Another Financial Advisor Question

[RobbieB]

I like Fidelity, they are just over the hill and close to a really good pizza place. And they do answer the phone and they do make appointments. I have my bond funds with them and the cool 2% visa card.

No presents though.

The FA account used to send me this absolutely gorgeous Poinsettia that has pissed off a couple girlfriends....

But the basket of gourmet chocolates has charms to sooth the savage breast -

 

[Another Reader]

Gourmet chocolates? Sign me up! The Fido 2 percent Visa is a winner, though...

I tried the FA route. Took me too long to fire the guy for under performing and not doing much of a job on the planning (CFP) side. Cost me a lot of money when he did not come back strong after the 2008 crash. Never again!

 

[RobbieB]

Ah, c'est la vie!

 

[growing_older]

Another claim, probably valid, is that a professional FA will keep his/her clients from bailing in a bad market. I talked to one guy who said that if he did that for clients once or twice he would have justified his AUM fee for the rest of their lives. Probably true.

If this is what actually happens, then the FA is worth the fee. But in actual practice, several friends with FA did panic and sell out, and in some cases it was the FA who instigated the "defensive" move of selling in hopes of buying later cheaper. They of course locked in losses and failed to buy back in until the market rose making those loses permanent. It's nice to promise that using a FA will be a cooler head, but it doesn't always happen that way.

 

[CoolRich59]

Well, FWIW:

An excellent post, IMO, DanP. Thanks for taking the time to provide another perspective. I appreciate it.

 

[45th Birthday]

I will agree that you have to search to find the right firm to do the FA thing. I tried 3 (with equities) and kept the winner.

I have a question for all you low fee Vanguard, Fidelity, Schwab couch potato index guys.

Given that I get the same returns even including the 1% I pay as the low fee index funds and I also get;

1) A free line of credit backed by my securities
2) A physical place to visit
3) A team that knows my face and voice when I call and actually picks up the phone
4) Christmas presents

Why would anyone choose a lower level of service?

I'm curious especially since this is the second time you have mentioned a free line of credit. Do you mean you can borrow $500,000 with no interest charges? That would be impressive. Or do you mean that they don't charge you for maintaining the ability to borrow $500,000? That, not so much.

 

[ncbill]

I'm curious especially since this is the second time you have mentioned a free line of credit. Do you mean you can borrow $500,000 with no interest charges? That would be impressive. Or do you mean that they don't charge you for maintaining the ability to borrow $500,000? That, not so much.

Doesn't he mean he can borrow up to that amount on margin, based on the value of his account?

Plus, as those over at bogleheads would note, there's no way someone paying a 1% AUM fee is going to beat the market over time.

 

[CaliKid]

A lot of people in this thread talk about returns when comparing how they did v. the financial advisor and other such comparisons. However, if you don't know your risk how can you really compare? Seems silly to me. I might have returned 30% this year on my investments... but that just means I have an inordinate amount of risk and might be down 70% next year. You can not focus on return alone as it's only half the equation.

Scuba's post about their financial advisor was really good and I agree. I have done DIY and I have hired a professional. It's all what you are comfortable with.

 

[Rustward]

Did your statement also detail the fee they charge you, it's often buried many pages inside.

Just curious: How do you know this? Personal experience? If so, how many different brokerages/managed accounts?

 

[Sunset]

Just curious: How do you know this? Personal experience? If so, how many different brokerages/managed accounts?

I saw the fees charged in statements while helping out a relative. He had 1 brokerage account with one of the big names.
They invested his money and sent him statements each year.

He showed me his annual statement, very thick and it showed they had put his money into approximately 30 different stocks/funds/etf's etc. The thickness is of course both a detailed view of what happened and a hindrance for anyone to actually read each page.

They had as part of the investment, put part of his money into Vanguard funds (so you have to ask yourself, why pay them a fee for that?).

He was pretty surprised, when I showed him in the statement, that they charged him a $2,000 fee per year. This is on top of the fees each fund/etf charges and of course the trading fees.

This was for a total of $100,000 so the fee was a whooping 2% of his account.
They will always make it sound like not much, but think that is $20,000 over 10 years even if the money doesn't grow.

I helped him move to Vanguard where there is no house fee, and helped him pick some broad etf/funds.

 

[Rustward]

They had as part of the investment, put part of his money into Vanguard funds (so you have to ask yourself, why pay them a fee for that?).

He was pretty surprised, when I showed him in the statement, that they charged him a $2,000 fee per year. This is on top of the fees each fund/etf charges and of course the trading fees.

This was for a total of $100,000 so the fee was a whooping 2% of his account.

I don't have to ask myself, but perhaps you should have asked your relative why they did what they did.

2% is a very high fee. Even 1% is waaay more than I would pay.

Is this the financial advisor's fault?

If Cut-Good Mowing Service knocks on a homeowner's door and says "I will mow your 1/8 acre yard for $500 each mow, and the homeowner agrees, whose fault is that?

You did a very nice thing for your relative, but they are the one that got themselves into that situation.

This stuff happens in a lot of other places: car sales, plumbing (toilets cost more to repair, you know), HVAC installers, roofers, . . .

 

[pb4uski]

.... Another claim, probably valid, is that a professional FA will keep his/her clients from bailing in a bad market. I talked to one guy who said that if he did that for clients once or twice he would have justified his AUM fee for the rest of their lives. Probably true.

I have a friend who is a FA and he says when markets are spooky that the biggest part of his job is handholding client that want to panic and bail out.

 

[Sunset]

I don't have to ask myself, but perhaps you should have asked your relative why they did what they did.

2% is a very high fee. Even 1% is waaay more than I would pay.

Is this the financial advisor's fault?

If Cut-Good Mowing Service knocks on a homeowner's door and says "I will mow your 1/8 acre yard for $500 each mow, and the homeowner agrees, whose fault is that?

You did a very nice thing for your relative, but they are the one that got themselves into that situation.

This stuff happens in a lot of other places: car sales, plumbing (toilets cost more to repair, you know), HVAC installers, roofers, . . .

The relative was well over 80 when he got "signed up". So while I won't consider it criminal, it certainly was a FA making a sale and frankly taking advantage of a very senior citizen.

 

[OldShooter]

Several of the positive comments about FAs remind me that many of us here (including me) focus on an FA's investment performance, which is virtually guaranteed to underperform a passive portfolio. But they do more than investments, particularly for younger folks needing help with college savings, life insurance, etc. Long story short: Maybe 20 years ago I was shooting in a pistol league and got to talking with one of the guys who had just come from a meeting with his Ameriprise FA. I tried to diplomatically point out that Ameriprise was maybe an unnecessarily expensive firm to choose. His response was: "I know that. But if it was not for this guy I wouldn't have anything." Point taken. That conversation permanently changed my thinking about FAs.

But ... they can be expensive. I am teaching an Adult Ed intro investing course next quarter. Here is one of the slides:

​

Comments welcome.

 

[bloom2708]

Compare Investment Fees

Play around with numbers with this calculator.

Use .1%, 1% and 2% and see the difference over 30, 40 years. Whew.

Come here or Bogleheads if you need help not panicking during the dips.

 

[GravitySucks]

I will agree that you have to search to find the right firm to do the FA thing. I tried 3 (with equities) and kept the winner.

I have a question for all you low fee Vanguard, Fidelity, Schwab couch potato index guys.

Given that I get the same returns even including the 1% I pay as the low fee index funds and I also get;

1) A free line of credit backed by my securities
2) A physical place to visit
3) A team that knows my face and voice when I call and actually picks up the phone
4) Christmas presents

Why would anyone choose a lower level of service?

You certainly don't owe me (or anyone else here) an explanation for your actions. (Well, other than not returning those bottles and cans for the nickel back. Don't want to see you end up living under a freeway bridge my friend.)

I Suppose my CU would extend me a credit line for 1. In general, I don't use credit though.
FIDO gets me 2 and 3.
They send me a very lame generic Seasons greetings card for 4. But it's signed by their top guy, so got that going for me.

I like my FIDO rep, he has talked me into a few things for my own good, suggested some moves that were more tax efficient than my first ideas etc. etc. If I didn't have that minimal hand holding I might look closer at using an advisor service.

 

[Scuba]

A lot of people in this thread talk about returns when comparing how they did v. the financial advisor and other such comparisons. However, if you don't know your risk how can you really compare? Seems silly to me. I might have returned 30% this year on my investments... but that just means I have an inordinate amount of risk and might be down 70% next year. You can not focus on return alone as it's only half the equation.



Scuba's post about their financial advisor was really good and I agree. I have done DIY and I have hired a professional. It's all what you are comfortable with.

Good point about risk. One of the things our FA did is to reduce the risk/beta of our portfolio. When DIY, the portfolio was heavy on growth stocks. Still some growth stocks in there, but definitely more value oriented dividend paying stocks than before.

 

[OldShooter]

Good point about risk. ...

Yes.

A closely related issue is benchmark comparisons. It makes no sense, for example to compare the performance of a small cap portfolio to a large cap benchmark like the S&P. Or vice versa. Or to call the S&P "the market." I prefer to use a total US market index like the Russell 3000 or a total world market index like the ACWI all cap all country. Then one can look at sector performance and other factors that are causing particular portfolio's underperformance or overperformance over a period of years and decide whether the performance is acceptable or whether something needs to be tweeked. And, yes, a reason for overperformance may be taking unacceptable risk and that in turn may be a reason to adjust the portfolio.

A real knee-slapper for me is when the hucksters start comparing themselves to some Lipper average. Since the Lipper is based on mutual fund performance this can easily in actuality be a claim of being the best out of a bunch of losers.

 

[CoolRich59]

Yes.
Since the Lipper is based on mutual fund performance this can easily in actuality be a claim of being the best out of a bunch of losers.

In regione caecorum rex est luscus

 

[Pilot2013]

My wife is so risk averse, we are sitting on six figures in a very poor savings account.

I'm not interested in a FA, but think it may have her feel more comfortable. So, I am thinking of hiring an actor to play the part of an FA. I will feed him the information, and what investments to recommend. Hopefully that will soothe her "uncormfortable gene"....


just kidding. About hiring an actor, I mean.

 

[Texas Proud]

Several of the positive comments about FAs remind me that many of us here (including me) focus on an FA's investment performance, which is virtually guaranteed to underperform a passive portfolio. But they do more than investments, particularly for younger folks needing help with college savings, life insurance, etc. Long story short: Maybe 20 years ago I was shooting in a pistol league and got to talking with one of the guys who had just come from a meeting with his Ameriprise FA. I tried to diplomatically point out that Ameriprise was maybe an unnecessarily expensive firm to choose. His response was: "I know that. But if it was not for this guy I wouldn't have anything." Point taken. That conversation permanently changed my thinking about FAs.

But ... they can be expensive. I am teaching an Adult Ed intro investing course next quarter. Here is one of the slides:


Comments welcome.

Yes, that is the only time I would agree that a FA is useful.... getting some people to actually invest... one of my sisters is in this boat... she was in the $75K range when she asked me since their 401(k) provider was changing... I mentioned the high fees of her FA but she said the same thing.... "he was worth it since I would not have $75K if not for him"....

 

[ERD50]

My wife is so risk averse, we are sitting on six figures in a very poor savings account.

I'm not interested in a FA, but think it may have her feel more comfortable. So, I am thinking of hiring an actor to play the part of an FA. I will feed him the information, and what investments to recommend. Hopefully that will soothe her "uncormfortable gene"....


just kidding. About hiring an actor, I mean.

This will apply to some other posts here, but I think that the general anti-FA feelings are regarding the FA that charges ongoing as a % of assets. I don't think many would have anything against buying some hours with a fiduciary FA to review everything, if it made you feel better, or had specific issues.

Hiring someone to review a plan could be a one-and-done (with maybe occasional follow ups as needed), compared to $10,000 each and every year for a 1% on a $1M account? I'm sure qualified fiduciaries don't come cheap, but $10,000 ought to buy a lot of hours.

-ERD50

 

[JoeWras]

This will apply to some other posts here, but I think that the general anti-FA feelings are regarding the FA that charges ongoing as a % of assets. I don't think many would have anything against buying some hours with a fiduciary FA to review everything, if it made you feel better, or had specific issues.

Hiring someone to review a plan could be a one-and-done (with maybe occasional follow ups as needed), compared to $10,000 each and every year for a 1% on a $1M account? I'm sure qualified fiduciaries don't come cheap, but $10,000 ought to buy a lot of hours.

-ERD50

I had to laugh. One morning I was watching Squawk Box (this will cause me to be flamed about watching money porn now), and wise guy Joe was interviewing Ken Fisher, of Fisher investments.

Q: What is your AUM?
A: About $100B
Q: Wow, let's see, 1%, that's $1B per year
A: Uh, so we are full service. Next question.

Joe got the hint and moved on. I couldn't stop laughing.

 

[braumeister]

I'll bet Ken sends out really nice birthday cards.

 

[SecondCor521]

I will agree that you have to search to find the right firm to do the FA thing. I tried 3 (with equities) and kept the winner.

I have a question for all you low fee Vanguard, Fidelity, Schwab couch potato index guys.

Given that I get the same returns even including the 1% I pay as the low fee index funds and I also get;

1) A free line of credit backed by my securities
2) A physical place to visit
3) A team that knows my face and voice when I call and actually picks up the phone
4) Christmas presents

Why would anyone choose a lower level of service?

I reject the premise.

First, I wonder if you are considering a long enough time frame. Beating the market for the first 9 months of this year is, as others have noted, probably luck, which is very unlikely to last.

Second, I wonder if you are accounting for risk. One could have done very well this year investing entirely in Amazon, but the risk would have been higher.

Third, I wonder if you are accounting for taxes and fees. If your ML guys are achieving this return by trading a lot, you will have higher taxes than you otherwise would in a couch potato type index fund. You will also have trading fees and bid/ask spreads, although these are probably cheerfully included in your 1% AUM fee.

Finally, think about it logically. Who do you think is paying for the building you visit, and the nice people in the nice suits' salaries, and the Christmas presents? And the lower interest rate on the margin loan you have - if your interest rate is in fact lower than what the market in general charges for such things? Do you really think Merrill Lynch is a giant charity? Or do you think it is the other guy who is paying for it, and if so, why is it the other guy and not you?

(Parenthetically, I thoroughly enjoy your posts and your joie de vivre and wish you best of luck with the girlfriend!)