Financial Advisor or Robo

[Brat]

I hate to call asset managers Financial Advisors. The former are simply doing what any good program using ETFs, mutual funds, would do.

 

[target2019]

I know the forum does not prefer financial advisors but I have a question concerning financial advisers and robo advisers. I understand the financial impact advisors have on my investments but am willing to pay. I am trying to figure out how to pay less.

I have an 8+ year history with an advisor that creates his own portfolio. I am holding primarily stocks and bonds not mutual funds of a 60/40 portfolio. He has the leeway to time the market within a range of changing the ratio about 15% in either direction. Over the 8 years buying/selling has been minimal and the stock part of the portfolio has been closer to 65%.

Returns from 2010 to 2018 has been 9.2% after fees. I think I should be happy with that for a 60/40+ portfolio. The funds are weighted to USA large caps. Fixed income investments are held in individual companies.

I have negotiated a reduction in my rate but it would still be slightly more than double of a robo program. Betterment is at the top of my list if I were to change. Betterment is charging 0.25%. Betterment data shows in the same period, 2010 -2018 their increase is about 92%. I believe the financial advisor's growth is a bit higher. I do understand enough to realize if large caps out performed the total market in the last few years, the advisors account would be showing the benefit of their current investment approach vs a more total market/global approach. I am not sure if the level of risk for that approach. The adviser in general focuses on large caps but can be more diversified. They control the approach.

I am hoping you can help me think through this decision of staying where I am at or moving to the lower cost robo adviser. I will be with an adviser. I want to be sure my analysis does not miss the obvious and/or subtle questions. Obviously, if you have questions that you feel will guide your advice, I will try to answer them.

One last thing, I do not need to speak to an adviser and the money is not really needed to support our lifestyle. I treat it in the same fashion as my pre-retirement money.

davef,
RA (Robot Advisor) fulfills your needs according to your own questions and answers. In your proposed move from FA to RA, there may be unexpected surprises. However, less surprises and expenses than if you moved FA-selected mutual funds, I believe. So you're in a better position than most, who eventually find it is easier to give up, and do nothing about a change that will save considerable money over longer period of time.

So, I'm assuming you're going from .75 to .25 e/r.

1. Do you have concern that the robot may make a mistake that the flesh and blood advisor may have better insight about? After all, the robot is just algorithms and what parameters you set. It is probably a very good robot, but what happens in a flash crash, for example?

2. If I understand your post, the bulk of the portfolio is individual stocks and bonds, with a smaller percentage in mutual funds. If you have to sell the funds to get into Betterment, will you take a large tax hit?

This article discusses tax-managed topic, and may help, assuming your portfolio is taxable brokerage.
https://www.bogleheads.org/wiki/Tax-managed_fund_comparison

 

[RobbieB]

I benchmark "my guys" against FXAIX, Fidelity's S&P 500 index.

As of 6-28-19 FXAIX is up 18.5% and "my guys" are up 21.2%

Like I keep saying, they are worth their 1% and have been for the last 5 years.

 

[GTFan]

They could also fall harder in the next bear, so it all depends on how much risk you want to take. With FAs some of that is often hidden from you.

I have no need to take any risk to outperform the market, because the market itself does well enough for me that index funds are all I need.

 

[RobbieB]

Nothing is hidden. Every month I get a 30 page report listing each stock and all transactions.

 

[travelover]

Nothing is hidden. Every month I get a 30 page report listing each stock and all transactions.

What? Only 30 pages? Must be hiding something.

 

[RobbieB]

No doubt.

Then I get separate mailings when they buy/sell anything.

 

[Markola]

We have an assigned Vanguard advisor who manages our Vanguard accounts, for the following reasons, mostly having to do with preventing mistakes:
1) It keeps my emotions, worry and potential to fiddle with our investments off the table.
2). It puts my wife and me on a more even and fair keel. She gets to talk about spending she wants to do, just like I do, and he makes it happen.
3). As DW turned 55 and we started tapping her TSP, the pressure on me to not screw up our finances compounded. She doesn’t know or want to know how this all works, and my tendency is to save while hers is to modestly spend. That pressure is dissipated having our advisor.
4). He will rebalance when he should, with no emotion or second guessing. Rather than me perhaps deciding not to pull the trigger in the depths of a bear market, we pay for him to always go for the jugular when the times come to.
4). I trust Vanguard and I fully understand our portfolio, which is just a collection of Vanguard mutual funds and ETFs. He’ll never try to put us into something exotic.
5). I do not worry about whether the 4% Rule is now the 3.5% Rule and such. Vanguard has spent vast sums building and updating its own proprietary Flexible Spending model, which takes into account SS and all other assets to simply tell us each year how much we should spend.
6). I sleep a lot better.

All of this makes the 30 basis points fee for our Vanguard Personal Services Advisor very worth it to us. We have our list of questions for him for this Friday’s quarterly phone chat and we are looking forward to it.

 

[ERD50]

I benchmark "my guys" against FXAIX, Fidelity's S&P 500 index.

As of 6-28-19 FXAIX is up 18.5% and "my guys" are up 21.2%

Like I keep saying, they are worth their 1% and have been for the last 5 years.

And that's good for you. And clearly, some FA's are expected to beat the market for 5 years, or even longer. It's just statistics, even without going into the question of luck versus skill. So I am not doubting the veracity of your claims (but we still must recognize that anyone can say pretty much anything on an anonymous forum).

I have a question, and it is in all seriousness, not trying to yank your chain or anything - how did these guys do in the 2000 and 2008 meltdowns? Five years is a pretty short time and mostly up.

If these guys are this good, and I assume they want more business, do they have a long term, audited record for various AA risk profiles, that they can share with potential customers? I can do that with any mutual fund/ETF I consider. Seems to me they would be proud to show off such a record. There ought to be plenty of potential customers here at er-org. Without that, what confidence can I have in them?

Hopefully they continue to do well for you, but I can't help but wonder if what GTFan said will come to pass, the reversion to mean?

-ERD50

 

[RobbieB]

I dunno about anything earlier than 2014, the year I retired. Wasn't paying attention back then. Too busy working. I don't want them to do AA stuff. On the very first meeting they said they don't favor bonds much at all.

Cool. I'll put my bonds somewhere else. I started with my IRA and they grew it much better than Edward Jones, so they got all the IRA dough. Then they got the rest of the equities to play with.

I like their style, they do their own research and just buy and sell stocks. Sorta like running their own "mini-funds"

And it's not like they're "killin' it", they make me more than the benchmark consistently fees included by a couple percent at most, not 50 to 100 eh?

 

[aja8888]

And that's good for you. And clearly, some FA's are expected to beat the market for 5 years, or even longer. It's just statistics, even without going into the question of luck versus skill. So I am not doubting the veracity of your claims (but we still must recognize that anyone can say pretty much anything on an anonymous forum).

I have a question, and it is in all seriousness, not trying to yank your chain or anything - how did these guys do in the 2000 and 2008 meltdowns? Five years is a pretty short time and mostly up.

If these guys are this good, and I assume they want more business, do they have a long term, audited record for various AA risk profiles, that they can share with potential customers? I can do that with any mutual fund/ETF I consider. Seems to me they would be proud to show off such a record. There ought to be plenty of potential customers here at er-org. Without that, what confidence can I have in them?

Hopefully they continue to do well for you, but I can't help but wonder if what GTFan said will come to pass, the reversion to mean?

-ERD50

My DW's brothers son-in-law is CA is a Merrill Lynch FA. I've known him (the FA) for 25 years. He lives in Marin County in a very, very large house paid for by commissions on his client's trades. His 20+ year old son is a recent grad from a prestigious CA college and is following in his Dad's footsteps in ML.

I don't know how Robbie gets all these "free" trades, but someone is paying commissions at ML.

 

[RobbieB]

It's included in the 1% AUM eh?

Oh I am paying, thousands a year. More than 10 and less than 20.

But that's the point of it yes? I pay 1%. But if they make me more than that (over my benchmark) is it worth it?

 

[samclem]

But that's the point of it yes? I pay 1%. But if they make me more than that (over my benchmark) is it worth it?

It's very hard to know. If you tracked everything you had in your portfolio over many years, it would theoretically be possible to know if the performance you got was better than a benchmark on a risk adjusted basis (i.e whether they added alpha). But even this assumes that volatility/standard deviation of return is equal to risk, which I would argue it is not.



Ultimately, you presently believe what you are paying is a good value. I'm pretty sure that nobody has made an objective determination of whether your advisors are truly doing better than chance.

 

[ERD50]

I dunno about anything earlier than 2014, the year I retired. Wasn't paying attention back then. Too busy working. I don't want them to do AA stuff. On the very first meeting they said they don't favor bonds much at all.

Cool. I'll put my bonds somewhere else. I started with my IRA and they grew it much better than Edward Jones, so they got all the IRA dough. Then they got the rest of the equities to play with.

I like their style, they do their own research and just buy and sell stocks. Sorta like running their own "mini-funds"

And it's not like they're "killin' it", they make me more than the benchmark consistently fees included by a couple percent at most, not 50 to 100 eh?

No problem, wouldn't they have a history to share of a 100% stock portfolio then?

If I were looking for an FA, I sure would want to see some history. You turned over all this money to them in 2014 based on just liking the approach they talked about? To each their own, I'd need to see some data, some history. "Better than Edward Jones" is probably a very low bar.

And I sure wouldn't expect them to be 'killin' it' - it's fine if they consistently do better by 1% per year or even less, after fees - that's great in the long run.

It's included in the 1% AUM eh?

Oh I am paying, thousands a year. More than 10 and less than 20.

But that's the point of it yes? I pay 1%. But if they make me more than that (over my benchmark) is it worth it?

Yes, if they consistently return anything above fees, it's worth it. But put me in the group that sure would want to understand how they have performed in the major downturns. I've seen lots of investments and strategies that work well, until they don't.

Good luck.

-ERD50

 

[OldShooter]

... If I were looking for an FA, I sure would want to see some history. ...

IIRC there are some fairly strict rules about providing history to prospective customers, the reason being that it is too easy for the FA to either fake it or cherry pick.

@RobbieB, It sounds like you are happy with your situation and that's fine. Just for grins I will give you my thoughts on FAs that produce positive alpha:

In my investment class I show the students a graph of a particularly volatile stock over a year or two period. The first point I make is that looking every day is a total waste of time -- you are trying to see a tiny trend in an incredibly noisy signal. The second point I make is maybe the most important one: It is easy to get lucky. Lots of runs where if you were lucky enough to buy at the bottom and sell at the top you look like a genius. It is impossible, though, to be consistently lucky because you are dealing with basically a random process. So you cannot conclude from seeing a lucky run that the trader is a genius.

Another thing I show them is the S&P SPIVA results, which basically say that biannual studies of thousands of stock-pickers repeatedly show that only a tiny fraction is successful over the long haul. Their companion "Manager Persistence Report Card" then shows that there is no persistence. Past results really aren't predictive. The stock pickers that do outperform are just lucky.

Then we talk about diversification. The only way a stock-picker can be a winner is by running a non-diversified portfolio where his winning picks are in positions large enough to affect the total. A well diversified portfolio ends up being what is sometimes called "closet indexing." It will neither excel nor will it underperform a relevant index except to the extent of its total costs: fees, trading, turnover, etc.

So, from that thought sequence I conclude that long-term outperformance is statistically almost impossible for me to get by selecting an advisor and, almost worse, I end up with a nondiversified portfolio.

I like quotations from guys smarter than me, which are many. Here is William Bernstein (https://en.wikipedia.org/wiki/William_J._Bernstein) on the subject of retirement investing:

“Do you think that by choosing a portfolio of only a few stocks that you hope will score big, you are maximizing your chances of becoming wealthy?

“Indeed you are, but you are also maximizing the chances of a retirement of cat food cuisine.”

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