Another Financial Advisor Question

[ERD50]

Quote:

Originally Posted by RobbieB And yet another example of what prevails here. What does PT Barnum have to do with FA's or indexers?

Well OK - there's one to boost Rustward's complaints! Making a snide comment about FA users being "suckers' isn't helpful to a serious discussion.

But I still don't think it's that common, and I hope my questions aren't lumped in with those kinds of comments.

-ERD50

[MRG]

Quote:

Originally Posted by aja8888 I think indexers are always right when the market is going up.

Since no-one has built a successful benchmark it will always be a "religious" type argument.

[OldShooter]

Quote:

Originally Posted by MRG Since no-one has built a successful benchmark it will always be a "religious" type argument.

Why would you say that? IMO there are lots of very useful benchmarks. In fact IMO it is a matter of too many, not that there are none.

For an equity portfolio, one very useful benchmark is Vanguard's Total World Stock Index Fund (VTWSX).

[MRG]

Quote:

Originally Posted by OldShooter Why would you say that? IMO there are lots of very useful benchmarks. In fact IMO it is a matter of too many, not that there are none. For an equity portfolio, one very useful benchmark is Vanguard's Total World Stock Index Fund (VTWSX).

In the context of what's better indexing vs. managed.

Look back at the last 100 identical threads here and tell me where consensus is.

So yeah there's plenty of benchmarks and no particular agreement on what they consistently tell you.

[ERD50]

Quote:

Originally Posted by MRG In the context of what's better indexing vs. managed. Look back at the last 100 identical threads here and tell me where consensus is. So yeah there's plenty of benchmarks and no particular agreement on what they consistently tell you.

I also don't think it's that hard. In fact, I think most people over-think it. Between that, and the various threads drifting all over, it maybe has not been answered well.

So here's my take, which I think I mentioned earlier. You may not agree with it, that's fine, I accept it's just my way of looking at it - no definitive right/wrong (unless you can show me I am definitively right/wrong).

Rather than trying to construct a benchmark to match the FA, just construct a benchmark on what you, as a DIY investor would do. To me, that's the real test, because that's the real alternative. And that seems pretty simple.

To keep it a bit simpler (I've already typed too much today!), let's say that like RobbieB, you have turned over only your equity portion to your FA. OK, so what would a DIY'er do? How about Total Market fund/ETF? Or maybe add 20% International, or some REITS? Whatever you are comfortable with. Check out the lists of "lazy portfolios". And then go for it.

So OK, maybe the FA went heavier into Intl, and Intl did well the past year (just using this as hypothetical example). You might say "No Fair! The FA only did better because our 'benchmarks' didn't match!". So? That's what you are paying him (or her) for. To do better than you would do on your own.

I doubt an FA can consistently beat any reasonably broad equity index like that. We always see INTL may do better for a while, then it will retreat. Probably all averages out over time. If the FA could move the right way most of the time, I do think we would see more managed funds beating the index.

Is it really any more complex than that?

-ERD50

[PatrickA5]

No Christmas card from my Vanguard Flagship Rep. She didn't make it to Christmas. Got an email yesterday wishing me well and she's off to some other job at VG. Only lasted 6 months. Maybe my new rep will send me a card.

[LOL!]

I posted about beating a benchmark about a year ago:
http://www.early-retirement.org/foru...ml#post1787189
which was before the OP joined the forum.

Long-time posters are going to believe what they believe. But newer forum members can still be influenced.

[OldShooter]

Quote:

Originally Posted by MRG In the context of what's better indexing vs. managed. Look back at the last 100 identical threads here and tell me where consensus is. So yeah there's plenty of benchmarks and no particular agreement on what they consistently tell you.

Well, I agree that agreement is hard to tease out of forum discussions. But all you really have to do is to pay attention to the mountain of published facts:

1) Here is Nobel Prize winner William Sharpe's original 1991 paper where he explains why active management will always lose to passive by the difference in fees: https://web.stanford.edu/~wfsharpe/a...ive/active.htm The paper is only three pages and is an easy read. The only math required is an understanding of addition and subtraction.

2) Here is a Kenneth French video explaining Sharpe's paper: https://famafrench.dimensional.com/v...investing.aspx

3) If you don't like economists, here is empirical research from S&P: Thought Leadership - Research - S&P Dow Jones Indices The SPIVA Report Card shows you how badly active managers miss beating their benchmarks and the Manager Persistence Report Card shows you that it is impossible to identify successful managers except in the rear-view mirror. These two reports have been published biannually for a number of years with exactly the same conclusions every time. Only the percentages vary a little bit.

4) Here is French again, explaining how he and Nobel Prize winner Eugene Fama tried and failed to find a way to identify successful managers ahead of time. https://famafrench.dimensional.com/v...-managers.aspx Their paper on this subject was published in the early 2000s. It's about 40 pages and for me a very tough read, but Google can find it for you.

5) A couple of weeks ago the WSJ published a persistence analysis of (IIRC) 1500 managers based on using Morningstar's "star" rating system and found the same thing S&P has consistently found: Success is simply a matter of luck and cannot be predicted. This article is unfortunately behnd the WSJ paywall, but you might be able to find it in the wild of you are lucky. "The Morningstar mirage: What those fund ratings really mean" 10/25/17 "Of funds awarded a coveted five-star overall rating, only 12% did well enough over the next five years to earn a top rating for that period; 10% performed so poorly they were branded with a rock-bottom one-star rating."

6) Morningstar itself just published an analysis very similar to the S&P SPIVA reports: "Morningstar’s Active/Passive Barometer Mid-Year 2017" It came to basically the same conclusions as the S&P SPIVA report cards: active management is a losing strategy. "In general, actively managed funds have failed to survive and beat their benchmarks, especially over longer time horizons." There is some interesting data on fund failure rates, too.

7) Books that explain this can be a list as long as your arm. Among the most famous are "A Random Walk Down Wall Street," "Winning the Losers' Game," and anything by William Bernstein.

There are valid excuses, though, for believing that the issue is not settled. According to the BLS, there are about 400,000 investment sales people in the US (presumably including FAs). The salaries of the vast majority of these people depend on selling the myth that stock picking works. So they are out there doing that. Same story with web sites that rely on advertising, like Motley Fool. Same story with the major invstment companies. Morgan Stanley just reported 3Q17 results with their "Wealth Managment" unit pulling in over $4Billion -- all based on people believing the myth. But in all the advertising, all the op-eds, and all the newsletters there is one thing you will NEVER find: Statistical evidence that stock picking works. Because there is none. But if you like anecdotes you will love the myth-sellers. They have anecdotes by the ton. Stock prices are noisy; it is inevitable that every day some stock pickers will get lucky. But that simply masks the fact that on average it is a losing strategy.

I think of this myth-selling as similar to the chaff and flares that a military airplane dispenses when it is under attack by an inbound missile. Desperate attempts to mislead, nothing more.

Finally, all of this data is based on "passive" investing. IOW buying the broad market. IMO the word "indexing" gets used as an equivalent to passive but that is not always true. For example, buying SPY is usually thought of as "indexing" but in fact it is a sector bet. SPY will, statistically, beat actively-managed US large cap stock pickers but is irrelevant to stock pickers working the EAFE. Fama says "We have to hold the market portfolio." IOW, everything.

Finally, here is a very worthwhile way to spend a half hour: https://www.top1000funds.com/feature...the-moon-fama/

[MRG]

Quote:

Originally Posted by OldShooter Well, I agree that agreement is hard to tease out of forum discussions. But all you really have to do is to pay attention to the mountain of published facts: 1) Here is Nobel Prize winner William Sharpe's original 1991 paper where he explains why active management will always lose to passive by the difference in fees: https://web.stanford.edu/~wfsharpe/a...ive/active.htm The paper is only three pages and is an easy read. The only math required is an understanding of addition and subtraction. 2) Here is a Kenneth French video explaining Sharpe's paper: https://famafrench.dimensional.com/v...investing.aspx 3) If you don't like economists, here is empirical research from S&P: Thought Leadership - Research - S&P Dow Jones Indices The SPIVA Report Card shows you how badly active managers miss beating their benchmarks and the Manager Persistence Report Card shows you that it is impossible to identify successful managers except in the rear-view mirror. These two reports have been published biannually for a number of years with exactly the same conclusions every time. Only the percentages vary a little bit. 4) Here is French again, explaining how he and Nobel Prize winner Eugene Fama tried and failed to find a way to identify successful managers ahead of time. https://famafrench.dimensional.com/v...-managers.aspx Their paper on this subject was published in the early 2000s. It's about 40 pages and for me a very tough read, but Google can find it for you. 5) A couple of weeks ago the WSJ published a persistence analysis of (IIRC) 1500 managers based on using Morningstar's "star" rating system and found the same thing S&P has consistently found: Success is simply a matter of luck and cannot be predicted. This article is unfortunately behnd the WSJ paywall, but you might be able to find it in the wild of you are lucky. "The Morningstar mirage: What those fund ratings really mean" 10/25/17 "Of funds awarded a coveted five-star overall rating, only 12% did well enough over the next five years to earn a top rating for that period; 10% performed so poorly they were branded with a rock-bottom one-star rating." 6) Morningstar itself just published an analysis very similar to the S&P SPIVA reports: "Morningstar’s Active/Passive Barometer Mid-Year 2017" It came to basically the same conclusions as the S&P SPIVA report cards: active management is a losing strategy. "In general, actively managed funds have failed to survive and beat their benchmarks, especially over longer time horizons." There is some interesting data on fund failure rates, too. 7) Books that explain this can be a list as long as your arm. Among the most famous are "A Random Walk Down Wall Street," "Winning the Losers' Game," and anything by William Bernstein. There are valid excuses, though, for believing that the issue is not settled. According to the BLS, there are about 400,000 investment sales people in the US (presumably including FAs). The salaries of the vast majority of these people depend on selling the myth that stock picking works. So they are out there doing that. Same story with web sites that rely on advertising, like Motley Fool. Same story with the major invstment companies. Morgan Stanley just reported 3Q17 results with their "Wealth Managment" unit pulling in over $4Billion -- all based on people believing the myth. But in all the advertising, all the op-eds, and all the newsletters there is one thing you will NEVER find: Statistical evidence that stock picking works. Because there is none. But if you like anecdotes you will love the myth-sellers. They have anecdotes by the ton. Stock prices are noisy; it is inevitable that every day some stock pickers will get lucky. But that simply masks the fact that on average it is a losing strategy. I think of this myth-selling as similar to the chaff and flares that a military airplane dispenses when it is under attack by an inbound missile. Desperate attempts to mislead, nothing more. Finally, all of this data is based on "passive" investing. IOW buying the broad market. IMO the word "indexing" gets used as an equivalent to passive but that is not always true. For example, buying SPY is usually thought of as "indexing" but in fact it is a sector bet. SPY will, statistically, beat actively-managed US large cap stock pickers but is irrelevant to stock pickers working the EAFE. Fama says "We have to hold the market portfolio." IOW, everything. Finally, here is a very worthwhile way to spend a half hour: https://www.top1000funds.com/feature...the-moon-fama/

I don't need convinced!


You are making Rustward's point for him.

[Texas Proud]

Quote:

Originally Posted by Rustward I was referring to the broader topic of indexing vs managing. It seems that the indexers are always right and everybody else is wrong. The people who favor managed accounts don't seem to give a rat's a$$ what anybody else does -- index your heart out if you want to. Just don't criticize what I am doing.

You would be wrong in this stmt.... I have about half of my investments in index funds and half in managed funds... sometimes the managed funds do better than index, sometimes not... but I think they are doing well for their costs... BTW, they are Vanguard funds....

Why do I need to pay a FA an additional 1% (or maybe half if I have enough money) to do the same thing FYI, Vanguard says I am up 23.5% for the last year.... without taking into account withdrawals etc. the simple calculation of how much I have earned with my starting amount is 22.8%....


Edit to add... check my mom who is 24.4% and my sister who is 23.1%.... IIRC you were less than 20%....

[OldShooter]

Quote:

Originally Posted by MRG I don't need convinced!

I interpreted your post as asserting that the stock picking vs indexing question was open. It is not open from a statistical point of view or in the minds of several Nobel Prize winners. I think the question can be only open in people's minds where they do not have the data or they do not understand it. If you're convinced/do not see it as an open question, then that's fine. Sorry to have misinterpreted.

Quote:

Originally Posted by MRG You are making Rustward's point for him.

I don't know. I have not studied his posts except that it seems he doesn't like to have FAs criticized. I didn't criticize anyone in my long post. The acronym "FA" doesn't even appear. I only presented data & it's actually data that an FA could use to design a winning portfolio, too. If someone has science-grade contradictory data I would love to see it. I am as greedy as the next guy and would love to beat my passive results.

[Ready]

Interesting discussion, and I agree that we should keep the thread on topic and discuss the issues, without making people feel like they are being attacked for choosing to use an FA.

When I first joined this forum, I had no idea what an index fund was, or why I would need one. I came close to using Fidelity's Portfolio Advisor Services and paying them 1%. Someone on the board suggested I educate myself on investing before making a decision.

So I bought the book Investments For Dummies. After reading the book I was comfortable enough with the concepts that I understood why it didn't make sense for me to hire someone to manage my money. But I continued to read more books on the subject, probably 5 or 6. And I did so because I found the topic interesting, so I enjoyed reading about it.

Some people really don't like investing, and don't want to take their time to educate themselves about the topic. I can relate, as I didn't really start doing so until I stopped working and had the time to delve into it.

For those people, all the nudging in the world may not be enough to change their minds. And really, why do we need to? This forum helps to educate people and open their minds to new ideas. But we don't win any awards for converting people from active to passive. For those who want the help and advice this is a great forum. For some, they would rather just continue down the path of using an FA because they made the decision to do so and would rather not change course. Or they simply like having some hand holding and are willing to pay for that luxury.

For those of you who strongly believe in passive investing, don't look to the folks using FAs to have a convincing argument why they do so. It's simply what they are more comfortable with. I don't think there's much more explanation than that.

[LOL!]

Quote:

Originally Posted by OldShooter [...] I only presented data & it's actually data that an FA could use to design a winning portfolio, too. If someone has science-grade contradictory data I would love to see it. I am as greedy as the next guy and would love to beat my passive results.

Financial advisors can follow a passive path. Vanguard advocates for financial advisors in this white paper:
https://www.vanguard.com/pdf/ISGQVAA.pdf

Quote:

We believe implementing the Vanguard Advisor’s Alpha framework can add about 3% in net returns for your clients and also allow you to differentiate your skills and practice.

[ncbill]

As pointed out over on bogleheads time and again it boils down to: what can you control?

You can't control investment returns.

You can control your investing costs.

[ERD50]

Quote:

Originally Posted by Ready Interesting discussion, and I agree that we should keep the thread on topic and discuss the issues, without making people feel like they are being attacked for choosing to use an FA. ... Some people really don't like investing, and don't want to take their time to educate themselves about the topic. I can relate, as I didn't really start doing so until I stopped working and had the time to delve into it. For those people, all the nudging in the world may not be enough to change their minds. And really, why do we need to? This forum helps to educate people and open their minds to new ideas. But we don't win any awards for converting people from active to passive. ....

Sure, and I don't see these discussions as focused on "changing anyone's mind". But... if someone is going to make a statement on this forum, and other's see some holes in that statement, well, then a discussion ensues.

I sure don't care if some individual wants to keep their FA. But if they are going to tell me it's great because they don't have to worry (aren't they worried about the FA?), or that capital gains taxes don't matter (they do), that becomes part of the general education process and give-and-take around here. No reason for anyone to take that personally, and especially to go to the length of telling us we shouldn't be talking about it, because it might upset some people who use FAs.

Quote:

Originally Posted by Ready ... When I first joined this forum, I had no idea what an index fund was, or why I would need one. I came close to using Fidelity's Portfolio Advisor Services and paying them 1%. Someone on the board suggested I educate myself on investing before making a decision. So I bought the book Investments For Dummies. After reading the book I was comfortable enough with the concepts that I understood why it didn't make sense for me to hire someone to manage my money. But I continued to read more books on the subject, probably 5 or 6. And I did so because I found the topic interesting, so I enjoyed reading about it. Some people really don't like investing, and don't want to take their time to educate themselves about the topic. ... .

Most of us have gone through something similar, and the counter-intuitive part of that is, after you do the learning, you come to the realization that is really is very simple. I think that is worth re-visiting, for all those people who assume it is complicated, difficult to learn, and will take a lot of time/effort.

My time/effort is 99.99% on trying to optimize (more like not making gross errors) in my taxes. The investing part is almost nothing. A very, very lazy portfolio for me now. Yawn.

-ERD50

[Texas Proud]

Quote:

Originally Posted by LOL! Financial advisors can follow a passive path. Vanguard advocates for financial advisors in this white paper: https://www.vanguard.com/pdf/ISGQVAA.pdf

But look at where they think they get that from....

Did not copy well.... but asset allocation using broadly diversified funds added 0 (yes ZERO) to the return...

Buying low cost funds added 40 bps....

Behavioral coaching is 150 bps.... which is do not sell when the market goes down!!!

Spending strategy 0 to 110 bps.... well, that is zero for me as I can figure out the best strategy for me....


Since I am doing ALL of what they would do they add zero value to my returns.... and if I have to pay for this advice then I am losing...







Typical value added for client
(basis points)
Suitable asset allocation using broadly diversified funds/ETFs
I
> 0 bps*
Cost-effective implementation (expense ratios)
II
40 bps
Rebalancing
III
35 bps
Behavioral coaching
IV
150 bps
Asset location
V
0 to 75 bps
Spending strategy (withdrawal order)
VI
0 to 110 bps
Total-return versus income investing
VII
> 0 bps*
Total potential value added
About 3% in net returns

[Scuba]

With all due respect to the many on this forum who think FA's are a waste of money, some of us like using them for a variety of reasons. I detailed DH's and my reasons in an earlier post on this thread. Our reasons work for us.

Many of the topics on this forum show different opinions on things, which is the beauty of a forum like this.

However for this particular topic, I don't feel there is much recognition that working with an FA can be a good decision. The tone of many of the anti-FA posts is that anyone who uses an FA on an ongoing basis must be uninformed, an idiot, or both.

For those of us who feel that our retirement financial needs are taken care of, whether we use financial advisors or other pros like tax advisors to help us is really no one else's concern.

If the intent of all the negativity about FA's is to provide information to help inform those who need assistance, I think it is more helpful to explain both sides of the issue. This is not a one size fits all question. A new reader would not necessarily get that there are some valid reasons to avoid certain types of FA's, while there are equally valid reasons to use an FA. It is a disservice to suggest that all FA's are crooks selling high commission products and churning portfolios for their own benefit. There are some great FA's out there, and if it builds someone's confidence, helps them avoid mistakes, or simply takes a burden off someone to use an FA, you're in good company!Many people including very smart and wealthy individuals use FA's as do corporations and endowment funds who have very smart people running them.

As with all topics on here, YMMV

[JoeWras]

Quote:

Originally Posted by Scuba With all due respect to the many on this forum who think FA's are a waste of money, some of us like using them for a variety of reasons. I detailed DH's and my reasons in an earlier post on this thread. Our reasons work for us.

I agree. I don't use an FA and won't. However, I think they are right for many people. If I kick the bucket first, I've already given instructions to DW as to what FA to work with. She doesn't want to self manage. So, she'll use an FA.

I think one take away people who use FA's should get from this discussion is you need to choose your FA carefully. Many of them are wonderful and do a great job with the client's interest at heart. However, many others seem to only look for their commission. Fees also vary widely, as do philosophies of investment. Do your homework.

Maybe it is my imagination, but lately ER.org forums seem to become more like our world: bifurcated. Topics such as debt and FA usage have become very hot with many people taking a side and drilling it in forever until they apparently break down the other side. I don't get it. There is room for both views.

[Ready]

I would have no issue using a financial advisor who I pay for on an hourly basis to answer my questions and review my portfolio. I think the negative reaction you see from many of the forum members comes from the potential conflict of interest that comes into play when the advisor charges for their services as a percentage of assets under management. Or worse, they make commissions on products they sell you. Either way introduces a conflict of interest that can cause the advisor to have to decide whether to give you the advice that best fits your needs or puts the most money in their pocket.

Does anyone on the forum use an advisor on an hourly basis?

[LOL!]

I thought this thread was to help the OP decide if their FA was any good and worth it. The folks who have responded that use FAs have not given many concrete criteria to help the OP decide if their FA was any good. I'm thinking of things like:

1. Saved me $20,000 on taxes every year.

2. My portfolio performance is not much worse (within FA fees) to the performance of a passively-managed benchmark performance.

3. The FA costs me very little.

4. ... what else?