with my experience so far with FAs. First I fell into the clutches of Am*riprise and got sold a VA in my Roth IRA, and I still haven't figured out what to do with it...then I went to a Fee Only planner, and due to a peculiarity of my pension (see my intro post for the details), she gave me what IMO is a gross overestimate of the "magic number" (how much I need in my nest egg to retire). So I am out quite a bit of money and still don't know what I was trying to find out.

I've read and followed the Asset Allocation tutorial, but ran into a snag with determining what allocation I want to use. I asked on that thread and didn't get any replies, so I'll try it again here. The piece of the puzzle I am missing is info on what return and standard deviation I can reasonably expect from a given asset allocation, based on historical data. I might be able to get this info from the fee-only planner, but it will cost me every time I want to do a "what if" scenario. Can anyone tell me a website or computer program I can use to figure this out? I've found a website that does Monte Carlo simulations and can more accurately model my pension than the software my FA was using, so once I have some return/std dev data I will finally be able to figure out my "magic number".
Magic number I shoot for is 25X expenses saved. How that number gets saved or what returns get me to that 25X number are not relevant to me- I just need to get to that number.

Most calculators are good at either predicting "when you will have enough to retire" or "how to draw down the money". Firecalc works good for drawing down, but it does not give me enough information as to how much I need to contribute to be able to draw down starting in a given year (for example).

I have not seen any calculator which takes both situations into account. When accumulating most emphasis is on taking risks to grow the portfolio. There are a finite amount of investments, primarily bonds, equities and cash, which would be used to reach this goal.

Once you have (or approach) having the 25X critical mass, there will be the withdraw portfolio. In this portfolio a person might add assets (commodities and real estate to name two) to stabalize the portfolio value (from year to year). The satablize does "hurt" returns, but IMO the goals change.

A portfolio will go through 5 phases for anyone saving to retire

1) starting out
2) accumulation
3) growth
4) stability
5) draw down

starting out you have around 1X annual expenses and your deposits might be larger than any single position you have in the account.

accumulation you have around 3-6X annual expenses and your annual deposits are more than the actual dollar amount of your single year return.

growth is when you approach 12X annual expenses and your annual return (in dollars) far exceeds the annual contributions (in dollars) you make to the account.

stability is when you reach or approach your critical mass (25X expenses or similar goal). Your goal here is low volatility and to have the yearly return in dollars meet your expense needs.

draw down is when you have to sell shares to meet income needs.

If your desired portfolio is a 5% SWR then you can back that into above (20X for stability, 10X for growth, 3-5X for accumulation and 1X for starting out). If your goal is a 3.3% SWR rate you can back 33X into stability, 16X into growth, 3-8X into accumulation and 1X into starting out. You need to know the end goal (33X, 25X, 20X or other) to know when to add asset classes, change the asset allocation or make other needed portfolio changes.

IMO it is important to see the phases because the deviation matters little when starting out or accumulating. It matters during growth to a degree, but does not really become a true risk until stability. In addition returns are relative to the phase- a 4% return when you are accumulating means little, but if the size of portfolio in growth or stability phase is high enough, that same 4% return prevents you from needing to draw down (sell) assets. Usually once you draw down, that is a point of no return (if you sell assets one year to meet income needs, it is probable you would need to sell some assets every year to meet income needs).
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Old 11-26-2008, 03:15 PM   #22
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Shoot first and ask questions later. Use em if you need em.

BTW - a Target funds is spread across about 5 funds.

But I would recommend you educate yourself. The basics are fairly easy learn and will empower to be more confident about your decisions.

If you are a DIY... It might be a good idea to have one review your plan. VG will do a review for a low price or free if you have enough assets with them.
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Old 11-26-2008, 03:37 PM   #23
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Originally Posted by kyounge1956 View Post
I've read and followed the Asset Allocation tutorial, but ran into a snag with determining what allocation I want to use. I asked on that thread and didn't get any replies, so I'll try it again here. The piece of the puzzle I am missing is info on what return and standard deviation I can reasonably expect from a given asset allocation, based on historical data.
Probably because what you want probably doesn't matter that much. That written, you can go to www.bogleheads.org and read many, many posts where they post where to get the data, the spreadsheets, etc so you can play to heart's content. Look for posts from rodc, where I think he clearly shows that the "expect from a given asset allocation" depends on what time frame you are looking at.

Since the results vary so much based on the time frame, I think you can only get a sense that you are wasting your time trying to come up with a perfect asset allocation based on some previous time period. All you need is a "good enough" asset allocation for future time periods.

BTW, the data you want may be available from a fee-only planner, but it won't do you any good because of the nature of predicting the future.
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Old 11-26-2008, 04:22 PM   #24
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And Scott Burns writes on the topic: A Better Way to Tough It Out - Registered Investment Advisor
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Old 11-26-2008, 04:30 PM   #25
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Hi, hope everyone has a nice Thanksgiving. I'm following an index fund approach to investing and have my money in a Vanguard Target Retirement fund, so I'm well diversified. I heard a radio program with Ric Edelman, a well-known financal advisor, and began wondering if just being on auto-pilot in the Vanguard Target funds is adequate. Edelman spoke about how they put their clients into 10 or 12 different asset classes, from small value to large growth, as well as REITS, commodities and other assets classes, to provide maximum diversity. He also talked about special opportunities with convertible bonds and other more sophisticated investments. So, I began thinking that maybe I'd be better off with an advisor like Edelman or someone else who is thinking more specifically about my situaton. I'd appreciate your thoughts.
I don't believe an FA is worthwhile for most people whose asset allocation is composed of mutual funds. Determining a decent asset allocation is not nearly as difficult as many people guess, but having a plan and the discipline to stick with it is more than half the challenge. I'd suggest you read The Four Pillars of Investing by Dr. William Bernstein (my favorite) or any of those listed under General Investing on this (IMO) outstanding reading list Investment Books, most likely several of them are available at your local library. Then if you think an FA is clearly value added for you (you, not based on an FA's recommendation or salesmanship), are convinced the cost of an FA will be more than offset by improved returns), you should proceed IMO. Some people simply aren't interested in managing their own portfolio's for a variety of reasons, and that's an individual choice. It's a question that's unique to every individual, and therefore one only you can answer.
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Old 11-26-2008, 04:38 PM   #26
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Well, as it were, Wellington and Wellesley happen to be my two core funds in retirement accounts (they balance out passive index funds in my taxable account) and I have only good things to say about them. On the plus side, they have a long, favorable track record. And in shaky markets they provide much needed income and relative stability (very relative! both are still down substantially YTD). But they invest in only 2 asset classes: large value stocks and investment-grade corporate bonds (which they supplement with government bonds from time to time). So they sometimes can underperform the market quite substantially especially when the market is on a tear and growth stocks are in favor like in the late 1990's.
Coincidentally, I just came across this article a few moments ago that sings the praises of VG Wellington...
TheStockAdvisors.com - A Guide to Stock Advisors, Financial Newsletters, Stock Market, China Stocks, Biotech Stocks & Oil Stocks
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Old 11-26-2008, 04:50 PM   #27
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My lesson is that despite anything that is said and promised by even the best FAs, we'll all make money when the market is up, and we'll all lose money when the market is down in times like these. It shows that financial advice is worth a lot less than we previously thought.

Still, getting to the point of not needing a FA at all, takes investing a lot of time in financial self-education. Not everyone has the time or inclination to do so. So, for many, there still is a benefit to having a FA. Just don't count on your FA to outsmart the market.
I agreed whole heartedly with the above quote. Over the years we have taken advise from one financial adviser who managed to do worse that we did on our own. We consulted two others who weren't really interested in giving us advise unless we turned over our entire portfolio to them. (and weren't really interested unless we handed over 1 mill +) I've listened to various "sales pitches" from a handfull of others.

I've come to the conclusion with just a bit of self education DH & I can do pretty well on our own. Our bank has financial advisers that provide a service that will advise us on asset allocation. I am not so naive as to think they do this "free". Their modus operandi is to keep our funds in their bank.

You will make mistakes along the road but thats ok, if u learn from them.

Listen to what various FA's have to say, & remember u retain the ultimate control as to saying yes or no. No one cares more about your money than u do.

Just my 2 cents.
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Old 11-26-2008, 05:25 PM   #28
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Originally Posted by kyounge1956 View Post
(snip) I've read and followed the Asset Allocation tutorial, but ran into a snag with determining what allocation I want to use. I asked on that thread and didn't get any replies, so I'll try it again here. The piece of the puzzle I am missing is info on what return and standard deviation I can reasonably expect from a given asset allocation, based on historical data. (snip)
Probably because what you want probably doesn't matter that much.
:confused: Please explain! How can I even estimate how much I need, how much to save, or how much longer it will take to get there, without any idea of likely return? jIMOH suggests 25x expenses, but isn't this based on the 4% SWR which if I understand correctly is itself based on a particular asset allocation and timespan? If that's the case, ISTM that if my AA or time span differs, I can't assume 4% is safe (or alternatively 5% or even more might be safe with a given set of parameters). If I make estimates assuming I will get (say) 15% return and 3% std dev from a portfolio with mostly cash and bonds in it, I'd end up in deep doo-doo, just like so many people who assumed that the high stock returns of the 90's would continue indefinitely.

Quote:
That written, you can go to www.bogleheads.org and read many, many posts where they post where to get the data, the spreadsheets, etc so you can play to heart's content. Look for posts from rodc, where I think he clearly shows that the "expect from a given asset allocation" depends on what time frame you are looking at.
Thanks, I will check it out.

Quote:
Since the results vary so much based on the time frame, I think you can only get a sense that you are wasting your time trying to come up with a perfect asset allocation based on some previous time period. All you need is a "good enough" asset allocation for future time periods. (snip)
I know roughly what time frame I'm looking at, so I should be able to find out how to come up with at least a realistic ballpark figure, which is more than I have now. At present I don't have even a "good enough" idea of a realistic return and volatility to plug into the Monte Carlo modeler I mentioned. Until I do I can only used the five pre-set AA's that come with it.

I also can't figure out what to expect should I leave the AA in my 457 plan as is. When I did the Asset Allocation tutorial I hd decided to go to 30% stock, 70% bonds, but with the limited selection of funds in the 457 plan, that would be difficult to do. There is only one "bond" fund available and when I did the "portfolio Xray" lesson, I discovered that it's mostly not bonds. It occurred to me that possibly the AA I have now (about 50% "stable value" and 50% cash) might be about equivalent to what I was aiming at. Right now that's just a guess, and I'd like to get to the point where it's an "educated guess", or better.
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Old 11-26-2008, 06:01 PM   #29
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:confused: Please explain! How can I even estimate how much I need, how much to save, or how much longer it will take to get there, without any idea of likely return? jIMOH suggests 25x expenses, but isn't this based on the 4% SWR which if I understand correctly is itself based on a particular asset allocation and timespan? If that's the case, ISTM that if my AA or time span differs, I can't assume 4% is safe (or alternatively 5% or even more might be safe with a given set of parameters). If I make estimates assuming I will get (say) 15% return and 3% std dev from a portfolio with mostly cash and bonds in it, I'd end up in deep doo-doo, just like so many people who assumed that the high stock returns of the 90's would continue indefinitely.

I know roughly what time frame I'm looking at, so I should be able to find out how to come up with at least a realistic ballpark figure, which is more than I have now. At present I don't have even a "good enough" idea of a realistic return and volatility to plug into the Monte Carlo modeler I mentioned. Until I do I can only used the five pre-set AA's that come with it.

I also can't figure out what to expect should I leave the AA in my 457 plan as is. When I did the Asset Allocation tutorial I hd decided to go to 30% stock, 70% bonds, but with the limited selection of funds in the 457 plan, that would be difficult to do. There is only one "bond" fund available and when I did the "portfolio Xray" lesson, I discovered that it's mostly not bonds. It occurred to me that possibly the AA I have now (about 50% "stable value" and 50% cash) might be about equivalent to what I was aiming at. Right now that's just a guess, and I'd like to get to the point where it's an "educated guess", or better.
Focus first on
a) what you know
then
b) on the variables you can control
then
c) ajust to the forces of the market as needed


You know your expenses and you should state your goal as a multiple of this based on a planned withraw rate.

If you do not know the withdraw rate, run firecalc on 20X expenses, 25X expenses and 33X expenses for example to see what works based on how long your retirement is.

I am 18 years from an age 53 retirement, so I use 25X for now (to plan), knowing when I get close I might tweak it to 33X or 30X based on how long I might live. Easy to work 1-3 more years to go from 25X to 30X or 33X.

The variables you can control
1) savings rate- this has the highest factor to your success
2) asset allocation- this is the second best factor you can control.

Adjust this to the market as needed- if market is in a bull like 1997-1999 a year or three before FIRE, might be wise to take some profits. If you have a market like 2008 a year before FIRE, you might need to delay a year.
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Old 11-26-2008, 06:03 PM   #30
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... jIMOH suggests 25x expenses, but isn't this based on the 4% SWR which if I understand correctly is itself based on a particular asset allocation and timespan? If that's the case, ...
No that's not the case. The 4% SWR turns out works pretty much over broad ranges of asset allocations and timespans. Sure, someone will come along and try to diddle with the numbers, but they really don't change all that much.

Quote:
I know roughly what time frame I'm looking at, ....
I guess I wasn't clear. By "time frame", I don't mean your time frame. I mean the time frame of the studies. Results vary whether you pick 1929 to present, 1982-2000, 1973-2006, 1954-1968, etc. In some sense, you can go data mining and get the result you want. You want bonds to outperform stocks? Pick the right time frame. You want a 30:70 asset allocation to do better than a 60:40? Pick the right time frame. You want a portfolio heavily weighted in foreign stocks to be the ideal portfolio. Pick the right time frame. You want a portfolio heavily weighted in foreign stocks to lose you the most money? Pick the right time frame.

You can't predict the future. And neither can a financial salesrep or an honest-to-God CFP/CFA/CFW. So there is no way to pick the best-performing asset allocation for you going forward. Since there is no way to do this, you should realize that you can settle for a mainstream common asset allocation and do about as well as you possibly can. Fortunately, there is a broad-minimum in the function (in the mathematical sense), so whatever you do will not be very far off what a --in hindsight-- "best" asset allocation should have been.
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Old 11-26-2008, 06:06 PM   #31
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I've never had an FA, but one benefit that I think should not be under-appreciated is handholding. For many people the biggest single risk to their portfolio returns is bailing after a big loss, when clearly the risk reward has improved from prior to the loss.

So if the investor is well diversified, an FA who can soothe his/her panic can be worth a lot. Also, the FA can try to be sure that the portfolio is in fact well diversified, so that when adversity comes it is easier to resist the "Oh crap, this could go to zero!" fears.

ha
Ha's right on the money here! In my experience that is what we do most of...handholding when times get hard. And boy, my hands are plum worn down to nubs by now!
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Old 11-26-2008, 07:04 PM   #32
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How can I even estimate how much I need, how much to save, or how much longer it will take to get there, without any idea of likely return? jIMOH suggests 25x expenses, but isn't this based on the 4% SWR which if I understand correctly is itself based on a particular asset allocation and timespan?
Yes, the 4% SWR is based on a well diversified portfolio--e.g. if you instead invest in nothing but a passbook savings account, you can't expect to withdraw 4%. There are many good books on portfolio construction and asset allocation, you've probably already read some. Bob Clyatt's book gives a concise but well-explained overview of a model portfolio and SWRs/withdrawal methods.

It's easy to get bogged down in "optimizing" your portfolio with consideration of all kinds of asset classes and consideration of their historical returns and volatility. If you want to go crazy with this, you want a "Mean Variance Optimizer" (MVO) program, and they are available. Here's are some of them. Here's an explanation of why they aren't very useful. Basically, trying to twaek these asset classes a few percentage points to get the best possble risk/return ratio in the future is an effort not worth your time. The data about the past is likely to vary enough from what will really happen in the future that fine tuning is impossible. As I think you know, no computer simulation is going to spit out a single target retirement dollar figure--there's going to be a lot of grey area. It's best to get a general idea of what has worked, pick assets with historically good returns and poor corelation to each other, and rebalance periodically. Build in enough wiggle-room (or backup plans) so that you are comfortable

jIMHO's approach to use FireCalc in an iterative manner makes sense to me.
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Old 11-26-2008, 07:55 PM   #33
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The initial 4 percent SWR came from trinity study which concluded 60-40 was optimum for the 4 percent.

Common sense tells me if you use 3 percent SWR that 80-20 and living off dividends should work without even running firecalc or another calculator. I would still run the calculator to be sure.

If you use higher than 4 percent SWR, you need the calculators to know what situations your AA does not work.
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Old 11-26-2008, 08:13 PM   #34
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No that's not the case. The 4% SWR turns out works pretty much over broad ranges of asset allocations and timespans. Sure, someone will come along and try to diddle with the numbers, but they really don't change all that much.
Well, that's reassuring. Can you point me at some info on when one is getting to the edges of the range where 4% is safe?

Quote:
I guess I wasn't clear. By "time frame", I don't mean your time frame. I mean the time frame of the studies. Results vary whether you pick 1929 to present, 1982-2000, 1973-2006, 1954-1968, etc. In some sense, you can go data mining and get the result you want. (snip)
I think I wasn't clear either. I know return & std dev can vary depending on the number of years of data included in the calculation. What I meant was, since I plan to be retired for 40-50 years, I should use a value calcuated using periods of decades rather than over periods of only a few years. Nor do I mean find the highest return over a 40 year period and use that, but rather, use numbers based on many 40 year periods rather than on many 5 year periods. Does that make sense?

Quote:
You can't predict the future. And neither can a financial salesrep or an honest-to-God CFP/CFA/CFW. So there is no way to pick the best-performing asset allocation for you going forward. Since there is no way to do this, you should realize that you can settle for a mainstream common asset allocation and do about as well as you possibly can. Fortunately, there is a broad-minimum in the function (in the mathematical sense), so whatever you do will not be very far off what a --in hindsight-- "best" asset allocation should have been.
I know I can't predict the future, past performance is no guarantee, etc, but what else is there to go on? ISTM I can either make an estimate based on past permformance, or a totally random guess based on numbers I pull out of a hat. Is there a better way to estimate returns going forward than using past history? If so, I'm all ears!

Also, I am not trying to pick a "best" asset allocation, I just want to find a realistic, reasonable ballpark number based on my (more-conservative-than-usual) AA, to use for estimating purposes. Most of the information I've seen is for more aggressive portfolios than I want to use. If I make estimates using the return and std dev from a 50/50 stock/bond portfolio but my actual AA is 30/70, they'll be way off, won't they? And I also want to see if 50% "stable value"/50% stock is more or less equivalent in return & volatility to 30% bonds/70% stock, so I will know if I need to change the funds in my 457 in order to get where I am trying to get (E.R.) when I want to get there (in 4 years or so).

The return & volatility for a conservative AA may also tell me I am being totally unrealistic about being able to FIRE in 2012. But if that's the case, I'd rather know now than get my hopes up and then have a bitter disappointment when I thought I was going to be able to do it. If that's what I find, I will either have to re-think my AA or adjust my schedule, but at least I will know (sort of) and not be blundering around in complete darkness like I am now. I want to be able to set a realistic goal, and know (roughly) if I'm on track, falling behind, or ahead of schedule. Is that possible?

Or is your point that the difference in return & volatility between portfolios with (say) 20/80 stock/bond vs 25/75 is negligible compared to other errors that can't be eliminated, so if one of the "pre-set" portfolios on the Monte Carlo modeler is even close to my planned AA, that's as close as I'm going to get, and as close as I need to? I may have given the impression that I am talking about tweaking my AA by fractions of a percentage point trying to get the ultimate highest return while cutting risk to the bone. Not so, I am looking for information on bigger pie slices than that--multiples of five or ten percentage points for each asset.
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Old 11-26-2008, 09:46 PM   #35
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Or is your point that the difference in return & volatility between portfolios with (say) 20/80 stock/bond vs 25/75 is negligible compared to other errors that can't be eliminated, so if one of the "pre-set" portfolios on the Monte Carlo modeler is even close to my planned AA, that's as close as I'm going to get, and as close as I need to?
Over the years I have been on this forum I notice a frequently expressed desire to get more out of data than is there. See what allocations are available for choosing in Firecalc or some other respectable machine, and use one of them for your testing and for your portfolio management. If you deviate from that, you really can't predict what will happen. Unless you use some other way of predicting that you have reason to believe is valid and robust.

The other thing that matters besides allocation is what you pay for whatever you buy. When you buy a long term government bond, you know what your return is going to be. It doesn't matter if you hold until maturity, or sell it along the way. As long as you intend to keep invested in the asset class, your ytm going in is written in stone. From this it should be clear that you can't withdraw an inflation adjusted 4% from a nominal bond yielding 4%.

This is a little harder to understand with equities, but it is more or less the same. If you buy and hold rather than try to trade, over a sufficiently long period your return can be predicted by your going in price.

That is why debates about whether to sell now, or hold on, and whether this time it is diferent, etc. are so much hot air. The wad was shot when the stocks were bought.

None of this applies if you think you can sucessfully trade the swings.

Ha
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Old 11-27-2008, 10:53 AM   #36
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Fee-Only Financial Planning and Advice for Everyday Life. Hourly, As-Needed Services ... The New Choice for Smart Consumers (tm).

I found a great guy through this site. Doesn't manage money, just seeks to understand your situation and give you good advice about how to manage your situation.
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Old 11-27-2008, 08:53 PM   #37
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If the only thing the advisor is doing is recomending investments, then you can probably get by with minimal use of an advisor.

If advisor is making commissions off each of your transactions, be weary of any advice regardless. If advisor is paid a fee each time you need advice, then that system is better for you (the investor).

If advisor can help with taxes, tax planning, short term savings goals, budgeting and financial decisions (in addition to investment suggestions), then I think there is significant value to having an advisor. Fee only is the best way to go.
Agreed. I would never go with someone who makes money from commisions, back-end paybacks, etc. I use a fee-only (not a fee-based, which still has commissions). Everything from wills, budgeting, tax planning, estate planning, lifestyle, small business planning, business coaching, insurance needs, vacation planning, savings, banking decisions, recommended reading, etc. We're in the same investments he is (everyone at his company walks the talk), with allocations adjusted for age. Investments are down this year like everyone else, but far less than the overall markets.

Flat fee was highest the first year due to getting the entire financial picture in order, and lower subsequent years because the bulk of what's done is reviewing the current picture and adjusting.
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Old 11-28-2008, 08:28 AM   #38
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Agreed. I would never go with someone who makes money from commisions, back-end paybacks, etc. I use a fee-only (not a fee-based, which still has commissions). Everything from wills, budgeting, tax planning, estate planning, lifestyle, small business planning, business coaching, insurance needs, vacation planning, savings, banking decisions, recommended reading, etc. We're in the same investments he is (everyone at his company walks the talk), with allocations adjusted for age. Investments are down this year like everyone else, but far less than the overall markets.

Flat fee was highest the first year due to getting the entire financial picture in order, and lower subsequent years because the bulk of what's done is reviewing the current picture and adjusting.
Could you outline the fee structure? Send me a PM if you do not feel like posting.

Thx.
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Old 11-28-2008, 08:34 AM   #39
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I like FAs, with a nice chianti...
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Old 11-28-2008, 08:39 AM   #40
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I like FAs, with a nice chianti...
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