Fee for Financial Advisor

[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.

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Originally Posted by FinanceDude 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]

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Originally Posted by 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).

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]

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Originally Posted by 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).

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.

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Originally Posted by Emeritus 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.

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Originally Posted by jIMOh 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]

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Originally Posted by jIMOh 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]

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Originally Posted by 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.

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.

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Originally Posted by kumquat My bold. That pretty much says it. Do you think this guy anyone can do it consistently? Your answer should help your decision.

[73ss454]

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Originally Posted by 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).

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.

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Originally Posted by 73ss454 He estimates or he guarantees? Because I estimate he's going to rip you off. Let's see who's right.

[golfnut]

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Originally Posted by 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.

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]

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Originally Posted by 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.

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

[jIMOh]

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Originally Posted by haha 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.

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Originally Posted by 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.

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)

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

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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

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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]

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Originally Posted by haha Quote: 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]

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Originally Posted by jIMOh 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

[leyland]

I am the OP. I dont have a FA. I realize I need a better asset allocation and I am trying to decide how to accomplish that. Using a FA (who charges a % of the assets) is one option.

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Originally Posted by jIMOh I am not the advisor, it appears from context of other posts, the OP has an allocation with a FA. 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) And this was posted by me- if you do not see these situations arising, the value an advisor brings (to you) is minimal 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.

[chinaco]

Was that

1) Fee for Adviser

Or

2) Flee from Adviser?

Given a choice I choose number 2.

Here is the definition.

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1.one who gives advice. 2.a teacher responsible for advising students on academic matters. 3.a fortuneteller.

I suspect definition #3 would be more accurate if it stated: FortuneTaker

[FinanceDude]

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Originally Posted by golfnut 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

Its the only ones they can tell you to purcahse...........

[M Paquette]

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Originally Posted by 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).

Don't forget. "Past performance does not necessarily predict future results."

You are guaranteed to pay out 1.25% in fees and expenses, of course, but there is no guarantee that you will receive 1.5% or better improvement in performance than your current portfolio. (And if the advisor IS guaranteeing that level of performance, RUN! That's a red flag.)

Start here: Bogleheads :: View topic - Investing: For Beginners
This should give you enough information on investment basics and planning to at least let you ask good questions of potential advisors, if not give you the confidence to manage your portfolio on your own.

[FinanceDude]

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Originally Posted by M Paquette Don't forget. "Past performance does not necessarily predict future results."

See my disclaimer.........