Are excessive financial fees eating your returns?

[Mulligan]

There are good financial advisors, as there also are investors needing professional help. If that is the case, more power to the investor. Calling people "lemmings" because they invest in index funds, however, isn't helpful and invites responses of similar ilk. Perhaps if we avoid characterizing one another a more useful discussion will result.

My investing needs are simple, I am indexer also, so my need for a financial advisor is nil. However, I have several friends that would benefit greatly in having one especially in the total personal finance arena. If FA would take the responsibility of beating the crap out of them every time they strayed from the plan, then my friends total balance sheets would benefit greatly from having one.

 

[pb4uski]

These remarks raised the hairs on the back of my neck. They are startlingly like things that people said when they "invested" with Bernie Madoff, as reported in "No One Would Listen" by Harry Markopolos, the analyst who sounded the alarm on Madoff years before the Ponzi scheme collapsed.

Sorry if this sounds like an inappropriate comparison to your FA, but that book make me paranoid about financial "advisors" whose returns are better than everyone else's, and who only accept money from the chosen few.

+1 those parts of his post made me think of Madoff as well. Scary.

 

[Sue J]

Volume? He only does business by word of mouth. We are in our third year with him after friends recommended him. It's nice not to have to deal with investments anymore. He's also with UBS, getting volume access to the top funds that way, as opposed to being an independent. Was wonderful in dealing with transfer of assets when Dad died, and will guide our kids when we pass. They have free accounts with him too.

I drank the TMF cool aide for quite some time, and indeed it was worth my while, but frankly if they try to say you should do it without a FA, these days it tends to be about steering you towards a for fee subscription of their own.

I may be the forum's 2nd most conservative investor. And this jumped out at me, too.

I read Markopolos's book and a few others on Madoff and this was one of the classic warning signs.

I hope your guy and his results are all on the up and up and you stay happy with him and end up solidly wealthy. But little old me, and my tiny nest egg wouldn't go there.

 

[MRG]

I read this yesterday, some guy named Buffet said this:

'He’s said individual investors may be better off avoiding his approach to picking stocks, instead purchasing a fund that holds every company in the Standard & Poor’s 500 Index.'

http://business.financialpost.com/2...r-investing-in-annual-letter-to-shareholders/

Seems he's done pretty well, and his advice costs me the time to read it.


MRG

 

[steelyman]

I'm the forum's most normal investor. Normal as blueberry pie.

 

[ChrisC]

I read this yesterday, some guy named Buffet said this:

'He’s said individual investors may be better off avoiding his approach to picking stocks, instead purchasing a fund that holds every company in the Standard & Poor’s 500 Index.'

Warren Buffett reveals 5 rules for investing in annual letter to shareholders | Financial Post

Seems he's done pretty well, and his advice costs me the time to read it.


MRG

Index investing appears to be premised on efficient market hypothesis and random walks through financial markets, but Buffet's experiences and those of others, as he has written nearly 30 years ago, stand in stark contrast to other data showing that managed funds do not statistically outperform index funds. No one has rebutted this: The Superinvestors of Graham-and-Doddsville - Wikipedia, the free encyclopedia

Perhaps these special managers are just special. But you know, statistics are only good for the averages.

 

[InParadise]

Are you going to give us his/her name so we can get in on the action... If not, what's the purpose of your post #3?

LOL. You are kidding right? I happen to like my FA. Post #3 has already been discussed.

But newbies do come here to learn, so if you're going to make a claim they're naturally going to want to believe, maybe give them any basis to support it.

Or maybe mentioning it in brief will trigger an idea for their own due diligence. I have no desire to beat my head against a brick wall.

The subsequent quote above suggests you don't understand the fundamentals of passive investing which include the discipline to avoid panic selling/market timing.

Red quote has already been discussed in length.

 

[InParadise]

Having a discussion about a subject where a member posts a position that is controversial to the general mindset of the forum (and virtually every investment book I've ever read) is great, as long as it is presented logically with appropriate facts to support the position. If InParadise chooses to present these facts, I'm sure it will generate a very intelligent discussion.

Heh. InParadise has decided that the pain and the effort of this exercise is not balanced by enough reward.

 

[RetireAge50]

I think a smart guy could beat the market net of fees. But it scares me to give my money to him.

Average returns will work just fine in my situation.

 

[CaliforniaMan]

This tone of this thread has gotten me thinking about a a few human traits.

In engineering we used to get ahead of the argument game by designing tests, finding failures, creating possible solutions, testing them, analyzing results, and then repeating as necessary. It was usually (sometimes) straightforward to find out if we were right or not, and we found that test results trumped opinion every time. Then we just went got on with it. Winning was being correct because it was better for the system to work than not!

However sales is not the same as engineering. Winning is convincing the customer that you offer something superior and getting them to give you money for it. As an consultant I found myself having to do both. Selling myself to get jobs, and then actually making something work. The two thought processes were so diametrically opposite that I found it took me some time, weeks, to switch my mind completely from one to the other, and weeks again to switch back.

Once one has put a lot of time and thought into something, and finally made a decision, it is psychologically very taxing and sometimes impossible to take in new information, especially if it fundamentally opposes your hard thought out decision.

It is helpful if we can learn from the experience of others but sometimes we really can only learn from our own experiences. I know I had to, I trusted smart people who wrote books showing how they were right and others wrong, people in expensive suits who apparently spent a lot of money, people smarter than the markets, etc. We look for these parent figures. It takes a long time to find that they are not there.

I know in my early years I used to study tricks on how to "win" an argument, only later finding that in real life winning the argument usually meant you lost something more important.

Creepy but good link for what a "good" FA should do.
3 Ways to Convince Anyone of Anything - wikiHow

 

[ERD50]

Let's compare these two statements from InParadise:

... The only horse I have in this race is pursuit of a good discussion that leads to the possibility of learning new things. ...

Heh. InParadise has decided that the pain and the effort of this exercise is not balanced by enough reward.

You say you want a 'good discussion', yet you won't back up your statements with even a shred of data/evidence. That's all people asked for - something that would be required for a 'good discussion'.

I've attempted to be open with you, but at this point I will simply call "BS", it appears you simply wanted to brag that you are smarter than most of us, and it cannot be questioned. I doubt anyone is impressed, at least not in a positive sense.

Funny thing, I just read a little ebook that a former boss (later VP in MegaCorp) self-published. One of the chapters was about 'learning', and he said he learned that arrogant people don't learn much, they already think the 'know it all' and are not open to new ideas or challenges to their thoughts. But if you can say "I don't know", you are open to learning.

Good luck - ERD50

 

[aja8888]

Creepy but good link for what a "good" FA should do.
3 Ways to Convince Anyone of Anything - wikiHow

The Wiki article reminded me of a good friend of mine who was sold an expensive variable annuity by his FA. My friend was recommending that product for my portfolio and I looked at it (closely) and saw that the REAL fees were up to 4% and went on for a while. Let alone the back end was unknown. I told my friend that the fees were expensive and he said that his FA is a great guy, knows the product, stands behind it, and life is good.

Well, I should have been in sales..............

 

[InParadise]

Let's compare these two statements from InParadise:





You say you want a 'good discussion', yet you won't back up your statements with even a shred of data/evidence. That's all people asked for - something that would be required for a 'good discussion'.

I've attempted to be open with you, but at this point I will simply call "BS", it appears you simply wanted to brag that you are smarter than most of us, and it cannot be questioned. I doubt anyone is impressed, at least not in a positive sense.

Funny thing, I just read a little ebook that a former boss (later VP in MegaCorp) self-published. One of the chapters was about 'learning', and he said he learned that arrogant people don't learn much, they already think the 'know it all' and are not open to new ideas or challenges to their thoughts. But if you can say "I don't know", you are open to learning.

Good luck - ERD50

Wow. You are being rude. Such a wonder why I don't want to make an effort on this thread. Some of you guys have blown this thread way out of proportion, mostly based on poor reading comprehension or checking out partial quotes that don't include all the context.

Freak. This is not a day job and I have no obligation to spend effort informing you, though frankly I would have been happy to share the details of my experience had the initial reception been less hostile. If you want to beat me up for not choosing to play in a game that is slanted against me, go for it. It seems to be the primary joy for some of you. Glad to make your day. Maybe that will make up for the loss of information. I however know when not to waste my time.

Maybe you'll have better luck with the next person if you as a board reply to their initial comments with questions rather than aggressiveness. It was clear pretty much from the start that it was a lost cause discussing my FA experience and I have been trying to back out gracefully ever since. LET IT GO. None of us get paid to be here, (well, I assume anyway,) and frankly for me belligerence and name calling is not an inducement to participate.

I for one am sorry this thread got derailed from the index fund discussion. I thank you who contributed to it initially. As I said earlier I appreciate the links, have done some Googling on some of it, and may even get back to doing my own investing when things get less hectic for me. I would really like to simplify the churn that the FA seems to feel obligated to perform, and make it less of a job to verify our results every month.

 

[ChrisC]

I think we're all prone to cognitive dissonance. We see something contrary to our actions and beliefs and we move to discredit, refute or ignore the opposing actions or views. It's hard to engage in debate when psychologically we're susceptible to defend and attack, sometimes under the purported guise of being open-minded. I see this a lot in threads where we've committed financially to a certain path of conduct.

Nonetheless, I do think there is an unfortunate element of piling on here, which would try anyone's willingness for further debate.

 

[CaliforniaMan]

I think we're all prone to cognitive dissonance. We see something contrary to our actions and beliefs and we move to discredit, refute or ignore the opposing actions or views. It's hard to engage in debate when psychologically we're susceptible to defend and attack, sometimes under the purported guise of being open-minded. I see this a lot in threads where we've committed financially to a certain path of conduct.

Nonetheless, I do think there is an unfortunate element of piling on here, which would try anyone's willingness for further debate.

+1
Agree 100%. I enjoy the a free flow of ideas here. Hope nobody takes anything personally. I for one hate it when people point out where I am wrong. And I really hate it when they are right! But after I cool down, sometimes a very long time later, I appropriate their argument as my own and life goes on.

 

[InParadise]

+1
I for one hate it when people point out where I am wrong. And I really hate it when they are right!

Ironically, I don't hate that, particularly on an anonymous internet board where no one actually knows me. I am free to benefit from the wisdom that comes with being shown my errors, RESPECTFULLY, without a blow to ego.

But my days of being managed and told what to do are quite over. That is the beauty of FI.

 

[gozer]

Excellent point Midpack, and I'll add one thought. If you were to take the 24% that did outperform the index, and then layer on 1.5% in advisor fees, I suspect the 24% would quickly approach a number very close to zero.

I didn't notice if anyone had responded to this, so forgive me if this is a repeat. I am re-reading the thread.

One of the conclusions of the article was:

Active managers outperform the index by 0.12% before fees, but charge more in fees than the value they create​

So the article did in fact state that as a group Active Manager aren't worth the fees they charge. It also concluded that when you added risk, active vs index performance was a total wash. Risk is a little more subjective than returns so YMMV.

This is actually the best showing for active managers I have ever seen. When I was in marketing classes in college we were shown a similar study with data from 30 years ago. Active management seemed to perform far worse back then because fees were much higher than today. The point of the class discussion was how were we, as future money managers, going to justify our cost to our future clients. I was only getting a minor in business, my major was System Analysis. So I thought the spin the actual business majors were trying to put on the data was unethical and highly misleading.

 

[ERD50]

... I for one hate it when people point out where I am wrong. And I really hate it when they are right! ....

I love it when people point out where I am wrong! Why would I want to go through life believing things that are wrong? If they are right, and tell me, then I learned something. Didn't many of us pay big $$ for education, or learn it the hard way?

InParadise -sorry if you felt I was rude. But if you look at your posts, can you see how some of us could see it as you 'came out swinging' with big claims? And then you shrug off any questions about these claims?

How would you respond to that?

Please notice that several posters who question the active/passive debate provided data. Up to you if you want to back your position with data, but if you make a big claim, and then refrain from backing it up, people are going to think what they are going to think.

-ERD50

 

[InParadise]

InParadise -sorry if you felt I was rude. But if you look at your posts, can you see how some of us could see it as you 'came out swinging' with big claims? And then you shrug off any questions about these claims?

How would you respond to that?
-ERD50

At this point my response would be a simple "Whatever." By post 10 it was repeatedly made clear that providing data would be pointless, that without subjective verification of said data, you all would continue to be Doubting Thomas-es. Reply was pointless for any other than the masochistic. Hey, I have a teenager at home. Sometimes the most valid approach is simply to shut down the argument.

I think it surprising I kept my cool as long as I did. Maybe another time, another thread. Definitely far from receptive to sharing now. If that means you have an erroneous bad impressions of me? Whatever.

By the way, an apology followed by "but" is no apology at all.

 

[gozer]

At this point my response would be a simple "Whatever." By post 10 it was repeatedly made clear that providing data would be pointless, that without subjective verification of said data, you all would continue to be Doubting Thomas-es. Reply was pointless for any other than the masochistic. Hey, I have a teenager at home. Sometimes the most valid approach is simply to shut down the argument.

Maybe another time, another thread. Definitely far from receptive from sharing now. If that means you have an erroneous bad impressions of me? Whatever.

How is the name(s) of your "top load based funds without paying the loads" subjective?

 

[Walt34]

These remarks raised the hairs on the back of my neck. They are startlingly like things that people said when they "invested" with Bernie Madoff, as reported in "No One Would Listen" by Harry Markopolos, the analyst who sounded the alarm on Madoff years before the Ponzi scheme collapsed.

Indeed it does have all the earmarks; secrecy, only dealing by word of mouth, nice guy. All reminiscent of the cases in the American Greed thread.

Not to say that is the case here (I sure hope not!) but a very high state of watchfulness would be in order. Therefore the statement that "It's nice not to have to deal with investments anymore" is troubling.

 

[aja8888]

Not to say that is the case here (I sure hope not!) but a very high state of watchfulness would be in order. Therefore the statement that "It's nice not to have to deal with investments anymore" is troubling.

It's like my Dad said a long time ago...."better keep YOUR EYE on those investments or you may be looking for work again some day".....

 

[InParadise]

Not to say that is the case here (I sure hope not!) but a very high state of watchfulness would be in order. Therefore the statement that "It's nice not to have to deal with investments anymore" is troubling.

I monitor them, I crunch the numbers to make sure that the calculated benchmark based on our specific portfolio allocation is accurate. Between DH and I you have an engineer and a research chemist. I am trained to analyze data and question assumptions. Number crunching for us is pretty much a reflex not worthy of much consideration on our part, so perhaps I minimized it too much given you have no clue who we are. This is a whole lot less work than before.

Honestly, the thing that would get me back to dealing with our own investments, perhaps indeed as index funds to minimize time input, would be the work I have to put in to verify our returns. All in all, I would rather be kayaking than dealing extensively with this, and I have started to get tired of verifying his every move, because there are so very many to verify. Additionally, being able to predict taxes will be very important to us when we retire fully in a couple of years. It is an issue we will broach with our FP when we meet next week. Sometimes I wonder if they make it more complicated than necessary to justify their fee, or even obfuscate the returns, but my re-analysis of the returns does back up their reports. If I can keep the good returns and lower my time spent with the funds, I would be all for that, but considering I went from Mechanical Investing with wild turbulence and very high returns, (TMF tutored, not my creation,) to a more conservative approach overnight, it made sense to hand it off to someone who was performing well until I figure out if I should take it back over. I am slammed right now and we analytical types can be subject to analysis paralysis, which does not tend to be good for the portfolio.

Given how much I loved Mechanical Investing, an approach similar to but more conservative than the "Gone Fishin'" portfolio may work well for me. But I would be sorry to leave behind the many services our FP does besides the portfolio maintenance.

 

[Texas Proud]

At this point my response would be a simple "Whatever." By post 10 it was repeatedly made clear that providing data would be pointless, that without subjective verification of said data, you all would continue to be Doubting Thomas-es. Reply was pointless for any other than the masochistic. Hey, I have a teenager at home. Sometimes the most valid approach is simply to shut down the argument.

I think it surprising I kept my cool as long as I did. Maybe another time, another thread. Definitely far from receptive to sharing now. If that means you have an erroneous bad impressions of me? Whatever.

How is the name(s) of your "top load based funds without paying the loads" subjective?

I am in the plus one on this.... If your stmt is true, then just posting your top 3 or 5 MF holdings would go a long way in this discussion...

I just wanted to take a look at the fee structure of these funds... pretty simple if I knew which ones they were...


To be fair, here are mine...

VPMAX Primecap
VTCLX Tax managed Cap appriciation
VCVLX Capital Value
VSEQX Strategic Equity
VEXAX Extended Market Index


Then it starts into some more index funds....


Took me all of 2 minutes to get them.....

 

[CaliforniaMan]

Given how much I loved Mechanical Investing, an approach similar to but more conservative than the "Gone Fishin'" portfolio may work well for me. But I would be sorry to leave behind the many services our FP does besides the portfolio maintenance.

A lot of us here have have spent considerable time in the market, myself since college in 1968, so of course there are some strong opinions.

IMO most of what has been said here can be boiled down to four points:

1) FAs over the long term cannot do better than chance either in stock selection or in timing.

2) A reasonable withdrawal rate is around 4% and giving 25% of your income to a FA seems unreasonable to most of us here considering point 1.

3) You are obviously a very intelligent person. You can do better for yourself, on your own.

4) Whatever other things your FA is doing for this 25% of your future income could likely be done by yourself or someone like a good CPA for a lot less.