Another Financial Advisor Question

[ERD50]

Quote:

Originally Posted by RobbieB ... I pay no trading fees but I do have a lot of cap gains. I get to deduct my 1% AUM fee on my taxes and at 25% my fee becomes .75% ...

Can you give us a sense of the cap gains (long & short)? Not picking on you, like some think, but it is relevant to the discussion. Especially when you mention the write off of expenses at 25% (so 25% STCG and 15% LTGC).

-ERD50

[Ready]

Quote:

Originally Posted by RobbieB First they have beat the market ever since I've been enrolled in their investment advisory program which is 3 years now, yes 3 years straight.

It's not uncommon for actively managed funds or individual stock picks to beat index funds for five year or even longer. But once you try to find an actively managed fund or individual stock picking strategy that has outperformed an index for 20 years, you will likely never find one. This is especially true when factoring risk into the equation. Picking higher risk stocks may lead to temporary performance gains, but in the long term you are unlikely to beat the market, and you could do significantly worse in a downturn.

Look up the theory of reversion to the mean. Simply put, if a fund (or advisor) outperforms the market for a period of time, they are more than likely to underperform in the future such that in the long term they just provide average performance. And average performance before fees means below average performance after fees.

What you are suggesting is that in spite of all of the overwhelming evidence that your advisor, actively picking stocks, can beat index fund performance, when it's extremely rare to find evidence of this skill for any long period of time, that you believe you have found the magical investor who can beat the odds.

If you feel good about it, that's all that matters. Your previous posts indicate you have no interest in reevaluating your position. It's your money, so whatever allows you to sleep at night is what is best for you. But I respectfully disagree with your position and strategy.

[DanP]

Ok, I am biting my tongue and this will be my last post on this thread. Tends to end at a Ford vs. Chevy type of argument.

Not talking about genius stock picking or anything else.

Talking about an FA that is aware of ER requirements and manages the allocation and tax consequences accordingly. Very individual.

I am comfortable that the cost (much less than the touted "1% for AUM", and way more diluted on his advice on external accounts) nets me a gain.

[OldShooter]

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Originally Posted by RobbieB First they have beat the market ever since I've been enrolled in their investment advisory program which is 3 years now, yes 3 years straight. ...

Boy, this makes me ask a couple of questions:

First, what is "the market?" FAs play egregious games with benchmarks, especially benchmarks of their own choosing. If you are in high risk emerging market stocks, "the market" is not the S&P 500, for example. Are you sure your "the market" measuring stick is suitable for what is being measured?

More importantly, let's postulate that these guys really do have the skills to "beat the market." If that was the case, why would they be getting up in the morning, stuffing themselves into suits and choking themselves with ties, commuting through rush hour, making nice to customers, and commuting home again though rush hour? Answer is they wouldn't. They would be on a private tropical island somewhere drinking from glasses garnished with orchids and doing a few trades whenever funds ran low.

Said another way, if there are such guys they are certainly not going to be screwing around with individual investor customers or retail mutual funds. The "investing experts" accessible to retail investors like us are just ignorant schlubs like us, no more able to predict the future than we are, and hoping like hell to get lucky enough in the market to keep their jobs for another year. Probably they are nice guys, though.

[RobbieB]

As long as everyone remains respectful wrt their personal strategies there will never be any problem. I will say that the level of vitriol I have seen re FA's has decreased markedly since I've been a member here. When I first joined it was like they were felons, thieves waiting to fleece their victims with glee.

I'm beating the market (or keeping up), but it's not like I'm killing it. But that's my point really, a good FA can make you dough and you don't have to worry and he makes enough dough to more than cover his fee. And you get all the benes that provides. Not just some internet screen shot of your account.

I think these old traditional firms have learned something from the internet low fee discount houses. They have lost a lot of dough eh? Isn't Vanguard number one in assets now? Churn em & burn em doesn't work anymore. But these brokers have been in business a long time and seen a lot of companies over a lot of years. They have good research people and they pay them well.

Right now I have a 110 grand long term gain and a 40 grand short term gain.

[RobbieB]

For "the market" I just googled up the S&P 500 YTD figures off the internet. The FA did not provide the info I googled it just like I did before in this thread.

It seemed appropriate since my bag is all large cap (mostly US) dividend stocks.

[ERD50]

Quote:

Originally Posted by RobbieB ... Right now I have a 110 grand long term gain and a 40 grand short term gain.

OK, I guess that would be more helpful in % or per $100K or something. But it sounds like a lot, SPY for example has only had one tiny cap gain distribution since 1993, and that was in 1997 ( ~ 0.1% STGC and ~ 0.05% LTCG). And roughly 2% divs, probably about on par with yours?

https://us.spdrs.com/en/resources/di...eam?ticker=SPY

Quote:

Originally Posted by RobbieB As long as everyone remains respectful wrt their personal strategies there will never be any problem. I will say that the level of vitriol I have seen re FA's has decreased markedly since I've been a member here. When I first joined it was like they were felons, thieves waiting to fleece their victims with glee. ..

Well, I think any vitriol was mostly aimed at the FAs who churned and put the investor in anything that would make the FA money. Yes, I think some posters put the whole bunch in that category, which isn't fair, but most of the people seeking out an FA didn't know enough to avoid those kinds, so it kinda worked as a generality (but still not fair).

Quote:

... I'm beating the market (or keeping up), but it's not like I'm killing it. But that's my point really, a good FA can make you dough and you don't have to worry and he makes enough dough to more than cover his fee. ...

Well, to each his own in that regard - but for me, I would be worried about an individual at the reigns. I guess that's a little like the mortgage debate, whee people say they sleep better at night without debt, whereas some of us sleep better at night knowing we have our money liquid and working for us instead of tied up in a house.

-ERD50

[ERD50]

Quote:

Originally Posted by OldShooter Boy, this makes me ask a couple of questions: First, what is "the market?" FAs play egregious games with benchmarks, especially benchmarks of their own choosing. If you are in high risk emerging market stocks, "the market" is not the S&P 500, for example. Are you sure your "the market" measuring stick is suitable for what is being measured? ... .

While I would say that is correct in a technical sense, I agree with RobbieB's approach to it. Are you going to test against a match to the FA balance (and then would you say timing and rebalance moves? That's what you are paying them for)? I think as long as they are working within the bounds they were given (sounds like 100% equity in this case, he has his fixed assets elsewhere), then the comparison is whatever the investor would do on their own. That might be SPY, or if some feel 500 large cap is too narrow, then a total market fund/ETF, or maybe a blend of international or whatever they feel comfortable with. Because that is the actual comparison, not some theoretical benchmark, but the actual alternative the investor would make.

-ERD50

[RobbieB]

The way it was explained to me is you convey what you want to do to your FA. For me it was stability and income. That gets plugged into the research teams program and it spits outs the buys and sells. But the local team (your FA and others in the office) have their own little pow-wows on what to do.

So there is one guy pulling the switches but he has the whole company research team as well as the local team input before he acts.

[Ready]

Quote:

Originally Posted by RobbieB Right now I have a 110 grand long term gain and a 40 grand short term gain.

How do you factor the taxes you are paying on gains when comparing returns to an index fund approach? Index funds should never have short term gains. Short term gains are taxed like ordinary income, so depending on your tax bracket, this could be a significant hit.

With index funds you would incur gains primarily when you sell the funds to cover living expenses, which could be many years in the future. With high stock turnover, you are incurring these taxes every year.

When you analyze the performance of your FA vs the market, are you analyzing the net returns after taxes vs the index fund returns?

[OldShooter]

Quote:

Originally Posted by ERD50 While I would say that is correct in a technical sense, I agree with RobbieB's approach to it. Are you going to test against a match to the FA balance (and then would you say timing and rebalance moves? That's what you are paying them for)? I think as long as they are working within the bounds they were given (sounds like 100% equity in this case, he has his fixed assets elsewhere), then the comparison is whatever the investor would do on their own. That might be SPY, or if some feel 500 large cap is too narrow, then a total market fund/ETF, or maybe a blend of international or whatever they feel comfortable with. Because that is the actual comparison, not some theoretical benchmark, but the actual alternative the investor would make. -ERD50

As usual, we are in agreement. In this case, complete agreement. I was trying to keep my response simple. But I'll amplify:

IMO an excellent benchmark is VTWSX , Vanguards total world stock index fund. I am just finishing up helping a nonprofit park $4M and I proposed this benchmark to the FA for the long-term investment bucket. They almost fell out of their chairs! They had never been approached or even considered benchmarking against (as you say) something the investor could do on their own. We compromised on a benchmark that is 80% ACWI and 20% some Barclay's bond index. That's close enough for me. I tried and failed to make them understand that VTWSX would be a more favorable benchmark for them because it incorporated fees that were not in their suggested benchmark. You can lead a horse to water but ...

Another approach I have been taking lately is setting up separate $100K portfolios, exactly $100K and invested as of the last trading day of a quarter. My current benchmarking favorite was, on 12/31/2014, 65% in a total US stock fund and 35% in a total international stock fund, interest and dividends reinvested, hands-off no rebalancing. With this benchmark I compare its cumulative return quarterly against whatever I want to check. I also have a similar experimental portfolio using DFA funds and until recently had one with Schwab's "Intelligent Portfolios" robot.

Effective 1/1/18, I am going to start another $100K benchmark that is 100% VTWSX. Then I will do the quarterly benchmarking that so horrified the FA. It will be fun to see what we learn.

[CoolRich59]

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Originally Posted by OldShooter Effective 1/1/18, I am going to start another $100K benchmark that is 100% VTWSX. Then I will do the quarterly benchmarking that so horrified the FA. It will be fun to see what we learn.

Fun and interesting. I look forward to seeing updates on this effort.

[Abe Frohman]

I use a FA. But my situation is complicated because I own two businesses with multiple Erisa plans, etc.

I believe in FA, in general. But let me say this. Any FA who's business model is to 'beat the averages' is in the wrong business.

The power of the FA is to eliminate mistakes. I.E eliminate opportunity cost. I'm 100% confident that I'm not making any mistakes because everything I do is vetted through my FA. I pay a little bit less than 1%. I view it this way. I'm paying .5% for him to manage the money, asset allocation etc. And I spend .4% for advice. I think it's worth it. My FA gives me advice around a whole multitude of financial issues. And brings things to my attention that I didn't think of. I also have some investments in Private equity funds and value their input on which fund, etc. instead of reading the prospectus, I was able to have my FA run through all the pros/cons of that specific investment.

So, overall it's worth it to me. YMMV.

[OldShooter]

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Originally Posted by CoolRich59 Fun and interesting. I look forward to seeing updates on this effort.

No need. Do your own benchmark. It does not have to be $100K. $10K will do just fine. Pick your benchmark, then set up the purchase so that you get end-of-day prices on 12/29 (last trading day). Reinvest dividend and interest, and don't touch anything else going forward. Total couch potato. Track its ITD cumulative performance quarterly or even annually. Now you have a known-good measuring stick in real money that you can use for years.

(or, if you like, rebalance your benchmark periodically. Whatever suits your philosophy.)

I keep my 65/35 benchmark isolated in my main account by having it invested in funds that I don't otherwise use. So I can just pick the dollars off my statement. An alternative would be to open a separate benchmark account or accounts. Whatever is easiest for you will work

My DFA benchmark is a separate account with an FA who can sell DFA funds. I talked him into a 50bps fee to run the experiment for a couple of years. I really like the DFA story, so 50bps was worth it for me. YMMV, however.

[Clone]

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Originally Posted by Rustward I really don't understand why the managed account haters can't just mind their own business and let everybody else go broke in the next three years. Then the managed account people won't be retired anymore, will have gone back to work, and will not be subscribed to this forum.

Yup, a FA helped a good friend of mine go back to work a couple months ago. He (the FA, using my friends money) had basically shorted the market assuming it would crash somewhere around the elections.

We all (should) know what the market has done in the past year.

My mom had some money roll over that she wanted to invest. First thing out of the FA's mouth- you should buy this variable annuity!

That plus watching a different FA churn her account- I have enough first hand experience to declare that 'there are a lot of bad Financial Advisors out there. Some of them will take every dollar they can get from you.'

There may be some good ones who have their client's interest at heart. Unfortunately, a person without a lot of stock market knowledge is a sheep among the wolves.

[CoolRich59]

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Originally Posted by OldShooter No need. Do your own benchmark.

Good idea.

I fired my FA yesterday and am in the process of moving the $$ to Vanguard.

I can set it up to start as of the first of the year.

[Rustward]

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Originally Posted by Clone Yup, a FA helped a good friend of mine go back to work a couple months ago. He (the FA, using my friends money) had basically shorted the market assuming it would crash somewhere around the elections. We all (should) know what the market has done in the past year. My mom had some money roll over that she wanted to invest. First thing out of the FA's mouth- you should buy this variable annuity! That plus watching a different FA churn her account- I have enough first hand experience to declare that 'there are a lot of bad Financial Advisors out there. Some of them will take every dollar they can get from you.' There may be some good ones who have their client's interest at heart. Unfortunately, a person without a lot of stock market knowledge is a sheep among the wolves.

Too bad for your friend and your mother. Just about anything can be messed up. Just as with anything else, you must choose wisely. If you just turn everything over to someone randomly picked out of the yellow pages, the results will likely be bad. I have been doing this for over 30 years and have not had such experiences, although I have vetoed a few proposed moves over the years, and I have made it clear: no churning, no annuities, no structured notes, no whole life insurance, no razzle dazzle products . . .

If one lets bad performance go long enough to get every last dollar from you -- well, maybe people should take action before it gets that far -- waay before it gets that far.

There are a lot of bad advisors. There are also many other people who want your money and will do all kinds of things to get it. It does take some personal responsibility to keep from becoming victims of those people.

[OldShooter]

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Originally Posted by CoolRich59 ... I can set it up to start as of the first of the year.

That's a nice thing IMO though I could also plead guilty to being unnecessarily prissy about it. But if you do that, then at the end of the year you can divide the year-end value by the account-opening value and have exactly the one year ITD performance of the benchmark.

[pb4uski]

Quote:

Originally Posted by RobbieB For "the market" I just googled up the S&P 500 YTD figures off the internet. The FA did not provide the info I googled it just like I did before in this thread. It seemed appropriate since my bag is all large cap (mostly US) dividend stocks.

Just curious.... did the YTD figures off the internet include reinvested dividends? (assuming that yours are reinvested). If you look up just the index and compute the change from beginning of year to current date, it would not include reinvested dividends so it would be ~1.5% short.

Also, did the FA managed portfolio beat the index by more than the 1% fee?

For example, $10k invested in Vanguard S&P 500 ETF (VOO) on 10/31/2016 grew to $12,358.75 as of 10/31/2017 for a 23.6% return.

The S&P 500 index was 2,575.30 on 10/31/2017 and 2.126.20 on 10/31/2016, so over the year the index increased 21.1%.

The 2.5% difference is dividends.

So to beat the benchmark with dividends reinvested your FA would have needed to exceed 24.6%.

If so, congratulations!

[RobbieB]

Yes they did. I ran another calculator and it came up with 15.4% YTD dividends re-invested.

Going back to pg 1, I'm at 17.9% (net after fees)

I agree, my FA is doing a sweet job -