Wade Pfau (again) on Financial Advice

[Animorph]

Sorry to once again shill for Dr. Pfau. Seems like every article gets posted here.

I thought this gave a nice checklist of things to think about when deciding whether to hire an advisor or DIY. Mostly a summary of Vanguard and Morningstar papers, with some numbers on the investment return values of certain actions.

(1) Build a customized investment plan aimed at achieving goals and meeting constraints for risk tolerance and risk capacity
> 0% suitable asset allocation with broadly diversified investments
0.45% focus on low-cost investments (low expense ratios)
0 – 0.75% locating assets properly in taxable and tax-advantaged accounts
>0% focusing on total returns investment instead of income investing
(2) Minimize risks and tax impacts
0.35% rebalancing to the strategic asset allocation
0 – 0.70% deciding where to draw assets from (tax-deferred or taxable) to meet spending
(3) Behavioral coaching
> 1.5% providing support to stay the course in times of market stress
Overall net impact of good advice: about 3%

Can an advisor charging a 1% fee provide enough value to justify the fee? It depends on the answers to two questions:
(a) Do you have the time, energy, interest, knowledge, and desire to implement all of these decisions on your own?
(b) Are you working with a comprehensive financial planner who does more than just manage investment portfolios and is capable of implementing good financial planning decisions?
If you have the time, interest, energy, knowledge, and desire to do this on your own, then you would make an excellent advisor. If your advisor is less than capable, you might be better off saving yourself the 1% or taking your business elsewhere.

 

[Totoro]

Here is the conundrum: how do you what is a capable financial advisor?

In my view, if you know how to select one you'll probably know how to do it yourself and indeed save the 1%.

Case in point:

• 0.45% focus on low investment cost: could actually be 1%, but isn't hard. And once you know this aspect, why need a financial advisor? If you don't know, you don't know enough to select one methinks.
• 0.35% rebalancing: can be done automatically. If it's DIY than you have the emotional aspect to deal with (last point).
• 0% - 0.7%: won't comment on this one since I'm not in the US system, yet it hardly seems rocket science from what I can read on this forum. Unless you've had a complicated life. Then hire a one-off tax planner I guess.

.. so basically you'll end up with emotions, admittedly a VERY big one.


I'd rather give the emotional coaching task to a stable trusted friend who no other stakes, if not up to the task myself.



Maybe just too critical ..

 

[REWahoo]

Here is the conundrum: how do you what is a capable financial advisor?

In my view, if you know how to select one you'll probably know how to do it yourself and indeed save the 1%.

"He seemed like such a nice young man..."

 

[2017ish]

Here is a link: Is It Worth Having a Financial Advisor?

 

[Options]

1.5% to stay the course? You can get all the unbiased, well thought out, and in-depth support you need and then some for free on the BH forum. And here, too, of course.

Rick Ferri again:

On advisor fees:

The last bastion of gluttony in the investment industry is stubbornly high financial advisor fees. It’s as though technology has passed over this business and financial advisors are getting rich from increasing profit margins.

There is nothing an adviser does for 1.0 percent that they can’t do for much less and still make a fair profit.

On feeling overwhelmed by markets:

People are constantly trying to convince you that the financial markets are a force to be reckoned with and that you need expensive help and complicated solutions. That’s not true. The markets are not the problem, the markets are the answer.

 

[Animorph]

1.5% to stay the course? You can get all the unbiased, well thought out, and in-depth support you need and then some for free on the BH forum. And here, too, of course.

Rick Ferri again:

That was 1.5% gained by staying the course. Not a cost.

 

[marko]

Just musing, ok?:

Not to slight Dr Pfau, AA, Boggleheads et. al. and all the incredibly useful information gleaned from this great forum, but I sometimes wonder if all these subjects get over-thought and mathematically get ground down to the proverbial "9th decimal places".

Many years ago, my ([-]idiot[/-] absolutely clueless) brother asked me to invest a sizable windfall for him.

I picked an offspring of the FIDO Magellan Fund more or less as a dart toss. Sort of: "Here you go...this'll work for you".

Over the past 20 years he hasn't checked on it (and barely realizes that the money is there) and essentially hasn't changed anything. I keep track of the fund for him but have never made any changes.

Despite my hard (and debatably slightly more competent) work at re-allocating, moving money around, taking advantage of low priced opportunities, my brother regularly beats me on annual returns (percentage-wise). Not by a lot, but considering he does nothing......

I just wonder if you've picked some good funds, over the long haul, all the running around is worth it.

Can you pick up a percent? Sure. Maybe.

 

[ETFs_Rule]

Wade Pfau is the same guy who puffed up the idea of replacing your bonds with income annuities by comparing them to a moderately risky 50/50 portfolio (Apples to oranges). Don't believe everything he says.

 

[brewer12345]

So not only does the Evil Dr. Pfau want us to work forever, now he is positioning us to be serviced by financial advisors. You have got to be kidding me. Where exactly does his grant money come from?

 

[ETFs_Rule]

So not only does the Evil Dr. Pfau want us to work forever, now he is positioning us to be serviced by financial advisors. You have got to be kidding me. Where exactly does his grant money come from?

+2
Pfau is in bed with the insurance industry. Another one is thisDavid Babbel guy who has all of these glowing things to say about index annuities. He also compares his insurance products to a 50/50 portfolio to try to demonstrate an uncertain failure rate of the portfolio.

These guys remind me of the global warming "researchers" who will gladly puff up the cult as long as the grand money is there.

 

[big-papa]

The main question that comes up for me (and I hope that it's never or at least a looooong way down the road) is the issue of DIY and possible cognitive decline. I like DIY and will continue to DIY, but there is that nagging question hanging out there of how-to-decide-if/when/who at some point in the future.
Saw my mother-in-law go through Alzheimers and the first thing my father-in-law noticed was that she wasn't balancing the checkbook properly and bills weren't getting paid.

 

[Independent]

Here is the conundrum: how do you what is a capable financial advisor?

In my view, if you know how to select one you'll probably know how to do it yourself and indeed save the 1%.

+1

 

[dunkelblau]

Sorry if already posted elsewhere, but this article suggests some serious milking of the upper crust as well--
Superrich Are Overpaying For Financial Advice - Penta Daily - Barrons.com
The blue bottom line in the figure from Doug Black suggests a benchmark of 0.35% for asset-weighted vs about 1% for "all-in". Does this mean they get 0.65% for AA and "emotional support"?

 

[Options]

That was 1.5% gained by staying the course. Not a cost.

Yea, and you don't need an adviser to tell you that (unless of course you're the type that does, and then I would question why that type of person wouldn't just build an LMP of some sort or buy and annuity and be done with it).

 

[bclover]

ok guys,
I'm the one that's always complaining lol about learning about investments. You guys told me to ask so I'm asking.

I did not understand this article.

Specifically I got the part about "alpha" so far so good. what do the % numbers mean.
>0% suitable asset allocation? wait isn't my entire portfolio supposed to have an asset allocation based on a few things?

0.45% focused on low cost investments. does that mean only 0.45% of my portfolio should be low cost vehicles.

methinks I'm reading this chart incorrectly help.

 

[Totoro]

0.45% focused on low cost investments. does that mean only 0.45% of my portfolio should be low cost vehicles.

It means you'll get a 0.45% better return (so e.g. 5% instead of 4.55% annual average return on investment).

This by choosing funds who charge low management fees (e.g. 0.15% instead of 0.60%).

 

[Independent]

ok guys,
I'm the one that's always complaining lol about learning about investments. You guys told me to ask so I'm asking.

I did not understand this article.

Specifically I got the part about "alpha" so far so good. what do the % numbers mean.
>0% suitable asset allocation? wait isn't my entire portfolio supposed to have an asset allocation based on a few things?

0.45% focused on low cost investments. does that mean only 0.45% of my portfolio should be low cost vehicles.

methinks I'm reading this chart incorrectly help.

In the context of the article, if the adviser opens your eyes to low cost funds, which average 0.45% less in fees than average funds, then the adviser has added 0.45% to your annual yield. If you pay the adviser any number less than 0.45%, you made money by hiring him/her.

(Of course, once your eyes are opened, it's not clear why you would continue to pay the adviser.

>0% means that IF advisers can add find a better point on the risk/reward curve than you would have found yourself, then the adviser must have added some value. But, it's hard to say how much.

 

[urn2bfree]

The dirty little and STUBBORN secret of the financial advising industry is that the model of charging a fee based on how much money you have is outdated and illogical. It is indeed, as Mr Ferri suggests, as if technology has completely bypassed the industry. No more green visor, rolled up sleeves, adding machine with rolls of paper. The huge drop in trading costs now possible with improved technology, the advent of index funds, the drop in the cost of complex calculations, all those savings go right into the advisor's pocket as he goes merrily along skimming the same percentage of YOUR money. The more money you have, the more he makes....he does not do anything more, it doesn't even take him longer to count his ever increasing pile of money he is extracting from your wealth....it just shows up as a new bigger number in his bank account. Imagine two people go see an advisor- 1 hour apart. The first one has $2 million, the second person has $3 Million. There is absolutely NOTHING done by the advisor managing a $3 Million portfolio different than what he does for the $2 Million portfolio, but somehow he does not mention this fact-- as he collects $10,000 more every year from the bigger portfolio.
I have an advisor. I pay him a flat fee which currently amounts to less than 0.06% and as my portfolio grows, it gets less percentage wise...BECAUSE the size of my portfolio does not determine the work or value of an advisor.
This outdated method of calculating compensation has got to go. And not just in financial advisors...I am looking at you- REALTORS!


Sent from my iPad using Early Retirement Forum

 

[Animorph]

Jeez, I didn't see the article, nor those it references, as pushing advisors. It simply had two nice lists of things to consider. If you were comfortable doing those things yourself (they weren't hard), be your own advisor. If not, an advisor should be able to do those things for you and you should still come out ahead if you were doing none of those things to begin with.

I would expect most of us would have no problem with the items on those lists. But for those just starting to think about their finances those are the things they should be thinking about when considering whether they should use an advisor or not.