How I chose My FA

[FlaGator]

As suggested by ERD50 in this thread, (http://www.early-retirement.org/foru...e-89489-2.html, post #28), I've taken the challenge and subjecting myself to whatever comes....

From ERD50, responses in italics
It seems to me that choosing this person is harder than DIY, so I'm curious how you would go about it, and what suggestions you have for others who are set on this path? Some considerations:

A) Do you expect the FA to:

1) Beat the market after fees/taxes/expenses?
No
2) Match the market after fees/taxes/expenses?
Yes, but....I've settled on a Small Cap/Value tilt and am giving Dimensional Funds a shot. Expect it will take a few years to know if their approach works. In the meantime, I expect to perform "close enough" to the market to not be anxious about being 0.5%-ish behind a hypothetical total market index with my current 70/30 allocation.

3) It is OK if you lag the market, you just don't want to deal with it?
May lag the market in the short term, and I expect to be able to understand why

For 1 & 2 - how do you go about determining if the FA is capable of that, in up, down and sideways markets?
Selected a RIA using DFA funds believing their small/value bias performs better over time. I'm patient.

B) Do you expect the FA to provide other advice, tax planning? Other?
Tax planning, no. General guidance that I flesh out with my CPA, yes. Very helpful guidance and a calm voice while dealing with late DW's estate. Also have been helpful with a forward look on Roth conversions, asset location, near term cash holdings, firecalc-type projections, insights on a small company I invested in. No birthday cards or holiday gifts, though

C) Do you expect the FA to just keep you from your own bad decisions, hand holding so you don't sell at the bottom? But if you want to sell at the bottom, what keeps you from firing your FA and just doing it anyhow?
Not an issue for me. Kept investing throughout the 1987, 2000-01 and 2008-09 events. Was VGD indexer before home life changed. Don't need help with that.

D) Why do you feel an ongoing AUM-charging FA serves you better than a per-hour fiduciary FA?
Don't know. I needed to do something to reduce my intellectual/emotional burden after my late wife's terminal diagnosis. Wasn't up to caring for her, managing the kids, my job and a not-insignificant amount of money. Was very helpful then, and I like being free of those decisions today, even though I know I'm not doing it the cheapest way. Money I'm willing to spend while giving DFA's small/value approach a chance to prove out.

Daily life has gotten easier in some respects since she died 4 years ago, so I'll take it back "in-house" if performance isn't at least meeting a TSM/TIntl/Bond benchmark after a few years.

So nothing there about not using an FA, just questions about how to go about finding one that meets your needs. I'll be glad to "shout down" any "pro-DIY naysayers" (and I'll need to hold my tongue as well), to keep the thread focused. I am curious about it.

Any takers? Feel free to copy/paste the above - I'd start it, but I think it would be better coming from someone who can speak directly to those topics.
---------------------------
For the curious with plenty of time on their hands, see posts 32, 35 and 46 in this thread (http://www.early-retirement.org/foru...e-86203-2.html) for more detail about how I view the FA situation.


As to finding one, I would look only at Registered Investment Advisers (RIA), and avoid anyone who has an insurance license or talks about variable annuities. No active management for me, and I wouldn't pay an FA to invest at VGD, but I've been deep in this game for 30+ years.

Fees for AUM should be 1% or less, and the funds they recommend should be index/passive with fees < 0.2% generally. EM and some internationals may be higher, but still under 0.5%.

One thing I believe is glossed over by "DIY with index funds is simple" is that the people I know who preach it usually have experience doing it the other way and have learned A LOT from that experience. There is confidence that comes with understanding the lessons of those experiences. That confidence, IMO, is necessary to be successful DIY investor, and one doesn't typically get it listening the stories at the ER Pub

[Montecfo]

Can't criticize your use of FA. Sounds like you know the costs and find value there.

I am a DIYer. Not an indexer but value oriented. I think anytime someone's investment philosophy becomes like a religion, it is probably not a good thing.

[VanWinkle]

Quote:

Originally Posted by FlaGator As suggested by ERD50 in this thread, (http://www.early-retirement.org/foru...e-89489-2.html, post #28), I've taken the challenge and subjecting myself to whatever comes.... From ERD50, responses in italics It seems to me that choosing this person is harder than DIY, so I'm curious how you would go about it, and what suggestions you have for others who are set on this path? Some considerations: A) Do you expect the FA to: 1) Beat the market after fees/taxes/expenses? No 2) Match the market after fees/taxes/expenses? Yes, but....I've settled on a Small Cap/Value tilt and am giving Dimensional Funds a shot. Expect it will take a few years to know if their approach works. In the meantime, I expect to perform "close enough" to the market to not be anxious about being 0.5%-ish behind a hypothetical total market index with my current 70/30 allocation. 3) It is OK if you lag the market, you just don't want to deal with it? May lag the market in the short term, and I expect to be able to understand why For 1 & 2 - how do you go about determining if the FA is capable of that, in up, down and sideways markets? Selected a RIA using DFA funds believing their small/value bias performs better over time. I'm patient. B) Do you expect the FA to provide other advice, tax planning? Other? Tax planning, no. General guidance that I flesh out with my CPA, yes. Very helpful guidance and a calm voice while dealing with late DW's estate. Also have been helpful with a forward look on Roth conversions, asset location, near term cash holdings, firecalc-type projections, insights on a small company I invested in. No birthday cards or holiday gifts, though C) Do you expect the FA to just keep you from your own bad decisions, hand holding so you don't sell at the bottom? But if you want to sell at the bottom, what keeps you from firing your FA and just doing it anyhow? Not an issue for me. Kept investing throughout the 1987, 2000-01 and 2008-09 events. Was VGD indexer before home life changed. Don't need help with that. D) Why do you feel an ongoing AUM-charging FA serves you better than a per-hour fiduciary FA? Don't know. I needed to do something to reduce my intellectual/emotional burden after my late wife's terminal diagnosis. Wasn't up to caring for her, managing the kids, my job and a not-insignificant amount of money. Was very helpful then, and I like being free of those decisions today, even though I know I'm not doing it the cheapest way. Money I'm willing to spend while giving DFA's small/value approach a chance to prove out. Daily life has gotten easier in some respects since she died 4 years ago, so I'll take it back "in-house" if performance isn't at least meeting a TSM/TIntl/Bond benchmark after a few years. So nothing there about not using an FA, just questions about how to go about finding one that meets your needs. I'll be glad to "shout down" any "pro-DIY naysayers" (and I'll need to hold my tongue as well), to keep the thread focused. I am curious about it. Any takers? Feel free to copy/paste the above - I'd start it, but I think it would be better coming from someone who can speak directly to those topics. --------------------------- For the curious with plenty of time on their hands, see posts 32, 35 and 46 in this thread (http://www.early-retirement.org/foru...e-86203-2.html) for more detail about how I view the FA situation. As to finding one, I would look only at Registered Investment Advisers (RIA), and avoid anyone who has an insurance license or talks about variable annuities. No active management for me, and I wouldn't pay an FA to invest at VGD, but I've been deep in this game for 30+ years. Fees for AUM should be 1% or less, and the funds they recommend should be index/passive with fees < 0.2% generally. EM and some internationals may be higher, but still under 0.5%. One thing I believe is glossed over by "DIY with index funds is simple" is that the people I know who preach it usually have experience doing it the other way and have learned A LOT from that experience. There is confidence that comes with understanding the lessons of those experiences. That confidence, IMO, is necessary to be successful DIY investor, and one doesn't typically get it listening the stories at the ER Pub

Well said Flagator and there is truth in your words!

Best to you,

VW

[DrRoy]

Why not just go with a small/value ETF, save the fees and boost your return?

[Closet_Gamer]

Quote:

Originally Posted by FlaGator As suggested by ERD50 in this thread, (http://www.early-retirement.org/foru...e-89489-2.html, post #28), I've taken the challenge and subjecting myself to whatever comes.... From ERD50, responses in italics It seems to me that choosing this person is harder than DIY, so I'm curious how you would go about it, and what suggestions you have for others who are set on this path? Some considerations: A) Do you expect the FA to: 1) Beat the market after fees/taxes/expenses? No 2) Match the market after fees/taxes/expenses? Yes, but....I've settled on a Small Cap/Value tilt and am giving Dimensional Funds a shot. Expect it will take a few years to know if their approach works. In the meantime, I expect to perform "close enough" to the market to not be anxious about being 0.5%-ish behind a hypothetical total market index with my current 70/30 allocation. 3) It is OK if you lag the market, you just don't want to deal with it? May lag the market in the short term, and I expect to be able to understand why For 1 & 2 - how do you go about determining if the FA is capable of that, in up, down and sideways markets? Selected a RIA using DFA funds believing their small/value bias performs better over time. I'm patient. B) Do you expect the FA to provide other advice, tax planning? Other? Tax planning, no. General guidance that I flesh out with my CPA, yes. Very helpful guidance and a calm voice while dealing with late DW's estate. Also have been helpful with a forward look on Roth conversions, asset location, near term cash holdings, firecalc-type projections, insights on a small company I invested in. No birthday cards or holiday gifts, though C) Do you expect the FA to just keep you from your own bad decisions, hand holding so you don't sell at the bottom? But if you want to sell at the bottom, what keeps you from firing your FA and just doing it anyhow? Not an issue for me. Kept investing throughout the 1987, 2000-01 and 2008-09 events. Was VGD indexer before home life changed. Don't need help with that. D) Why do you feel an ongoing AUM-charging FA serves you better than a per-hour fiduciary FA? Don't know. I needed to do something to reduce my intellectual/emotional burden after my late wife's terminal diagnosis. Wasn't up to caring for her, managing the kids, my job and a not-insignificant amount of money. Was very helpful then, and I like being free of those decisions today, even though I know I'm not doing it the cheapest way. Money I'm willing to spend while giving DFA's small/value approach a chance to prove out. Daily life has gotten easier in some respects since she died 4 years ago, so I'll take it back "in-house" if performance isn't at least meeting a TSM/TIntl/Bond benchmark after a few years. So nothing there about not using an FA, just questions about how to go about finding one that meets your needs. I'll be glad to "shout down" any "pro-DIY naysayers" (and I'll need to hold my tongue as well), to keep the thread focused. I am curious about it. Any takers? Feel free to copy/paste the above - I'd start it, but I think it would be better coming from someone who can speak directly to those topics. --------------------------- For the curious with plenty of time on their hands, see posts 32, 35 and 46 in this thread (http://www.early-retirement.org/foru...e-86203-2.html) for more detail about how I view the FA situation. As to finding one, I would look only at Registered Investment Advisers (RIA), and avoid anyone who has an insurance license or talks about variable annuities. No active management for me, and I wouldn't pay an FA to invest at VGD, but I've been deep in this game for 30+ years. Fees for AUM should be 1% or less, and the funds they recommend should be index/passive with fees < 0.2% generally. EM and some internationals may be higher, but still under 0.5%. One thing I believe is glossed over by "DIY with index funds is simple" is that the people I know who preach it usually have experience doing it the other way and have learned A LOT from that experience. There is confidence that comes with understanding the lessons of those experiences. That confidence, IMO, is necessary to be successful DIY investor, and one doesn't typically get it listening the stories at the ER Pub

Great post. Very sorry to hear about the journey with your spouse. Both my parents were very ill when I was a kid and at a certain level I live in fear of that situation.

I don't use an FA anymore, but when I did, a key criteria for me was to see their personal net worth and investment approach/results. If they couldn't mange their own money, they couldn't get mine.

Thx

[target2019]

Quote:

Originally Posted by FlaGator D) Why do you feel an ongoing AUM-charging FA serves you better than a per-hour fiduciary FA? Don't know. I needed to do something to reduce my intellectual/emotional burden after my late wife's terminal diagnosis. Wasn't up to caring for her, managing the kids, my job and a not-insignificant amount of money. Was very helpful then, and I like being free of those decisions today, even though I know I'm not doing it the cheapest way. Money I'm willing to spend while giving DFA's small/value approach a chance to prove out. Daily life has gotten easier in some respects since she died 4 years ago, so I'll take it back "in-house" if performance isn't at least meeting a TSM/TIntl/Bond benchmark after a few years.

I haven't walked in your shoes. Your decision for FA was well thought out, and is entirely understandable.

[UnrealizedPotential]

I think for some a FA is a good thing, perhaps even a necessary thing, depending on ones circumstances. For others who like me who are DIY that's good as well, if we think we can serve that role on our own behalf . To me, it just seems the choice of whether FA or not is what one thinks best serves their interest. It's a personal decision and each individual is in the best position to make that choice.

[mrfeh]

I used a FA for 3 years, from '10 thru '12. The main reason I used his services was that our portfolio was getting large; large enough that I could see ER was a possibility. And since I didn't really know what I was doing, I didn't want to screw things up. He charged 1% AUM.

I chose him because he was/is the FA of the CEO of the company I work for. This CEO used to work for Baird and knows his stuff. I figured if he was good enough for the CEO, he was good enough for me.

Then, 5 years ago I found bogleheads.org. I read lots of posts. I read the boglehead wiki. I read books. In short, I educated myself. I realized that over time, almost nobody can beat the market, so why pay somebody to try, when I can put together a passive portfolio myself.

So, I've been a DIYer the last 5 years. I shudder to think that during that time, if I had stuck w/ the FA, I would've paid him something approaching $100K.

[UnrealizedPotential]

Some investors would panic and sell during a bear market and lose a lot more than 100k. Also, some investors just don't want to spend the time looking after their portfolio and will pay a FA his/her fees for doing so. That's okay. I don't want or need a FA now, but want to keep an open mind if I can because the day may come when I want one. I hope not , but it's a possibility.

What I've learned is life is not so simple that we can say this is the best way, so everyone should just do it that way. Also, if at any time one needs to change course it's a lot easier when one can see both sides. Otherwise, one would have to eat crow, and I'm sure I wouldn't like the taste of it.

[Freedom56]

How about doing a broker check of your FA through FINRA?
You may be surprised by what you find. I have found many financial advisers are losers that live paycheck to paycheck, have large credit card debt, and live beyond their means. Don't be fooled by the slick talk and the expensive cars on lease. They are after one thing and one thing only - your money.

[VanWinkle]

Quote:

Originally Posted by UnrealizedPotential Some investors would panic and sell during a bear market and lose a lot more than 100k. Also, some investors just don't want to spend the time looking after their portfolio and will pay a FA his/her fees for doing so. That's okay. I don't want or need a FA now, but want to keep an open mind if I can because the day may come when I want one. I hope not , but it's a possibility. What I've learned is life is not so simple that we can say this is the best way, so everyone should just do it that way. Also, if at any time one needs to change course it's a lot easier when one can see both sides. Otherwise, one would have to eat crow, and I'm sure I wouldn't like the taste of it.

I actually shot and cleaned a crow many years ago, you are right- you wouldn't like the taste or smell of it.

VW

[Ready]

Your rationale sounds well thought out and you seem to have a good understanding of the situation. My only observation is your comment:

"I'll take it back "in-house" if performance isn't at least meeting a TSM/TIntl/Bond benchmark after a few years."

I don't think this is realistic. Your FA may outperform or underperform the market over a period of a few years, and either way it means nothing regarding the long term performance of the FA vs an index fund. It's only over very long periods of time that differences are meaningful.

The theory of reversion to the mean suggests that when an FA outperforms for a period of time, such as ten years, they are more than likely to underperform the next ten years, so that over a 20 year average they end up with mean performance. The reverse is true too. If they underperform the first ten years, maybe their best years are still ahead of them.

In any case, I would make the decision to keep or leave your FA based on your experience with how much value they are adding, and not how your funds are performing over a short period of time.

[ERD50]

Thanks FlaGator, for starting the thread. And I'll reiterate - the purpose here was to isolate this thread from the DIY versus FA threads, we have plenty of those. This thread is for those who are set on using an FA, have seen those threads and have not been swayed. So for them, suggestions on how to choose/evaluate their FA.

Quote:

Originally Posted by FlaGator .... Also have been helpful with a forward look on Roth conversions, ...

I'd like to hear more about this. I keep poking at it with various spreadsheets, ROTH versus 0% LTCG harvest is a question for me. I might even consider a by-the-hour FA for this, but my feeling is (like SS at 62 versus 70), the 'answer' is so dependent on unknowns, and the likely difference isn't great enough to worry too much about. I just want to avoid a big mistake.

Quote:

As to finding one, I would look only at Registered Investment Advisers (RIA), and avoid anyone who has an insurance license or talks about variable annuities. ...

FINRA was also mentioned later, these sound like good sources, here's a little info, maybe others have some better links:

https://www.investopedia.com/terms/r/ria.asp

https://www.investopedia.com/article...qsrc=0&o=40186

The key to me is that the RIA members are fiduciaries. IMO, that is so important, and will help people avoid hiring an FA that is focused on their own income, rather than the customers.

Quote:

... One thing I believe is glossed over by "DIY with index funds is simple" is that the people I know who preach it usually have experience doing it the other way and have learned A LOT from that experience. There is confidence that comes with understanding the lessons of those experiences. That confidence, IMO, is necessary to be successful DIY investor, and one doesn't typically get it listening the stories at the ER Pub ...

Since this is getting into the DIY vs FA, I'll answer in that other thread:

http://www.early-retirement.org/foru...ml#post1970418

-ERD50

[HFWR]

Small sample size, but most of my friends/acquaintances that use an advisor do it because they aren’t confident in their own ability, and/or because they just don’t want to deal with it. Many aren’t sure what fees they’re paying, or how their returns compare to “market returns”.

[OldShooter]

Thanks, @FlaGator for the thoughtful OP. I am especially interested in your choice of DFA, which from my investigations I think is wise.

I would like to read more discussion of DFA, but didn't want to hijack your thread. So I have started this one: http://www.early-retirement.org/foru...ml#post1970410 and would appreciate your and others' insights.

[RunningBum]

Quote:

Originally Posted by Freedom56 How about doing a broker check of your FA through FINRA? You may be surprised by what you find. I have found many financial advisers are losers that live paycheck to paycheck, have large credit card debt, and live beyond their means. Don't be fooled by the slick talk and the expensive cars on lease. They are after one thing and one thing only - your money.

FINRA will actually tell you if an FA lives paycheck to paycheck, has large CC debt, or lives beyond their means?

[RobbieB]

I don't think so, I just looked up my guy.

Is a registered broker and Investment Advisor, worked in the field for 23 years, licensed in 23 states, and passed 3 exams.

No info re slick talk, paycheck to paycheck maxed out credit cards or expensive cars on lease.

[flintnational]

Quote:

Originally Posted by target2019 I haven't walked in your shoes. Your decision for FA was well thought out, and is entirely understandable.

I agree. Normally when I advise against a FA it is because the poster may not be familiar with the fees/potential pitfalls and is hiring the FA naively. In your case, you seem to know the subject well, have carefully thought out your decision and have valid reasons. Sorry for your loss.

[OldShooter]

Brokercheck is an important tool, but for someone who wants to be really thorough it may be worthwhile pay a few bucks to have an attorney do a real background check and a credit check. Liens, judgments, late payments etc. can tell quite a story that you won't get from brokercheck.

I have gotten interesting information on a couple of brokerchecks. One guy had been kicked out of the business for forging customer signatures on documents. Another had 22 customer disputes including several that were settled for six figure sums. He must have been a helluva rainmaker as he was still employed by the same (sleazy) firm.

[Scuba]

We have done both DIY and FA in the past. We chose to go back to using an FA about four years ago in preparation for ER.

I don't expect our FA to beat the market. I do expect her to first and foremost meet our cash flow goals in a way that is projected to be sustainable throughout our lives (until we're 95+). I expect her results to be close to market performance over the long run net of fees, but also accept that I'm paying fees of 0.7% in exchange for getting a service. I do compare her results to a weighted average market benchmark comparable to our AA. She and I discuss why our returns have varied from the benchmark, which has primarily been driven by differences in AA for sub-segments such as more or less emerging markets, growth vs value tilt, etc. Sometimes we've been on the good side of that, sometimes not.

I don't worry about selling in a panic as I haven't done that in the past when I was DIY. In fact I've explicitly told my FA that my reaction to downturns is to buy more. We do rely on our FA for other advice such as risk management, cash flow projections, tax considerations (although we also have a tax CPA to help with tax advice), and trade-offs involved in decisions such as when to take my pension, deferred comp, SS, etc.

We selected our FA by first identifying criteria such as:
- Must be an RIA/fiduciary
- Must focus on portfolio management rather than selling other products (annuities, insurance, etc.)
- Must primarily serve clients similar to us; did not want to be their largest client or a very small client. Also wanted someone who had a mix of retired clients and clients still in accumulation phase.
- Wanted to understand and be comfortable with their processes used to select investments for and monitor client portfolios.
- Preferred an advisor who was part of a small team so there is backup, but without the overhead of a really large firm. Wanted to personally meet all team members who would be involved in servicing our account.
- One criteria we did NOT use is that our FA must be apparently very wealthy. We made that mistake before. An FA we previously used had multiple homes, fancy cars and a lavish lifestyle because he very successfully sold people products they didn't need. Took us a couple of years to figure that out and go DIY for 5 years.

Once we identified our criteria, we conducted a search, initial telephone interviews, and met with the top three in person. We had several calls and meetings with the top two, and checked references, FINRA, and other publicly available information.

Our selection process was thorough and detailed. We wanted an ongoing relationship, not just a one-time service, so we went with an AUM arrangement and negotiated fees of 0.7%. That was the same percentage that my employer was paying for a $250M portfolio so we were happy with that. We are mostly in individual stocks and bonds, so very few additional fees.

Our advisor provides very personalized service - no gifts, but comes to our home for meetings, is always available for calls/texts, and is happy to engage in dialog about any topic desired as well as works well with our tax CPA.

We have been with her for about 4 years but haven't been through a down market together yet. She has made our portfolio less volatile than it was when I was managing it while still staying close to market benchmark returns net of fees. Once we get through the first few years of ER and make several major irreversible decisions, we may go back to DIY, as I appreciate that the fees are significant and compound over time.