Vanguard report on the value of financial advice

[Skeptic]

I'm perrenially concerned about the true value of financial advice, and I often run across citations of a Vanguard white paper called "Putting a Value on Value: Quantifying Advisors' Alpha"; you can easily Google for it. This study defends the typical 1% AUM rate by claiming that a financial advisor can provide "about 3% in total potential value added," broken down like so:

Bps
> 0 Suitable asset allocation using broadly diversified funds/ETFs
40 Cost-effective implementation (expense ratios)
35 Rebalancing
150 Behavioral coaching
< 75 Asset location
< 110 Spending strategy (withdrawal order)
> 0 Total-return versus income investing

~ 3% Total potential value added, in net returns


Question: does anybody buy this breakdown? I just can't see it. For one thing, many of these purported value-adds are, at most, one-time deals, and shouldn't be used to offset the *annual* fee of an advisor. More significantly, fully half of this value is claimed to come from the category of “Behavioral Coaching”, or what I might call “saving clients from themselves”---that is, advising them to stay the course and avoid buying high because of irrational exuberance or selling low because of irrational panic.

Now, here’s the thing: I truly cannot imagine that I will get anything like 150 bps of value from this component of financial management. “Staying the course” seems to me to have been the very soul of my financial life so far. Still, I understand that retirement is a new stage in life and my relationship with money might well change when I start only spending it and not making it. In your experience, do people really end up needing very much of that “behavioral coaching”---anywhere near 150 bps/year worth, year in and year out?

 

[FlaGator]

Horses for courses.

I don't need the behavioral coaching, buy my sister would benefit - chronic buy high, sell low. DGF has been out of the market since her losses in 2008-09 (good thing she has a COLA pension)

I have found there is value for me in asset location, fine-tuning allocation, withdrawal, Roth conversions and overall financial mgmt. Will take some time to see if the DFA funds perform better than the alternatives.

Paying <0.70%. Happy with the value, and don't expect to make any changes soon.

 

[ERD50]

I have not read the report, but I imagine it deals with the average investor, and in my experience, the average investor is clueless. For them, maybe a 1% fee would provide a 3% return.

But it takes so little to educate yourself to the basics, and almost no effort to maintain it, then you can get the 3% plus the 1% for yourself.

I could make this analogy:

I have a car I plan to sell for $10,000. It then develops a serious problem, it won't run and no one wants to buy it. I find a mechanic that will fix it for $9,000, so I can sell it for $10,000. At least I'm still $1,000 ahead instead of a total loss.

Or, I learn a little about the problem, and realize a mechanic should be able to fix it for $1,000. Now I pocket $9,000 when I sell it.

I guess you could say I did well with the first mechanic - I came out ahead, right? But I could have done much better, as in the second case. So just showing that something 'works out' is rather meaningless unless it is also compared to reasonable alternatives. And I think for most people, DIY personal finance is a reasonable alternative - they just don't know it.

-ERD50

 

[Rustward]

Anybody who pays 1% AUM is paying waaay too much. Don't blame the advisor for asking for that 1%; they are just trying to make the most that they can. Blame the investor who overpays.

Has anybody here ever had a job that required selling something, either directly or indirectly -- a product or a service or some intangible? Do you get paid more for giving the customer the best financial deal, or do you get paid the most for getting your employer the best financial deal?

For some investors (like the ones who sold at the bottom in 2009 and are still waiting to get back in), 1% might be better than they can do on their own. Of course we all know it doesn't have to be that way, but some people do not have the wherewithal to do this completely on their own, so they need paid professionals. I am not saying that 1% is acceptable (it certainly is not for me -- not even in the ballpark), but it might be the best that some people can do if it gets better results than they could get on their own.

Edit to add: I hear that 1% rate kicked around here a lot, but I think many can do much better than 1%. For those who can't, if 1% is better than they could do on their own, then it is still better. Not everybody has the interest and desire to study and understand this stuff like the average Early-Retirement.org forum reader does -- and it does not take that much to understand it, but some people just do not want to do that. Right or wrong, that is their decision.

 

[jazz4cash]

Yes I generally buy into this and appreciate the detailed breakdown because if you are objective you can determine which services you would benefit from to decide if an advisor is worthwhile. Interestingly the last time I saw this it was distributed by Ric Edelman. I wonder if they believe anyone would actually read it because their general message is "you need help to do this". It only reinforces my decision to DIY.

 

[exnavynuke]

> 0 Suitable asset allocation using broadly diversified funds/ETFs - stick to a Bogle style index investing plan and you don't need any advice for this that you can't get for free
40 Cost-effective implementation (expense ratios) - easily done yourself so reduce that to 0 bps
35 Rebalancing - easily done yourself so reduce that to 0 bps
150 Behavioral coaching - stick to a Bogle style index investing plan and you don't need any behavioral coaching
< 75 Asset location - stick to a Bogle style index investing plan and you don't need to pay for asset location coaching
< 110 Spending strategy (withdrawal order) - use any of the free online tools for this such as I-ORP etc and you have no need to pay for it
> 0 Total-return versus income investing

Sure, you "can" get value for such things. There's value in me helping someone do a budget using their existing expenses so they can see that they're paying for a gym membership they don't use so they should cancel it and save money. That doesn't mean that you can't get the "value" without having to pay for it though.

With a marginal time investment, anyone of reasonable intelligence can discover how to do all of these things for free by themselves.

 

[sakowitzm]

I'm with those who believe it could be valid. I graduated with honors from an elite University, with a degree in Mathematics and a love of financials. Yet for 30 years I was my own worst enemy, with far more losers than winners. The 1% I've been paying for several years now is some of the best money I've ever spent.

 

[ERD50]

I'm with those who believe it could be valid. I graduated with honors from an elite University, with a degree in Mathematics and a love of financials. Yet for 30 years I was my own worst enemy, with far more losers than winners. The 1% I've been paying for several years now is some of the best money I've ever spent.

OK, but just because you were doing it "wrong" in the past doesn't mean you can't easily do it "right" in the future (couch potato style portfolio), and save yourself the 1% on top of it. That might become the best action you ever took (and it doesn't take much at all).

-ERD50

 

[Which Roger]

Bps
> 0 Suitable asset allocation using broadly diversified funds/ETFs
40 Cost-effective implementation (expense ratios)
35 Rebalancing
150 Behavioral coaching
< 75 Asset location
< 110 Spending strategy (withdrawal order)
> 0 Total-return versus income investing

~ 3% Total potential value added, in net returns

Question: does anybody buy this breakdown?

I buy it. Not for people on this forum, but certainly for the investing population at large. Whenever I see something like this, I feel compelled to issue the reminder that "we are different". The average person on this forum knows more about investing than 98% of the general population. Most of us know the ins-and-outs of all of the above items. The average Joe can't even define most of them. Yes, the average Joe could and should educate himself, but until he does, the numbers seem about right.

 

[Rustward]

OK, but just because you were doing it "wrong" in the past doesn't mean you can't easily do it "right" in the future (couch potato style portfolio), and save yourself the 1% on top of it. That might become the best action you ever took (and it doesn't take much at all).

-ERD50

Why do you care? Just let this person do what they want to do. How would you like it if they told you that you could do better?

You can't save the whole world.

If someone asks for help, then feel free to offer suggestions. Otherwise . . .

 

[ERD50]

Why do you care? Just let this person do what they want to do. How would you like it if they told you that you could do better?

You can't save the whole world.

If someone asks for help, then feel free to offer suggestions. Otherwise . . .

It's just information for anyone (including lurkers) who might care. Fell free to ignore it.

Also, I totally appreciate people providing information to me on how I can do better. I've learned lots of great tips from this forum, and I hope to share some as well.


-ERD50

 

[RobbieB]

You should start doing it the right way like me.

Go to a full service broker and sign up for a professional to manage your accounts for a measly 1% of AUM which is a tax write off.

 

[REWahoo]

Hey, it's only money...

 

[ERD50]

You should start doing it the right way like me.

Go to a full service broker and sign up for a professional to manage your accounts for a measly 1% of AUM which is a tax write off.

No need to be so sensitive. When I said "do it right", I didn't mean to say that using an FA was "wrong", I was saying there is a right and a wrong way to DIY. Look at the context, the poster said he was doing DIY 'wrong', so went to an FA.

But it's not a binary choice - it's not "Bad DIY" or "FA". The choices are many, a few are:

A) Learn just a teeny amount and DIY (couch potato or equivalent)

B) Hire a fiduciary by the hour to get specific advise (appropriate for some, and no recurring fees, pay as you need)

C) Use an FA and be happy paying 1% or whatever, plus risk being put in under-performing, high expense funds. And w/o the teeny amount of learning from "A", you probably won't know enough to realize what you are getting.

There are a few other choices, like a Vanguard or Fidelity review I guess. It's good to have choices, I think people should be aware of them, and choose as they wish. I always feel informed choices are better than uninformed ones. But people are free to choose as they wish, I have yet to hack anyone's account and force them to allocate their funds as I see fit

-ERD50

 

[Skeptic]

I'm with those who believe it could be valid. I graduated with honors from an elite University, with a degree in Mathematics and a love of financials. Yet for 30 years I was my own worst enemy, with far more losers than winners. The 1% I've been paying for several years now is some of the best money I've ever spent.

What's valuable for you about the FA? Is s/he smarter than you (mathematically or financially), or just more objective, keeping you from buying high and selling low?

 

[plex]

Instead of it being simply 3% of "value," it is a lot more honest to call it up to 3% of value, for just the right person. The majority do not fall into that category, it requires someone to be completely unable to handle their financial affairs (and likely they can't handle many other things too), with little hope of improving.

Averaging it out, even those that do get 3% of value out of the advice, there is still no way an adviser should be charging 1%+ to anyone that wants their services, and eating anywhere from 1/3 too more than all the value they potentially can provide in even the best of circumstances.

 

[sakowitzm]

What's valuable for you about the FA? Is s/he smarter than you (mathematically or financially), or just more objective, keeping you from buying high and selling low?

Though he is very smart, and knowledgeable (I first met him when he was with Fidelity, as a high net worth advisor), the primary reason is temperament. I'm not well suited to either buy and hold or sticking to an asset allocation. I completely understand both, and the value/importance of both, just find it easier to have someone else monitoring and maintaining them. Which gives you the other reason - laziness.

 

[RobbieB]

Mine too, in fact I've got a whole team of experts working for me.

I'm no good at picking stocks and I have some that I would have never bought because I hate the companies. They take the emotion out of the process.

I don't own any funds or ETF's, just about 70 common stocks that change from time to time. The FA takes care of that on expert advice wrt my goals which are stability and income. I'm never charged for any trades and I don't even know about it until after the fact.

So yeah, I employ a 1% AUM plan with Merrill Lynch. I'm staking dough and smiling. When I call a real person answers that I have met in person. I've met the whole team, the advisers (they work in teams now, an older guy and a younger guy) and the all important admin assistant (who really knows how to get things done) and they all know me in person and by voice so me thinks I'm not going to get scammed or hacked.

I don't worry about it, I don't fret. I sleep good at night.

I would be very suspicious of an AUM plan that bought mutual funds. Why pay twice?

 

[ERD50]

Mine too, in fact I've got a whole team of experts working for me.....

I don't worry about it, I don't fret. I sleep good at night.

I would be very suspicious of an AUM plan that bought mutual funds. Why pay twice?

And that's fine, but the real questions is - are they doing better for you than a couch potato portfolio (after taxes)?

Maybe you don't know, and maybe you don't care, and that's fine too. But if you don't know, you can't really say this is a good approach. Maybe it is you that is paying twice, or thrice, compared to just picking a few funds and calling it a night? Or maybe your advisors aren't doing any better with their stock picking than if they had chosen mutual funds, even after fees? Unless you measure this, how can you know?

-ERD50

 

[RobbieB]

The stuff they did last year was up 12% including fees. I'm in the 28% bracket first time ever. My net worth is the highest it's ever been.

That's good enough for me.


edit - I looked it up from last years thread and they did 12.8% including fees. Already posted.

 

[mathjak107]

the value in the adviser is keeping most small investors from themselves . most can't learn pucker factor . in fact there is little evidence that investors stay in more conservative funds either .

losing money is losing money and the more skittish someone is the more likely they are to exhibit bad investor behavior in any fund .

the one exception i see is wellesley . it seems to have better investor returns . makes you wonder why it seems to have investors who exhibit better behavior .

one guess is it really is not a popular 401k or 529 fund . it really is talked up on investor sites and retirement forum sites so they may attract a different type of investor than just the public

 

[target2019]

The stuff they did last year was up 12% including fees. I'm in the 28% bracket first time ever. My net worth is the highest it's ever been.
That's good enough for me.
edit - I looked it up from last years thread and they did 12.8% including fees. Already posted.

I think you'll find that some will have questions.
What benchmark is ML using, for instance?
What AA?
Do you verify the IRR they give you?

When threads like this come up, it seems to be difficult to accept that some FAs must outperform the market just as many don't. And then there's the challenge of outperforming year after year.

Take care.

 

[nativenewenglander]

the one exception i see is wellesley . it seems to have better investor returns . makes you wonder why it seems to have investors who exhibit better behavior .

one guess is it really is not a popular 401k or 529 fund . it really is talked up on investor sites and retirement forum sites so they may attract a different type of investor than just the public[/QUOTE]

I have Wellesley as my only fund for the stability, growth and ease of use. It's a great sleep at night fund. I have yet to find a fund that is better for my needs at such a low cost.

 

[mathjak107]

rising rates may make it not the best place to be but time will tell . it has had pretty low returns since the flip in bond rates .

 

[nativenewenglander]

It's a risk, but the threat of rising rates had been around for north of 7 years. The fund did fine in the 70's even figuring in inflation then. The managers will keep changing the bonds out as needed depending if rates rise or fall. I've considered the 5 pronged portfolio you have of IWM, SPY, GLD, SHY, TLT 20% each. It's the only portfolio with lower volatility than Wellesley I've found. My only concern is my wife would have to re-balance if I was out of the picture. Wellesley is more or less set and forget.