FA - The Exception That Proves the Rule

[braumeister]

Just a nit: it is unclear in what sense an exception can ever "prove" a rule.

One of the most confusing old sayings we have.
Here is a good explanation of how it came about:
How Does an Exception Prove a Rule?

 

[Midpack]

There are definitely good guy FA’s out there, but fees alone aren’t an indication, Vanguard charges 0.30% AUM last time I looked BTW.

The problem is there are more that will enrich themselves before the client (where are the customers yachts), so finding a good one is tough, there’s an old adage that sums up the dilemma nicely. ’By the time you know enough to choose a good FA, you don’t need one...’

 

[kcowan]

There is a good series of ads in the land of high MERs (Canada). One is the client observing that the FA is guaranteed his fee, and the fund manager gets their fee and the client gets what's left over. He says How come you guys are assured your fees no matter what! The FA observes that it is a long-term game and the client retorts that it is not a game, it is his retirement...Then up flashes the ad for a discount brokerage.

 

[ERD50]

There are definitely good guy FA’s out there, but fees alone aren’t an indication, Vanguard charges 0.30% AUM last time I looked BTW. ...

Per OP, does that make Vanguard twice as good as their 0.60% AUM FA?

.... The problem is there are more that will enrich themselves before the client (where are the customers yachts), so finding a good one is tough, there’s an old adage that sums up the dilemma nicely. ’By the time you know enough to choose a good FA, you don’t need one...’

+1 (again!)

Also, OP has not been back since asking the question. Hmmmm.

-ERD50

 

[ncbill]

I don't think that's a good method. If they're getting you 2% worse than the index returns, they aren't worthwhile even if they're getting $10/hour. If they're beating the market by 2%, I don't care how much time they spend on me.

An FA is worthwhile if they can consistently beat the market even with their fees, keep you from making mistakes, and give good tax/estate advice. Maybe a few other things I haven't thought of. Beyond that, I don't see the value. If you get peace of mind from it, fine, but I would lose sleep if I was paying someone a lot to get the same returns I could with minimal work.

Anyone can "beat the market" (at least in expected returns) by taking on much more risk.

E.g. Paul Merriman is a value investing fanatic, his model large cap/small cap value portfolio has expected returns much higher than the total market average, but the standard deviation (risk) is huge compared to the market.

 

[Rustward]

Also, OP has not been back since asking the question. Hmmmm.

-ERD50

Do you wonder why?

 

[ERD50]

Originally Posted by ERD50
Also, OP has not been back since asking the question. Hmmmm.

-ERD50

Do you wonder why?

Maybe he's just been busy? We will see.

You are so over-sensitive to this subject. A few posts in that other thread about birthday cards is enough to set you off. It's really incredible.

Some good points have been made in this thread, let's see how it plays out, shall we?


-ERD50

 

[Qs Laptop]

I recently came into a large sum of money, and so I reached out to him to remind me what his fee schedule was. His answer was 60 bps, so I asked him to clarify - was that 0.60% on everything, or was 0.60% the fee on the last $XXX? His answer was that it would ordinarily be the latter (the lowest rate on the last dollars), but he appreciated our relationship, and was charging me 0.60% on everything. Thanks, Joe.

Your FA gave you a reduction in your AUM because you came into a large sum of money. That was a nice gesture. But consider....

Will his approach to your portfolio change, or will he simply employ the same strategies as before?

Here's a scenario. Let's say your FA's normal fee structure is 1% for anything under $1M; 0.8% for anything between $1M and $2M, and 0.6% for anything over $2M.

Now suppose these past years you had $800K your FA was overseeing. He was charging you a 1% annual fee, or $8,000 per year. Now you came into $1.4 million. You now have a total of $2.2M under his care. Using the normal (hypothetical) fee structure your fees should be:

$1M X 1% = $10,000
$1M X 0.8% = $8,000
$200K X 0.6% = $1,200

Your annual fee is now supposed to be $19,200. But your FA decided to nice and apply the lowest AUM rate of 0.6% to your entire portfolio.

$2.2M X 0.6% = $13,200

Going with the 0.6% AUM is still a $5,200 annual raise for him.

You're right though, he didn't need to do it and it was a nice gesture.

Will his approach to your portfolio change, or will he simply employ the same strategies as before?

If you're happy with what he's doing I'd be tempted to open an account at Fidelity or Vanguard and duplicate his strategies with your newly found money. In my hypothetical example you'd save $5,200 a year, or $100 a week. Not bad.

 

[Chuckanut]

T there’s an old adage that sums up the dilemma nicely. ’By the time you know enough to choose a good FA, you don’t need one...’

Good point.

I would add that if I had a dollar for every person who told me they could not manage their own retirement funds because "I'm not good at math" or some other silly reason, I would have been able to retire even earlier.

A good friend had an FA. Without it I have no doubt she would have been working to 70 and then complained about how she could not live on her SS check. The FA put her into high cost, under performing funds, but at least she was putting money away for her later years. The alternative was not making more money using a simple Index Fund strategy. The alternative was having zero retirement savings. Sad but true.

 

[OldShooter]

... expected returns ...

 

[OldShooter]

... Will his approach to your portfolio change, or will he simply employ the same strategies as before? ...

Are you suggesting that he should? Why? Adding a relatively small amount of money to a relatively small amount of money (on the scale of investment management portfolio sizes) should not change anything.


Getting into the double-digit millions might involve adding asset classes like private equity, but even then a simple passive strategy is increasingly popular even with huge pension funds.
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[TwoByFour]

Anyone can hope to "beat the market" (at least in expected returns) by taking on much more risk.

There, I fixed it for you.

Adding small-cap value to a portfolio looks good on paper but is notoriously fickle in actually out performing.

 

[Qs Laptop]

Are you suggesting that he should? Why?

I don't know. Maybe. Depends on the person's age and situation. How much income does he need from his portfolio? Maybe with a large lump sum like that he could dial down the risk. Put a large chunk into safer investments and use it to generate income instead of looking for gains.

My point is if you're paying him, say, $8,000 a year to maintain a 60/40 portfolio, and the FA is only going to plow the extra money into the same investment vehicles, maybe you do a 60/40 portfolio on your own and pocket the savings.

 

[mickeyd]

I see his smiling face when I shave in the morning and I always decide to keep him.

My guy only shaves 2-3 times per week. Sure he looks scruffy at times, but he is as honest as I am.

 

[ERD50]

I don't know. Maybe. Depends on the person's age and situation. How much income does he need from his portfolio? Maybe with a large lump sum like that he could dial down the risk. Put a large chunk into safer investments and use it to generate income instead of looking for gains.

My point is if you're paying him, say, $8,000 a year to maintain a 60/40 portfolio, and the FA is only going to plow the extra money into the same investment vehicles, maybe you do a 60/40 portfolio on your own and pocket the savings.

But those same variables and considerations could also be true of two different clients that each had an equal $1M portfolio. These decisions/considerations must be made, regardless of the portfolio being $1M or $2M.

-ERD50

 

[RunningBum]

Anyone can "beat the market" (at least in expected returns) by taking on much more risk.

E.g. Paul Merriman is a value investing fanatic, his model large cap/small cap value portfolio has expected returns much higher than the total market average, but the standard deviation (risk) is huge compared to the market.

In good times, yes. In bad times, they will probably do worse. Unless they time it right.

That is a good point though. It's not really accurate to measure an FA's performance over only a bull market.

 

[grump]

Is a financial advisor only an investment advisor

First post here so hopefully I don't go outside the guardrails. This thread interested me because I too am content with my FA, who is a retirement planning specialist. I consider the cost of my guy fair but rather than discuss why that is and the details thereof (or investment strategy/AA), I would like to understand how the members here think about the scope of services provided by a FA. I found it interesting that a number of commenters have discussed investment advice and markets but really not that much else. I recognize the criticality of good portfolio management but what about other aspects of financial advice and information including LTCI, taxes, SS and pension claiming, Roth conversions, insurance, estate planning, healthcare, annuities/QLACs, how much cash to keep and where etc.? Does everybody here DIY those bits too?

 

[REWahoo]

Does everybody here DIY those bits too?

Not everybody, but many of us.

I'm a "trust but verify" type thanks in large part to the misinformed advice I received from the first FA I ever encountered . Since I have to educate myself to do the verification I decided to skip the cost of the trust part and DIY.

 

[OldShooter]

First post here so hopefully I don't go outside the guardrails. This thread interested me because I too am content with my FA, who is a retirement planning specialist. I consider the cost of my guy fair but rather than discuss why that is and the details thereof (or investment strategy/AA), I would like to understand how the members here think about the scope of services provided by a FA. I found it interesting that a number of commenters have discussed investment advice and markets but really not that much else. I recognize the criticality of good portfolio management but what about other aspects of financial advice and information including LTCI, taxes, SS and pension claiming, Roth conversions, insurance, estate planning, healthcare, annuities/QLACs, how much cash to keep and where etc.? Does everybody here DIY those bits too?

You make an excellent point. In the adult-ed investing course I teach, I have a slide that shows a small circle labeled "Investment Advisor" inside a larger circle labeled "Financial Advisor." I then make exactly the point that you are making: They are not the same. A true financial advisor does much more than provide investment advice.

And you're right; the two functions are frequently conflated here.

 

[ERD50]

... but what about other aspects of financial advice and information including LTCI, taxes, SS and pension claiming, Roth conversions, insurance, estate planning, healthcare, annuities/QLACs, how much cash to keep and where etc.? Does everybody here DIY those bits too?

The portfolio management is very simple to DIY, I really haven't seen a case for paying for advice there, once one realizes how simple it is.

As far as the other stuff you list, if you can't get info here, or find other good sources for decision making, I'd hire a pro by the hour/job for each of these. They are mostly one time things, maybe occasional review. I can't see paying a % of AUM every year for that - and doubt that many AUM type advisors are fluent in all those areas. And again, how do you know if their advice is sound if you haven't done some pre-study?

-ERD50

 

[OldShooter]

The portfolio management is very simple to DIY, I really haven't seen a case for paying for advice there, once one realizes how simple it is.

As far as the other stuff you list, if you can't get info here, or find other good sources for decision making, I'd hire a pro by the hour/job for each of these. They are mostly one time things, maybe occasional review. I can't see paying a % of AUM every year for that - and doubt that many AUM type advisors are fluent in all those areas. And again, how do you know if their advice is sound if you haven't done some pre-study?

-ERD50

+1

 

[VanWinkle]

Spending hourly fees designated for taxes, roth conversions, and how to create multiple income streams would be a good use of funds. Paying someone a % of your money every year just to be able to ask a question on occasion seems like a waste of funds to me. Most FAs do not have that kind of knowledge to be receiving 1000.00 per month on a 1000K portfolio. Some have the knowledge to receive a fair hourly fee for their services.

VW

 

[target2019]

First post here so hopefully I don't go outside the guardrails. This thread interested me because I too am content with my FA, who is a retirement planning specialist. I consider the cost of my guy fair but rather than discuss why that is and the details thereof (or investment strategy/AA), I would like to understand how the members here think about the scope of services provided by a FA. I found it interesting that a number of commenters have discussed investment advice and markets but really not that much else. I recognize the criticality of good portfolio management but what about other aspects of financial advice and information including LTCI, taxes, SS and pension claiming, Roth conversions, insurance, estate planning, healthcare, annuities/QLACs, how much cash to keep and where etc.? Does everybody here DIY those bits too?

To answer the first question (title of post), "Is a Financial Advisor only an investment advisor?", it depends on the certifications the individual possesses, or the hired help on staff at the firm, or a 3rd party that may be paid a consulting fee.
Here's the rest:
1) LTCI - If the FA has credentials that allow advice on insurance, then I'd ask for fiduciary agreement before asking their recommendation. The FAs I've known, and the ones we assessed for AARP, always mentioned a great basket of things they had to offer. But when the rubber hit the road, they would send you to someone who had credentials to perform that function.
2) Taxes - We do our own taxes. I've done taxes for others. It is not difficult.
3) SS & Pension claiming - Following a gazillion threads on E-R, I am certain we will make a good decision when the time comes.
4) Roth conversions - Yes, with a tax program and some experience you can master the conversion game. Lots of thread on E-R about that.
5) Insurance - Same as LTCI for the most part. No whole life, etc.
6) Estate planning - We're in the process of consolidating, and changing account titling where possible (TOD, POD). Both of us are active readers, and have put significant time into self-educating.
7) Healthcare - not very complicated for us. In 3 years we'll have decisions to make, Medicare supplements, etc.
8) Annuities/QLACs - We inherited a few (not annuitized), but we don't see much need for that right now.
9) How much cash to keep and where etc.? We used to keep a lot of cash in MMF, checking, etc. Now we actively transfer to online banking (2%), guaranteed interest (3%), stable value, etc. We have about 5% in other cash accounts to pay for 24 months bills and big items coming up (roof, oven, etc.)

When we are old and frail, we'll probably use the robo-advisor device the kids install in our living room.

 

[pb4uski]

.... I found it interesting that a number of commenters have discussed investment advice and markets but really not that much else. I recognize the criticality of good portfolio management but what about other aspects of financial advice and information including LTCI, taxes, SS and pension claiming, Roth conversions, insurance, estate planning, healthcare, annuities/QLACs, how much cash to keep and where etc.? Does everybody here DIY those bits too?

Good first post and question. Part of the answer is because most people out there who call themselves financial advisers, principally focus on investments because fees and commissions from investments are how they earn there income so that is what they focus on. Secondly, IME there are very few FAs out there who can cover all the bases of investments, tax optimization, SS optimization, Roth conversions, etc so as a practical reality we DIY.

Even as a CPA (or more properly, a retired CPA), I don't know anyone who is more knowledgable on those issues than people on these boards... it is a very narrow niche that few if any financial professionals practice in.

 

[Scrapr]

When we are old and frail, we'll probably use the robo-advisor device the kids install in our living room.

I think I saw that on my Roku the other day