Fee for Financial Advisor

[73ss454]

I'm here to entertain you.

Nope, I don't pay or use Rick. But as one poster said, some people want their hands held and isn't it better to pay .25 of your 4% than 2% of your 4% SWR. I don't think anyone needs a 50% partner in their money, well maybe in your case it would be worth it. (heh)

 

[jIMOh]

So, WHY would anyone PAY Rick Ferri .25% a year to manage a DIY portfolio? ......

Financial decisions take time to research. Could be selling a house, refinancing a house, college savings strategies, tax credits for college, estate planning, tax planning, divorce settlements (and this list is longer than what I typed).

Two choices, research it yourself, or hire someone which knows the ins and outs of each of above, and has done it before.

 

[FinanceDude]

Financial decisions take time to research. Could be selling a house, refinancing a house, college savings strategies, tax credits for college, estate planning, tax planning, divorce settlements (and this list is longer than what I typed).

Two choices, research it yourself, or hire someone which knows the ins and outs of each of above, and has done it before.

Not arguing with you, I see it that way too. I used to share true anonymous stories of what happens in the field, and I don't think most people believed them, so I stopped doing that........

 

[leyland]

Does anyone here use/recommend Dan Wiener's Vanguard Portfolio's?

Not arguing with you, I see it that way too. I used to share true anonymous stories of what happens in the field, and I don't think most people believed them, so I stopped doing that........

 

[haha]

Financial decisions take time to research. Could be selling a house, refinancing a house, college savings strategies, tax credits for college, estate planning, tax planning, divorce settlements (and this list is longer than what I typed).

Two choices, research it yourself, or hire someone which knows the ins and outs of each of above, and has done it before.

The chances of getting an FA who is adequate in all these fields is remote, and besides, there are people who specialize in each one of these things. They are called attorneys, and they charge by the hour, not 1 % of your liver.

I do see why FA is a very appealing business for the FA. Almost no research- after all he is buying mutual funds, products that were designed to replace custom portfolio management for the masses. So he is free to spend most of his time on business development and selling. Now if the client hopes to exist on a gross 4% from his mixed portfolio (ambitious goal under current conditions) and he gives up 1% to the FA, that means he can live on 3%, or thinks he can. Say the FA has a 50% net profit margin in his business, but he wants to live a bit better than the client. So his net profit is 1/2% of his clients assets per year. With twelve clients he nets 6% of these clients's assets, or exactly twice what the clients each make. And who bears the risk?

Not too shabby for work that requires moderate formal schooling.
And I say this with absolute respect for the FAs on the board. To make a good living on your own, without taxpayer assistance, or union or guild protection takes ability and drive.

Clients likely are like the OP. They might have had little financial experience in their lives, and they do not trust their own judgment. So it is not like the FA needs to twist their arms. Usually the spouse will do any twisting necessary.

Ha

 

[Sarah in SC]

I do see why FA is a very appealing business for the FA. Almost no research- after all he is buying mutual funds, products that were designed to replace custom portfolio management for the masses.

And to add to what Ha is saying, many FAs don't manage mutual fund portfolios but do customized Separate Account Management (SAM) accounts with equities. Most of these are managed by CFAs, not garden variety FAs (even if CFPs). FA encompasses a pretty wide swath of the business, including insurance sales folks, cold callers, etc as well as credentialed professionals with long-term track records. YMMV.

 

[leyland]

Some more numbers. Based on past records, the FA estimated that his recommended portfolio (of which he will charge 1.25% per year as his fee) will deliver 1.5% better performance than my current portfolio. My current portfolio has 15% in cash right now and his recommended portfolio has 2% in cash. Simply moving money out of cash would likely close the 1.5% difference (along with changing the currently skewed asset allocation). It isn't clear to me that he is likely to generate returns that are enough to cover his fee based on what was presented to me (assuming, of course, that I change the asset allocation to something more reasonable).

The chances of getting an FA who is adequate in all these fields is remote, and besides, there are people who specialize in each one of these things. They are called attorneys, and they charge by the hour, not 1 % of your liver.

I do see why FA is a very appealing business for the FA. Almost no research- after all he is buying mutual funds, products that were designed to replace custom portfolio management for the masses. So he is free to spend most of his time on business development and selling. Now if the client hopes to exist on a gross 4% from his mixed portfolio (ambitious goal under current conditions) and he gives up 1% to the FA, that means he can live on 3%, or thinks he can. Say the FA has a 50% net profit margin in his business, but he wants to live a bit better than the client. So his net profit is 1/2% of his clients assets per year. With twelve clients he nets 6% of these clients's assets, or exactly twice what the clients each make. And who bears the risk?

Not too shabby for work that requires moderate formal schooling.
And I say this with absolute respect for the FAs on the board. To make a good living on your own, without taxpayer assistance, or union or guild protection takes ability and drive.

Clients likely are like the OP. They might have had little financial experience in their lives, and they do not trust their own judgment. So it is not like the FA needs to twist their arms. Usually the spouse will do any twisting necessary.

Ha

 

[FinanceDude]

My current portfolio has 15% in cash right now and his recommended portfolio has 2% in cash. Simply moving money out of cash would likely close the 1.5% difference (along with changing the currently skewed asset allocation). It isn't clear to me that he is likely to generate returns that are enough to cover his fee based on what was presented to me (assuming, of course, that I change the asset allocation to something more reasonable).

You are correct. You have to determine if you want an FA and WHY you want an FA. That decision and some due diligence might give you the answers you are looking for.

 

[FinanceDude]

I do see why FA is a very appealing business for the FA. Almost no research- after all he is buying mutual funds, products that were designed to replace custom portfolio management for the masses.

So he is free to spend most of his time on business development and selling. Now if the client hopes to exist on a gross 4% from his mixed portfolio (ambitious goal under current conditions) and he gives up 1% to the FA, that means he can live on 3%, or thinks he can. Say the FA has a 50% net profit margin in his business, but he wants to live a bit better than the client. So his net profit is 1/2% of his clients assets per year. With twelve clients he nets 6% of these clients's assets, or exactly twice what the clients each make. And who bears the risk?

Wow, I never knew my job was SO easy!

Not too shabby for work that requires moderate formal schooling.
And I say this with absolute respect for the FAs on the board. To make a good living on your own, without taxpayer assistance, or union or guild protection takes ability and drive.

Up until 1990 or so, a college degree was NOT required to be an advisor.............

 

[BTravlin]

Some more numbers. Based on past records, the FA estimated that his recommended portfolio (of which he will charge 1.25% per year as his fee) will deliver 1.5% better performance than my current portfolio.

So you pay 1.25% to get an improvement of .25%?

Hell I think I can do better than that for you and I'll only charge you .5%!

 

[leyland]

Vanguard is working up a recommended portfolio for me based on my input (via a questionaire). I will have a conf call with them next week to discuss. Essentially, I am looking for a better strategy than I have now. This could come from an FC or my own research.

You are correct. You have to determine if you want an FA and WHY you want an FA. That decision and some due diligence might give you the answers you are looking for.

 

[Emeritus]

Some more numbers. Based on past records, the FA estimated that his recommended portfolio (of which he will charge 1.25% per year as his fee) will deliver 1.5% better performance than my current portfolio. My current portfolio has 15% in cash right now and his recommended portfolio has 2% in cash. Simply moving money out of cash would likely close the 1.5% difference (along with changing the currently skewed asset allocation). It isn't clear to me that he is likely to generate returns that are enough to cover his fee based on what was presented to me (assuming, of course, that I change the asset allocation to something more reasonable).

Better performance than your current portfolio is a meaningless yardstick
The Marines promote the V-22 on the grounds that it is better than a 1970s helicopter that costs 1/10th as much. Possibly true, but so what?

More importantly, you are not improving performance unless you analyze both risk and return.

 

[jIMOh]

Some more numbers. Based on past records, the FA estimated that his recommended portfolio (of which he will charge 1.25% per year as his fee) will deliver 1.5% better performance than my current portfolio. My current portfolio has 15% in cash right now and his recommended portfolio has 2% in cash. Simply moving money out of cash would likely close the 1.5% difference (along with changing the currently skewed asset allocation). It isn't clear to me that he is likely to generate returns that are enough to cover his fee based on what was presented to me (assuming, of course, that I change the asset allocation to something more reasonable).

A financial advisor would not choose different investments "to cover his/her fee" that would be unethical.

The advisor chose an allocation based on the clients risk tolerance and doing some due diligence to figure out what that risk tolerance is.

 

[leyland]

The proposed portfolio does have lower risk although not by much. I was a bit surprised by this since the % of equities is lower.

Better performance than your current portfolio is a meaningless yardstick
The Marines promote the V-22 on the grounds that it is better than a 1970s helicopter that costs 1/10th as much. Possibly true, but so what?

More importantly, you are not improving performance unless you analyze both risk and return.

 

[leyland]

I may not have been clear. It seems to me that there is no sense using a FA unless I feel he can generate returns that are better than I can do. His returns would start off being 1.25% in the hole.

A financial advisor would not choose different investments "to cover his/her fee" that would be unethical.

The advisor chose an allocation based on the clients risk tolerance and doing some due diligence to figure out what that risk tolerance is.

 

[haha]

A financial advisor would not choose different investments "to cover his/her fee" that would be unethical.

The advisor chose an allocation based on the clients risk tolerance and doing some due diligence to figure out what that risk tolerance is.

Since you used past tense, "chose", you imply that you have definite knowledge of how this FA arrived at this particular recommendation. How did you find this out? Are you the advisor?

Ha

 

[kumquat]

I may not have been clear. It seems to me that there is no sense using a FA unless I feel he can generate returns that are better than I can do. His returns would start off being 1.25% in the hole.

My bold. That pretty much says it. Do you think [-]this guy[/-] anyone can do it consistently? Your answer should help your decision.

 

[leyland]

My gut reaction is "probably not" as long as redo my asset allocation to something that makes more sense (whatever that means). I want to see what the Vanguard FA comes back with and I might subscribe to Dan Wiener and use one of his model portfolios.

My bold. That pretty much says it. Do you think [-]this guy[/-] anyone can do it consistently? Your answer should help your decision.

 

[73ss454]

Some more numbers. Based on past records, the FA estimated that his recommended portfolio (of which he will charge 1.25% per year as his fee) will deliver 1.5% better performance than my current portfolio. My current portfolio has 15% in cash right now and his recommended portfolio has 2% in cash. Simply moving money out of cash would likely close the 1.5% difference (along with changing the currently skewed asset allocation). It isn't clear to me that he is likely to generate returns that are enough to cover his fee based on what was presented to me (assuming, of course, that I change the asset allocation to something more reasonable).

He estimates or he guarantees? Because I estimate he's going to rip you off. Let's see who's right.

 

[leyland]

Nobody guarantees anything. I probably will not be using him - will probably go with a Vanguard recommended asset allocation, an asset allocation recommendation I find off the web, or one of Dan Wieners recommendations.

He estimates or he guarantees? Because I estimate he's going to rip you off. Let's see who's right.

 

[golfnut]

Nobody guarantees anything. I probably will not be using him - will probably go with a Vanguard recommended asset allocation, an asset allocation recommendation I find off the web, or one of Dan Wieners recommendations.

I just had a review completed by Vanguard (at no charge) IMHO, good place to start. They really push their index/lost cost mutual funds

Back a few years ago, I did the Weiner thing (for 2 yrs). He strongly advocates Vanguard active (rather than index/passive) funds. After 2 years, I felt I learned all I was going to learn. As a subscriber, you receive a monthly newsletter and you get access to the the investment forum. Just be careful, you do not pay too much for his services. If you look around, you should be able to get a yearly membership for around $80 or a 2 year membership for maybe, $130.

If I had a do over, I probably would have bought a few investment books instead even though I do think Weiner is a smart guy and maybe a little too pompous.

 

[73ss454]

Nobody guarantees anything. I probably will not be using him - will probably go with a Vanguard recommended asset allocation, an asset allocation recommendation I find off the web, or one of Dan Wieners recommendations.

Nobody guarantees anything, exactly my point. I think you're sharp enough to figure this out.

 

[jIMOh]

Since you used past tense, "chose", you imply that you have definite knowledge of how this FA arrived at this particular recommendation. How did you find this out? Are you the advisor?

Ha

I am not the advisor, it appears from context of other posts, the OP has an allocation with a FA.

I may not have been clear. It seems to me that there is no sense using a FA unless I feel he can generate returns that are better than I can do. His returns would start off being 1.25% in the hole.

Not sure if my reply was to another poster or yourself.

If you believe you can DIY, then DIY. The value of an advisor is in getting advice about situations you may not be familiar with (as you indicated in this response)

You're right, there's NO knowledge involved, just put $3million wherever and you'll be fine............

A bit more information. We are currently using Fidelity and Vanguard. Our asset allocation is probably not the best - highly slanted towards large US company stocks and also too much is cash. I obviously need to pay more attention or get someone to do it for me. Vanguard is going to work up a new asset allocation for me (for no cost).

And this was posted by me- if you do not see these situations arising, the value an advisor brings (to you) is minimal

Financial decisions take time to research. Could be selling a house, refinancing a house, college savings strategies, tax credits for college, estate planning, tax planning, divorce settlements (and this list is longer than what I typed).

Two choices, research it yourself, or hire someone which knows the ins and outs of each of above, and has done it before.

If you intend to research every decision before you make it, then DIY. If you want immediate answers from someone which knows "everything" going on financially, you want a FA.

 

[jIMOh]

Originally Posted by jIMOh
Financial decisions take time to research. Could be selling a house, refinancing a house, college savings strategies, tax credits for college, estate planning, tax planning, divorce settlements (and this list is longer than what I typed).

Two choices, research it yourself, or hire someone which knows the ins and outs of each of above, and has done it before.

The chances of getting an FA who is adequate in all these fields is remote, and besides, there are people who specialize in each one of these things. They are called attorneys, and they charge by the hour, not 1 % of your liver.

I do see why FA is a very appealing business for the FA. Almost no research- after all he is buying mutual funds, products that were designed to replace custom portfolio management for the masses. So he is free to spend most of his time on business development and selling. Now if the client hopes to exist on a gross 4% from his mixed portfolio (ambitious goal under current conditions) and he gives up 1% to the FA, that means he can live on 3%, or thinks he can. Say the FA has a 50% net profit margin in his business, but he wants to live a bit better than the client. So his net profit is 1/2% of his clients assets per year. With twelve clients he nets 6% of these clients's assets, or exactly twice what the clients each make. And who bears the risk?

Not too shabby for work that requires moderate formal schooling.
And I say this with absolute respect for the FAs on the board. To make a good living on your own, without taxpayer assistance, or union or guild protection takes ability and drive.

Clients likely are like the OP. They might have had little financial experience in their lives, and they do not trust their own judgment. So it is not like the FA needs to twist their arms. Usually the spouse will do any twisting necessary.

Ha

Have you looked for an advisor before? Not tough to find one if you are looking for one.

Attorneys charge by the hour, and some have high retainers too.

FA get compensated for their time.

Might be
1) loads on mutual funds sold (front end loads, 12b1 trailers or other)
2) straight fee for a financial plan
3) assets under management (.5% fee-1% fee annually) aka wrap fee

If a client has a wrap fee, financial plans usually come along for free.

If a planner is involved, you assume the entire withdraw is 100% of client's income. Keep making assumptions like that, its how the other FA actually make a living- you disclude other products- like annuities.

If a person is skilled and takes the time to educate themselves, then a FA is NOT needed.
If a person wants another person to guide them thru, they can hire a FA. How that advisor is compensated depends on clients needs.

 

[haha]

Have you looked for an advisor before? Not tough to find one if you are looking for one.

No I haven't, and I don't suppose I will be anytime during this lifetime.

Ha