FA - The Exception That Proves the Rule

[RunningBum]

You don't pay an electrician a yearly rate based on the value of your home to wire something for you, and stay familiar with your house wiring so that he can wire something else for you once in awhile in the future, or diagnose a problem you might have. That's the problem many of us have with the AUM model.

 

[audreyh1]

I like the electrical analogy. However it is fraught with assumptions. I was an accomplished electrician when I took on wiring an N-Way light switch. That required extra study! Like any skill, it is layered with nuances. So is investing.

I don’t see the nuances. Sure you can get fancy, but you don’t have to. You will be OK just picking one well known balanced fund and leaving it alone, or maybe two or three low cost index funds and doing the annual rebalancing yourself. That’s not complicated.

 

[steelyman]

“Leaving it alone” is important and the thing many people struggle with. Constant chatter on news and social media make the situation worse.

 

[Bestwifeever]

Yes. Many, maybe most people, are afraid to work on their home's electricity, like adding an outlet or a circuit. Others would probably call a plumber rather than re-soldering a leaky joint. Others might not want to repair damaged sheetrock.

I think of these decisions as a tradeoff between learning and possibly struggling versus remaining helpless. Personally, I would rather buy a tool and learn to use it even if my first attempts produce poor results because in the end I will have a new capability that I can use for the rest of my life. For example, we had a clogged drain in the basement and I bought a drain machine on CraigsList for $100 rather than pay the drain cleaning company the $150 that a service call would have cost. A professional would have laughed at my initial attempts to use the thing, but I prevailed and now can easily handle the next time we have a clogged drain.

IMO investing is not much different. One can take the time to learn the DIY skills necessary or one can remain helpless. ("Helpless" is maybe not the right word because it sort of implies criticism, but I'm not sure what a better word might be.)

In our non-engineer, non-mechanically inclined house, we pay people to do all the things (and many others ) in your first paragraph when we need them done. We don’t pay them an ongoing retainer or a percentage of our home’s value, we pay at the time of service. If we felt we needed help making financial decisions, we would find an expert to pay a fee at the time we needed it done, but we would never ever enter into an ongoing AUM arrangement. YMMV.

 

[Dtail]

In our non-engineer, non-mechanically inclined house, we pay people to do all the things (and many others ) in your first paragraph when we need them done. We don’t pay them an ongoing retainer or a percentage of our home’s value, we pay at the time of service. If we felt we needed help making financial decisions, we would find an expert to pay a fee at the time we needed it done, but we would never ever enter into an ongoing AUM arrangement. YMMV.

+1

 

[travelover]

........... I was an accomplished electrician when I took on wiring an N-Way light switch.........

I've never heard of an N-Way switch. I've heard the joke about a Henway.

 

[target2019]

I know I've heard similar analogies at FA dinners. At the heart of the comparison is FUD Fear Uncertainty and Doubt. You wouldn't try to build your own house, would you?

N-Way would be 3-way, 4-way, etc.

 

[flintnational]

........N-Way would be 3-way, 4-way, etc.

Thanks, I thought the answer to the question "Whats an N-Way?"
was "About 3 pounds".

 

[Scuba]

Some forget how much reading and questioning went into their own education.

What I learned many years ago was how difficult it was to illustrate what appeared to be a simple machine. The essence was that I had to understand the entire system before breaking down the complexity into simple pieces which could be drawn with a minimum of detail and lines. When I did that, a novice could begin to understand the point.

Investing is like that. There are levels of understanding one goes through. WItness your course, or the modules at Morningstar. For an adult learner, you layer it on. It's not one cue card or 20 minutes of dictation.

Since investing is a noisy topic, you must spend time on what sources to avoid, what signals to ignore.

Completely agree with this. DH is a smart guy and well-educated, but doesn’t understand or have much interest in investing. He’s learned several concepts from me over the years, but I’m not sure he would choose to DIY our portfolio after I’m gone. I’ve already simplified it quite a bit, and plan to simplify it more while also keeping capital gains to the level we need to for tax purposes. We may not ever get down to 2 funds however.

At one point I think DH would have definitely gone back to having an FA if I weren’t able to manage our portfolio. Now I think he may choose to DIY and pay for advice when needed, because even though we only paid 0.7% for AUM when we had our FA, the absolute cost was significant. Once he realized that if we eliminated the FA, we could afford one to two more nice trips per year, he was ready to pull the plug!

 

[OldShooter]

We’re both engineers, I’m an EE, and we do certain home electrical work ourselves, but call an electrician for other jobs. Same with plumbing. ... I’m fine with hiring handymen with good references. Never felt compelled to master those kinds of skills although there is plenty of stuff we end up doing ourselves anyway for various reasons.

Since I made the argument that fear of electricity is similar to fear of managing one's investments, I'll jump on @Audreh1's comment here:

Deciding to hire work done is just fine. It is best done when one understands the work to be done and the hiring is not done out of fear. For example, our water heater went out over the weekend and we had it replaced yesterday. I have the capability and experience to do that job but decided, basically out of laziness, to hire it done. It's conceptually very simple: Break two water and one natural gas connection, haul the old water heater up the basement steps on a two-wheeler, buy and pick up the new one, haul it down the steps and reconnect the three connections. But I'm old enough and prosperous enough to take the easy way out.

I can also see where someone who did understand investing would choose to hire it done, spend the money, and be happy not bothering with it. Just like our water heater. Let someone else worry about timing of capital gains, tax loss harvesting, home country bias, QCDs, RMDs, buckets, etc.

 

[ERD50]

Since I made the argument that fear of electricity is similar to fear of managing one's investments, I'll jump on @Audreh1's comment here:

Deciding to hire work done is just fine. It is best done when one understands the work to be done and the hiring is not done out of fear. For example, our water heater went out over the weekend and we had it replaced yesterday. I have the capability and experience to do that job but decided, basically out of laziness, to hire it done. It's conceptually very simple: Break two water and one natural gas connection, haul the old water heater up the basement steps on a two-wheeler, buy and pick up the new one, haul it down the steps and reconnect the three connections. But I'm old enough and prosperous enough to take the easy way out.

I can also see where someone who did understand investing would choose to hire it done, spend the money, and be happy not bothering with it. Just like our water heater. Let someone else worry about timing of capital gains, tax loss harvesting, home country bias, QCDs, RMDs, buckets, etc.

I agree completely with your water heater situation. I've paid to have it done, even though I can do it, it's not too difficult, and I would be 100% confident in the end product. But even then, I once had to call the 'pros' back - they reversed the HOT/COLD inlets, so we got about 2 gallons of hot water (pulled from the bottom), then it went cold. Now that's a noob mistake that I would not have made. IOW, you need to check, even with 'pros'.

But I'm not sure that is a good analogy to the discussions that typically go on here. Is the average FA working under AUM really digging into tax efficiency and other things? Almost no one is arguing against paying someone on a fee basis for specific tasks. And heck, RMDs are so simple that's hardly worth mentioning (I do it for my MIL, the numbers are provided, I just click on a date and where to deposit).

OK, maybe just me, but since you framed it as "someone who did understand investing", that's me and I'd rather just do it myself than pick someone to do it, and then wonder if they did it right. I'd feel obligated to check up on what they did. Heck, it's simpler to do it myself!

-ERD50

 

[Chuckanut]

One difference between replacing my old water heater and doing my financial planning myself is that I am far more likely to physically injure myself replacing the water heater. I am at a time of life where injuries happen more easily and healing from them takes longer.

When doing my financial planning, I suppose I could get a paper cut, but nothing that would require doctors, tests, surgery, PT, scripts, etc. etc. etc.

 

[travelover]

.......... Is the average FA working under AUM really digging into tax efficiency and other things? .........-ERD50

One of the advantages that "professionals" have is that the people that hire them don't generally know enough to be able to tell if they screwed up or not. For example, periodically we get someone here who posts that their FA delivers a solid X% return, but don't realize that an index fund would have done much better and for virtually no fee.


Contractors play the same game and don't get caught unless it is really obvious.

 

[target2019]

I've been asked advice here and there, by a young man. He recently read an index book I gave him. I sense that the light is going on. The situation is that he inherited an IRA, and asked me earlier in the year what I though of various FA proposals. I explained various topics, and the belief that over a long period, I was convinced a simple portfolio would out-perform anything the inherited FA could do for him. Besides, in his field, knowing more about investments would be especially valuable.

Sunday night he sent me the 3Q report (he started a month before the 3Q). He was up 5% in the report, but very concerned. In just two months, the spectacular results turned into -12.5% from the peak.

I mentioned that he could ask the FA about going from 90% equity to 80%. But think about it before jumping, because he may just see things going up, and then regret going more conservative. In just a few days, of course, the market has improved.

Meanwhile, I entered his AUM portfolio and a comparable passive index portfolio into Morningstar. We'll see where that goes.

 

[audreyh1]

Well lo and behold!

We got a Christmas Card from Fidelity today, signed by Abigail Johnson herself!

 

[RobbieB]

Me too.

 

[flintnational]

I got a "Seasons Greetings" email from Vanguard. Now you know my real name, "Dear Vanguard Client". Just call me VC. When you get an email, you can be assured your fees are low. You Fidelity folks are spendthrifts.

"Wishing you a joyful holiday season

Dear Vanguard Client,

One of the joys of the holiday season is the opportunity for us to say "thank you." It's been a pleasure working with you to help you reach your financial goals, and we look forward to our continued relationship with you.

We wish you peace and prosperity during the holidays and in the year to come!"

 

[MRG]

Well lo and behold!

We got a Christmas Card from Fidelity today, signed by Abigail Johnson herself!

Woo hoo, us too(but it was a "happy holiday" card) . I wonder what that means to the bottom line? There's a cost to mailing millions of cards. I don't recall receiving a holiday/Christmas card from her before.

 

[Texas Proud]

I got a "Seasons Greetings" email from Vanguard. Now you know my real name, "Dear Vanguard Client". Just call me VC. When you get an email, you can be assured your fees are low. You Fidelity folks are spendthrifts.

"Wishing you a joyful holiday season

Dear Vanguard Client,

One of the joys of the holiday season is the opportunity for us to say "thank you." It's been a pleasure working with you to help you reach your financial goals, and we look forward to our continued relationship with you.

We wish you peace and prosperity during the holidays and in the year to come!"

Dang it... I deleted mine before I read it so I do not know if mine was the same...


OHHH, forgot it was still in the trash... pulled it up and I am also Vangurd Client!!! I did not know we had the same name