Whether to stay with Advisor or DIY...

[OldShooter]

... OP here ...well, if you had to explain it to him, how would you present it? I'm regretting the decision - but if he was willing to work hourly before, and I had second thoughts after considering the nature of the portfolio being somewhat 'static' and about how I feel like we'd done pretty well with the previous arrangement, I don't see it as offensive necessarily - just not my preferred 'model' of fee-based advice ...

Hiring an FA is no different than hiring a lawn service. You are concerned with the quality of work and the cost. You also want a positive relationship with the owner or manager, but he is not your friend. He is a vendor.

If you go into the conversation understanding that you are in a customer/vendor relationship you should do well. Explain your needs and your rationale, then listen. But remember one of the lessons from Negotiation 101: If you are not willing to leave the table you are not negotiating. You are begging.

I am willing to give it a full year vs just dropping it after only a couple of months....

Oooo. Don't do it! This is called "negotiating with yourself" and it is not a good idea. If the FA comes up with this proposal, then you can talk about it. But don't negotiate yourself into a fallback position that hasn't been proposed by the other side.

 

[mikes425]

Hiring an FA is no different than hiring a lawn service. You are concerned with the quality of work and the cost. You also want a positive relationship with the owner or manager, but he is not your friend. He is a vendor.

If you go into the conversation understanding that you are in a customer/vendor relationship you should do well. Explain your needs and your rationale, then listen. But remember one of the lessons from Negotiation 101: If you are not willing to leave the table you are not negotiating. You are begging.

Hi and thanks. Well I'm not actually hiring him as I've been with him for about 10 years. There's not really any negotiating in this case. I initiated the decision to go to an AUM arrangement instead of hourly. Now I'm inclined to go back to the hourly model, so that's really the only conversation I need to have - or email exchange for that matter. As far as giving it a year, I meant that I could choose to simply not bring this up until next Spring, or, tell him now that I want to switch back. In fairness, i would essentially be giving it a "trial run" to actually see if in fact there is any measurable added value as an AUM client and if not, just tell him at that time that I realized that I would be more comfortable with our previous type of relationship.

 

[Markola]

Agree 100%. The only way to obtain those out-sized returns is to take on more risk. I would be skeptical and want to see what's under the hood.

We know that the overwhelming majority of people significantly underperform a simple buy and hold of index funds approach, because they make mistakes fiddling with their investments, get scared and don’t stay fully invested, lose too much in compounding fees, etc. Given that most people come to Vanguard from such a deeply suboptimal hole, VGPAS can reasonably add 3.75% or so over the long run by rectifying common errors and then adding more complex expertise, like tax efficiency and spending of assets in optimal sequence, etc. You and many others on this board may not be average, but the herd out there is losing tons of money and should have help.

 

[OldShooter]

Hi and thanks. Well I'm not actually hiring him as I've been with him for about 10 years. There's not really any negotiating in this case. I initiated the decision to go to an AUM arrangement instead of hourly. Now I'm inclined to go back to the hourly model, so that's really the only conversation I need to have - or email exchange for that matter. As far as giving it a year, I meant that I could choose to simply not bring this up until next Spring, or, tell him now that I want to switch back. In fairness, i would essentially be giving it a "trial run" to actually see if in fact there is any measurable added value as an AUM client and if not, just tell him at that time that I realized that I would be more comfortable with our previous type of relationship.

With respect, @mikes425, you are approaching this like a friendship, not a customer/vendor relationship. Every day you keep him is the same as a decision to hire him. Every day you delay doing what you want costs you money. Any change to the customer/vendor relationship is a negotiation. The other problem is that a year proves nothing. It really takes five or even ten years to evaluate a portfolio or a strategy. All one year will tell you is whether he was lucky that year or not.

There was a hilarious post here a couple of years ago and I have regretted not bookmarking it. The poster was talking about what a great friendship he had with his FA. FA would frequently invite him to go fishing on FA's boat and they always had a great time. The poster pulled his portfolio and seemed a little sad that he had not been invited to go fishing since then.

Every smart salesman, and FA's are no different, wants to be considered to be a friend. Friends trust friends. Friends don't ask friends hard questions. Friends don't pull assets away from friends.

 

[Retire52]

whether its $10k a year or $200 an hour, I'd drop him like a hot potato. there is a mountain of research showing FA can't beat a monkey with a dart. good investment advise is ubiquitous on the internet. I'd recommend reading an article by a great DIY blogger on his thoughts about using a FA.

https://jlcollinsnh.com/2012/06/06/why-i-dont-like-investment-advisors/

 

[OldShooter]

whether its $10k a year or $200 an hour, I'd drop him like a hot potato. there is a mountain of research showing FA can't beat a monkey with a dart. good investment advise is ubiquitous on the internet. I'd recommend reading an article by a great DIY blogger on his thoughts about using a FA.

https://jlcollinsnh.com/2012/06/06/why-i-dont-like-investment-advisors/

There is a confusion point here: Is the term "FA" referring strictly to an investment advisor, or is the term referring to a much broader role?

Agreed, an investment advisor probably "can't beat a monkey with a dart." But maybe that is not the goal. Maybe the goal is to help a financially naive customer put together a sensible portfolio and to coach the customer into staying the course. I had an FA tell me something I don't doubt: "If I keep a customer from panic selling once or twice, I will have earned all the fees he has ever paid me and all the fees he ever will pay me."

A true "financial advisor" is much more than an investment advisor or should be. Tax issues, savings plans for children's education, insurance strategy and selection, plus general hand holding are all tasks that are well beyond the scope of a mere investment advisor. They are also tasks that may be beyond the DIY capabilities of many clients.

My son has a (platonic) friend who spent the last ten or fifteen years of her life living in a basement apartment and caring for her mother who lived upstairs. She never really had any money of her own, just what her mother would give her. She routinely shopped at Goodwill. When mom died, Grace received most of the estate which included 3M stock worth about 3/4 $million, a rental house in LA, the family home, plus other financial assets. If she had been alone, salespeople would have chewed her up like locusts. Fortunately, we were able to introduce her to an FA (female) who is now effectively her financial mother. FA does the investing plus is supporting plans to dump the LA house and to, in general, plan and manage the rest of Grace's financial life.

I am not saying that everyone needs an FA who can manage their financial life but I am pointing out that there is much more to financial advice than investment advice and trying to beat the monkeys.

It sounds like the OP is fairly sophisticated with his investments but if he has consulted with this FA for ten years he is obviously getting something that he perceives to be valuable. Quoting H. L. Mencken: "“For every complex problem, there is a solution that is simple, neat and wrong.” "Drop him like a hot potato" may be far too simple an answer to suit the OP's situation.

 

[Retire52]

There is a confusion point here: Is the term "FA" referring strictly to an investment advisor, or is the term referring to a much broader role?

Agreed, an investment advisor probably "can't beat a monkey with a dart." But maybe that is not the goal. Maybe the goal is to help a financially naive customer put together a sensible portfolio and to coach the customer into staying the course. I had an FA tell me something I don't doubt: "If I keep a customer from panic selling once or twice, I will have earned all the fees he has ever paid me and all the fees he ever will pay me."

A true "financial advisor" is much more than an investment advisor or should be. Tax issues, savings plans for children's education, insurance strategy and selection, plus general hand holding are all tasks that are well beyond the scope of a mere investment advisor. They are also tasks that may be beyond the DIY capabilities of many clients.

My son has a (platonic) friend who spent the last ten or fifteen years of her life living in a basement apartment and caring for her mother who lived upstairs. She never really had any money of her own, just what her mother would give her. She routinely shopped at Goodwill. When mom died, Grace received most of the estate which included 3M stock worth about 3/4 $million, a rental house in LA, the family home, plus other financial assets. If she had been alone, salespeople would have chewed her up like locusts. Fortunately, we were able to introduce her to an FA (female) who is now effectively her financial mother. FA does the investing plus is supporting plans to dump the LA house and to, in general, plan and manage the rest of Grace's financial life.

I am not saying that everyone needs an FA who can manage their financial life but I am pointing out that there is much more to financial advice than investment advice and trying to beat the monkeys.

It sounds like the OP is fairly sophisticated with his investments but if he has consulted with this FA for ten years he is obviously getting something that he perceives to be valuable. Quoting H. L. Mencken: "“For every complex problem, there is a solution that is simple, neat and wrong.” "Drop him like a hot potato" may be far too simple an answer to suit the OP's situation.

OldShooter, you've expressed good points about the difference between a FA and Investment Advisor. I'm thinking the OP's FA as more of an IA. He indicated the IA could get him 3-4% in additional returns on the OPs portfolio.

I think the experience of the young lady taking care of her mother is a case of the exception proving the rule. her situation being so unusual in that she had near zero experience managing money and investing prior to receiving a multimillion estate that I agree in that case she likely needed a Financial Mom, but for most people, especially an experienced investor, sole proprietor such as the OP, an IA is a waste of money.

your points about all the added benefits that a FA can provide are well made. I am guilty there of painting with too broad a brush. o guess I just havent met an advisor that brings all those skills to the table as you may have. cheers

 

[mikes425]

There is a confusion point here: Is the term "FA" referring strictly to an investment advisor, or is the term referring to a much broader role?

Agreed, an investment advisor probably "can't beat a monkey with a dart." But maybe that is not the goal......I had an FA tell me something I don't doubt: "If I keep a customer from panic selling once or twice, I will have earned all the fees he has ever paid me and all the fees he ever will pay me."

A true "financial advisor" is much more than an investment advisor or should be. Tax issues, savings plans for children's education, insurance strategy and selection, plus general hand holding are all tasks that are well beyond the scope of a mere investment advisor. They are also tasks that may be beyond the DIY capabilities of many clients.
...
I am not saying that everyone needs an FA who can manage their financial life but I am pointing out that there is much more to financial advice than investment advice and trying to beat the monkeys.

It sounds like the OP is fairly sophisticated with his investments but if he has consulted with this FA for ten years he is obviously getting something that he perceives to be valuable. Quoting H. L. Mencken: "“For every complex problem, there is a solution that is simple, neat and wrong.” "Drop him like a hot potato" may be far too simple an answer to suit the OP's situation.

Hi from OP Mike. Agreed the scope of a FA should be comprehensive for an AUM client. In my experience with him he has been helpful in keeping me from panic selling and impulsiveness and that’s helped me become more risk tolerant. To his credit, my asset value has doubled in the period since i began working with him. The main reason i felt it might be worth staying on the AUM plan for a year is that i believe we’re due for extraordinary market conditions in the next 6-8 months with the confluence of multiple major uncertainties, politically, economically and otherwise. This frankly is what weighed most in my decision...i would have someone to co-manage things more proactively and have unlimited advice vs. having to guess if/when to initiate a call to him every time i have a question. Having said that, in hindsight, even if I made 20 calls to him at a billable rate of $300/hr., it would still come to well below 1/2 the cost of the AUM model. Didn’t think that through clearly at the time.

The other point is that if I do wait on this, it’s in the realm of possibility that i could achieve at least as good or better returns, net of fees, compared with past years. If so, there isn’t as much harm in this experiment...and if not, it gives me a justification to switch back to the old fee model or, move on on my own.

 

[mikes425]

OldShooter, you've expressed good points about the difference between a FA and Investment Advisor. I'm thinking the OP's FA as more of an IA. He indicated the IA could get him 3-4% in additional returns on the OPs portfolio.

I think the experience of the young lady taking care of her mother is a case of the exception proving the rule. her situation being so unusual in that she had near zero experience managing money and investing...but for most people, especially an experienced investor, sole proprietor such as the OP, an IA is a waste of money

Hi R52, from OP Mike...you are correct that he is an IA, but the suggestion about an advisor being able to add 3-4% in returns actually came from the Vanguard ‘report’ mentioned earlier. My IA always qualifies the fact that there are no guarantees, but i think he did tell me he felt it was a reasonable expectation to realize at least an average of 5% net of fees annually, on an AUM basis with him.
For a relatively conservative portfolio of abt. $1.9m, i might be comfortable with that. (but as he said...there are ’no guarantees’ ) ��

 

[jimbee]

My IA always qualifies the fact that there are no guarantees, but i think he did tell me he felt it was a reasonable expectation to realize at least an average of 5% net of fees annually, on an AUM basis with him.

So how might that be measured? What is the baseline?

 

[mikes425]

So how might that be measured? What is the baseline?

Hi, I'm not sure but probably he was basing it on the ten year performance of my portfolio which more or less has been his design and allocation. i.e., starting in '09: As of this year, total return was:
3-years: 3.75%,
5-years: 5.15%
10 years: 6%.

I did interview a few other FA's earlier this year and one proposed that based on my current asset and retirement spending projection, an annual return of 4% would enable me to comfortably meet my needs with average annual spending of 40-45k. That's 4% after-fees. In their case they suggested that was easily achievable with a well diversified/allocated PF of about 5.7 funds.

 

[jimbee]

^^ Ok, thanks.

 

[target2019]

Hi, actually a few links. Turns out Vanguard invests quite a bit in promotional support material specifically targeting the "advisor market" - this is a report that they came up with in 2001. I didn't know that they've updated it many times since. It may be a tad biased but the research appears legit. First link is to the article I mentioned.. If you want much more detail, the other links are from Vanguard's Advisor site.

https://www.thebalance.com/should-y...tm_medium=social&utm_campaign=shareurlbuttons

https://www.vanguard.com/pdf/ISGAA.pdf

https://www.vanguard.com/pdf/ISGQVAA.pdf

It's click bait. Not a peer-reviewed study.

The correct interpretation of this "study" is that an advisor "could" add that much return. Nothing more should be drawn from it, since no data is presented of actual advisors provided those numbers.

 

[mikes425]

It's click bait. Not a peer-reviewed study.

The correct interpretation of this "study" is that an advisor "could" add that much return. Nothing more should be drawn from it, since no data is presented of actual advisors provided those numbers.

Agreed, there is no definitive 'promise' - only speculation that it "could" result in higher return. The thing I mainly took from it was in regard to the theoretical added value from an 'emotional' standpoint of an FA being able to help an investor avoid losses (and in effect improve performance) simply in their role as a behavioral psychologist, preventing clients who might otherwise be prone to impulsive kneejerk selling in volatile times.

My formerly-hourly FA has definitely been helpful in that regard but i think i've learned enough now to be able to handle that myself. That said, as mentioned, i was able to get a qualified estimate that it'd be reasonable to expect about 5% returns net-of-fees with him on the AUM basis, which is in line with our portfolio return over 10 years.

 

[OldShooter]

Hi, I'm not sure but probably he was basing it on the ten year performance of my portfolio which more or less has been his design and allocation. i.e., starting in '09: As of this year, total return was:
3-years: 3.75%,
5-years: 5.15%
10 years: 6%.
...

This is a blended portfolio, right? Some equity, some fixed income.

Blended portfolios have what I call the "Kool-Aid" problem: When you pour the red Kool-Aid and the green Kool-Aid together in a glass, you really don't know what caused the resulting color. Same-o, when you mix the returns on both parts of the portfolio you don't know what was responsible for the result. Brokers love this because it makes it impossible to evaluate their performance against other portfolios; everything is apples and oranges.

My recommendation to a couple of nonprofits has been to separate the red and the green into different accounts. Then it is easy to benchmark the equity account against indices like the Russell 3000 or the ACWI. On the fixed income side, you can benchmark against various govvies, against investment grade corporates, etc. You have to look at both return and bond ratings though. If you are getting govvie return from a portfolio of unrated bonds, you may have a problem.

Last week I was talking to the board chair of a nonprofit and he said: "What if they say they can't split the account?" I told him that he should then say "I'm sorry to hear that. Can you recommend an advisor who will be able to handle this as two accounts?" His nonprofit is running a bit over $22M, so not a lot, but it is enough to justify some flexibility from the advisors. I'm sure he will get it.

 

[mikes425]

This is a blended portfolio, right? Some equity, some fixed income.

Blended portfolios have what I call the "Kool-Aid" problem: When you pour the red Kool-Aid and the green Kool-Aid together in a glass, you really don't know what caused the resulting color. Same-o, when you mix the returns on both parts of the portfolio you don't know what was responsible for the result. Brokers love this because it makes it impossible to evaluate their performance against other portfolios; everything is apples and oranges.

My recommendation to a couple of nonprofits has been to separate the red and the green into different accounts. Then it is easy to benchmark the equity account against indices like the Russell 3000 or the ACWI. On the fixed income side, you can benchmark against various govvies, against investment grade corporates, etc. You have to look at both return and bond ratings though. If you are getting govvie return from a portfolio of unrated bonds, you may have a problem.

Last week I was talking to the board chair of a nonprofit and he said: "What if they say they can't split the account?" I told him that he should then say "I'm sorry to hear that. Can you recommend an advisor who will be able to handle this as two accounts?" His nonprofit is running a bit over $22M, so not a lot, but it is enough to justify some flexibility from the advisors. I'm sure he will get it.

I've simply decided to use a couple of Vanguard funds as a benchmark, i.e., approximately mirroring my allocation (conservative by most standards) - looking at say, VSCGX, (Life Strategy Conservative Growth) - the 3 yr, 5 yr and 10-yr are pretty much in line with this PF (5-6%) ... of course that argues the point that one fund with similar goal accomplished the same return as a semi-managed portfolio of 15 to 20 funds. Soo...the case for DIY with a few VG funds (for example) isn't lost on me. I don't see this as an urgent thing but in due time, likely after the election and other uncertainties play out, i'll probably make the move to a self-managed simple 3-5 fund port., and exit the FA relationship or revert to an occasional hourly consult format. I think it's a pretty reasonable decision, having evaluated opinions here and elsewhere.

 

[target2019]

Agreed, there is no definitive 'promise' - only speculation that it "could" result in higher return. The thing I mainly took from it was in regard to the theoretical added value from an 'emotional' standpoint of an FA being able to help an investor avoid losses (and in effect improve performance) simply in their role as a behavioral psychologist, preventing clients who might otherwise be prone to impulsive kneejerk selling in volatile times.

My formerly-hourly FA has definitely been helpful in that regard but i think i've learned enough now to be able to handle that myself. That said, as mentioned, i was able to get a qualified estimate that it'd be reasonable to expect about 5% returns net-of-fees with him on the AUM basis, which is in line with our portfolio return over 10 years.

Your return will come from the returns of investments chosen (your Asset Allocation) less fund fees and advisor fees.

You've grabbed a study and taken a WAG and placed it in your crystal ball to predict the advisor can beat a simple Bogleheads index. It won't happen over ten years IMO.

You do have enough to give away 10K to an advisor each year, so we're beating a dead horse. Whether you proceed as DIY or FA is your business.

 

[mikes425]

Your return will come from the returns of investments chosen (your Asset Allocation) less fund fees and advisor fees.

You've grabbed a study and taken a WAG and placed it in your crystal ball to predict the advisor can beat a simple Bogleheads index. It won't happen over ten years IMO.

You do have enough to give away 10K to an advisor each year, so we're beating a dead horse. Whether you proceed as DIY or FA is your business.

"tell me how you really feel" -

opinion duly noted.

 

[WhenIsItTime]

I have 10% with an AUM advisor. He occasionally collects my other 90% data and gives me some thoughts on the overall portfolio. This has worked for me and I think the advisor understands as well.

 

[mikes425]

I have 10% with an AUM advisor. He occasionally collects my other 90% data and gives me some thoughts on the overall portfolio. This has worked for me and I think the advisor understands as well.

That is a generous arrangement on his part. Rare to find any FA users on these forums...I guess understandable given the overwhelming consensus for DIY investing. I actually am not particularly advocating advisers, simply a preference for the hourly model. With so many robo-advice options i can see a place for the as-needed adviser, if only to help transition tax/cost-efficiently to a newly designed simple PF from a needlessly micro-diversified one...and maybe a quarterly review in the 200-300/hr range. Far cheaper than AUM. Seems i've seen a few IA's offering a flat monthly fee regardless of one's amt. of assets.

 

[WhenIsItTime]

10% of portfolio at 0.7% fee.

 

[mikes425]

yep, got it...i misunderstood, and revised my reply

 

[target2019]

"tell me how you really feel" -

opinion duly noted.

I did tell you my opinion. It is based on 15-year involvement with investing boards (M*, E-R, and Bogleheads). You've been around long enough to know that if you ask for opinions (and that is what you're asking) you'll get opinions.

But you seem to be looking for assurance through studies and conversations that your going back and forth over the years between strategies and asset allocations is ok. Alright then, it's ok. But you would better serve your future (my opinion) by getting Boglehead direction and just sticking with it. Three funds, set the allocation, and enjoy life. Maybe you need more funds than that, I can't say for sure.

I don't have three funds because my Spouse and I have inherited monies, and over the years just ended up with multiple accounts. I work at simplifying on a consistent basis. I download balance information once a month and save it (data goes back to 1990). If AA is out of wack, I re-tune it.

Good luck with your search. I hope you can stick with a single approach whether it's paying the FA or DIY. Or maybe a hybrid approach like mentioned by others is better for you.

 

[Red Badger]

Hi and thanks for your perspectives. I just re-read a research report by Vanguard where they address the question, “Why on Earth hire an advisor when I can manage my own money?" It concludes that there is a quanitifiable increase in return which VG called 'the Advisor's Alpha' - that is, a good FA can increase investor returns by 3-4%. More important, the single largest way an advisor can add value - up to 1.5% per year of increased returns - is 'behavioral coaching." i.e., the best advisors are those who can keep their clients’ fears and emotions in check by providing steady, fact-based advice and reassurance when the markets get wobbly or crazy.

This change from hourly to AUM for me has only been in place since April; almost 4 months. I don't see how anyone could argue that we're experiencing the most extraordinary and unpredictable market conditions in a lifetime.
As such I'm pretty much settled on looking at this as a "trial run." I figure I'll give it another 6-8 months, and revert to an hourly or, self-managed approach in early 2021.

I figure that with as much as I have at stake, in the name of principal preservation the trade-off for having someone else's active oversight - even if only during a period of continued volatilty and uncertainty, isn't all that much for some degree of peace of mind in the grand scheme of things.

And you're predicting the market will cease to be volatile and uncertain exactly when?
With that mindset, perhaps an FA is in you're best interest.

 

[WhenIsItTime]

Ease up a bit folks. Your opinions are turning nasty.