Your Thoughts On Financial Advisors?

[Marcretire]

Hi, hope everyone has a nice Thanksgiving. I'm following an index fund approach to investing and have my money in a Vanguard Target Retirement fund, so I'm well diversified. I heard a radio program with Ric Edelman, a well-known financal advisor, and began wondering if just being on auto-pilot in the Vanguard Target funds is adequate. Edelman spoke about how they put their clients into 10 or 12 different asset classes, from small value to large growth, as well as REITS, commodities and other assets classes, to provide maximum diversity. He also talked about special opportunities with convertible bonds and other more sophisticated investments. So, I began thinking that maybe I'd be better off with an advisor like Edelman or someone else who is thinking more specifically about my situaton. I'd appreciate your thoughts.

 

[dex]

What would he have to talk about if he said just put you money in a Vanguard Target fund?

 

[limpid lizard]

I think the FA's are getting hungry. I had one walk through the neighborhood last week. He was banging on doors trying to drum up business. His hot tip was tax free munis.

 

[FinanceDude]

I think the FA's are getting hungry. I had one walk through the neighborhood last week. He was banging on doors trying to drum up business. His hot tip was tax free munis.

He no doubt was an Ed Jones rep. New reps have to bang on 1000 doors and log the person's name and address or corporate takes away his Ed Jones office........

 

[limpid lizard]

Sorry Finance Dude. Wrong guess.

 

[CaseInPoint]

For many people, it's vital to have a financial advisor who can analyze their overall assets and needs. The less financially savvy someone is, the more they need good advice. Many people don't necessarily need advice for individual stock picks, but they do need advice for a diversified strategy that goes beyond a single Vanguard account.

We've seen from this ongoing economic disaster that no investments are really safe, and that paying for advice to eventually lose money, is very annoying. I personally absolutely hate paying management fees for a portfolio that is losing big-time.

My lesson is that despite anything that is said and promised by even the best FAs, we'll all make money when the market is up, and we'll all lose money when the market is down in times like these. It shows that financial advice is worth a lot less than we previously thought.

Still, getting to the point of not needing a FA at all, takes investing a lot of time in financial self-education. Not everyone has the time or inclination to do so. So, for many, there still is a benefit to having a FA. Just don't count on your FA to outsmart the market.

 

[FinanceDude]

Sorry Finance Dude. Wrong guess.

Hmm........Merrill Lynch or Smith Barney??

 

[limpid lizard]

D.A. Davidson

 

[FIREd]

Hi, hope everyone has a nice Thanksgiving. I'm following an index fund approach to investing and have my money in a Vanguard Target Retirement fund, so I'm well diversified. I heard a radio program with Ric Edelman, a well-known financal advisor, and began wondering if just being on auto-pilot in the Vanguard Target funds is adequate. Edelman spoke about how they put their clients into 10 or 12 different asset classes, from small value to large growth, as well as REITS, commodities and other assets classes, to provide maximum diversity. He also talked about special opportunities with convertible bonds and other more sophisticated investments. So, I began thinking that maybe I'd be better off with an advisor like Edelman or someone else who is thinking more specifically about my situaton. I'd appreciate your thoughts.

You can definitely create your own slice and dice portfolio at Vanguard. All the asset classes you mentioned are available as stand alone funds there or you can buy No Trading Fee (NTF) funds via a Vanguard Brokerage account. But with a target retirement fund, don't forget that your already own the entire stock market universe: small cap, large cap, value, growth, domestic, international, etc... You also own the entire bond market universe: treasuries, agency, corporate, high yields, various maturities, etc.... So right now you are only missing just a few "specialty" asset classes: REITs, commodities, international bonds, small caps foreign... And before doing anything, I think you should do some reading first to find out which specialty asset classes are worth adding to your portfolio and which are questionable. You can find good discussions here and on the boglehead board on the subject: for example some people don't like adding stand alone commodity funds to their portfolio because a good chunk of the S&P is already exposed to the commodity market (via the stock of oil and natural resources companies). Some argue that foreign bonds should be avoided because the bond portion of your portfolio should have as little risk as possible and therefore adding currency risk to your bond holdings doesn't make any sense. Even the necessity of REITs is being questioned.

What I do is pick a core holding (in your case it would be the target retirement fund), and I spice it up lightly with a few specialty funds (no more than 5% of my portfolio each).

And don't forget that, despite all those talks about diversification, in this latest downturn, REITs and commodity funds have fallen far more than the overall stock market and international bonds have also suffered far more than the overall bond market. So this is one instance where owning specialty funds would have hurt rather than protected you.

 

[FinanceDude]

D.A. Davidson

Heard of them, a small regional based out West I believe. He must not have a referral network,or he's new and doesn't know anybody. Sounds like a rough way to meet potential investors........

 

[haha]

I've never had an FA, but one benefit that I think should not be under-appreciated is handholding. For many people the biggest single risk to their portfolio returns is bailing after a big loss, when clearly the risk reward has improved from prior to the loss.

So if the investor is well diversified, an FA who can soothe his/her panic can be worth a lot. Also, the FA can try to be sure that the portfolio is in fact well diversified, so that when adversity comes it is easier to resist the "Oh crap, this could go to zero!" fears.

ha

 

[jazz4cash]

Speaking directly to Ric Edelman, he is based in DC and very highly regarded. He has a weekly radio program which I think extends to various stations around the country.

I personally never cared too much for Ric as he has "NOBODY ELSE is as good as we are" approach. He spends alot of time selling his firm's services and his books, etc. OTOH I do agree with much of the advice, its just that he seems to argue that only Edelman Advisors has the magic formula.

I believe you could go to his website and get a complimentary asset allocation.

I would suggest getting one of his books to get a feel for his style.

I heard an interesting diaglogue on the radio where a customer complained that an Edelman Advisor would not take a 'trial' investment of $50k.....they wanted all or nothing! Ric defended that position, but I don't recall the details.

 

[LOL!]

You can figure out everything that someone like Edelman is going to do to you, so you can do it yourself. Here's a tutorial on how: http://www.early-retirement.org/forums/f28/asset-allocation-tutorial-31324-2.html#post578722

 

[Marcretire]

Thanks for everyone's responses. If I wanted to be n a couple actively managed funds in the Vanguard family, what are your thoughts on Wellington and Wellesley? I'm thinking that having a manager at the helm might be an idea worth considering as opposed to a strictly passive approach. Thanks.

 

[Gotadimple]

Thanks for everyone's responses. If I wanted to be n a couple actively managed funds in the Vanguard family, what are your thoughts on Wellington and Wellesley? I'm thinking that having a manager at the helm might be an idea worth considering as opposed to a strictly passive approach. Thanks.

Both are good funds and perform well. There are studies that have shown passive management to best active management by several points.

As others have said, you can do this yourself if you want to spend time understanding the fine points of asset allocation (its really not that difficult, look how many people here do it). For a start try "All About Asset Allocation" by Rick Ferri (and there are others).

But, if what you are looking for is overall financial advice, starting with budgeting through life insurance, etc., Vanguard may be able to help you with that as well, or refer you to a fee-based financial planner (not a financial advisor) who will look at your entire financial picture with you and make suggestions for a flat fee.

From there you can decide if you are interested in managing your own money or want someone to do it for you (figure 1% of your assets as the fee for management on top of the operating expense fees you pay to own the mutual funds).

-- Rita

 

[FinanceDude]

I heard an interesting diaglogue on the radio where a customer complained that an Edelman Advisor would not take a 'trial' investment of $50k.....they wanted all or nothing! Ric defended that position, but I don't recall the details.

Guys like Edelman don't need $50K investments, he can stick to an "all-or nothing" approach, like ken Fisher and others do......

 

[samclem]

Still, getting to the point of not needing a FA at all, takes investing a lot of time in financial self-education. Not everyone has the time or inclination to do so. So, for many, there still is a benefit to having a FA. Just don't count on your FA to outsmart the market.

I agree with your post 99%. The only problem is in implementing the ideas in the section above. There are bad FAs out there--ones who will push high load funds, inappropriate investments, annuities inside IRAs, etc. It takes a smart consumer to figure out if the FA is truly working for the client's best interest. By the time a person has that level of knowledge, he/she is 75% of the way toward being able to do things without the handholding.

I wonder if there's hope of some meaningful certification/rating of FAs/FPs. FA's who truly put the client first and who would take small accounts can definitely be worth the money for individuals who are disinclined to do these things themselves.

 

[FIREd]

Thanks for everyone's responses. If I wanted to be n a couple actively managed funds in the Vanguard family, what are your thoughts on Wellington and Wellesley? I'm thinking that having a manager at the helm might be an idea worth considering as opposed to a strictly passive approach. Thanks.

Well, as it were, Wellington and Wellesley happen to be my two core funds in retirement accounts (they balance out passive index funds in my taxable account) and I have only good things to say about them. On the plus side, they have a long, favorable track record. And in shaky markets they provide much needed income and relative stability (very relative! both are still down substantially YTD). But they invest in only 2 asset classes: large value stocks and investment-grade corporate bonds (which they supplement with government bonds from time to time). So they sometimes can underperform the market quite substantially especially when the market is on a tear and growth stocks are in favor like in the late 1990's.

 

[jIMOh]

If the only thing the advisor is doing is recomending investments, then you can probably get by with minimal use of an advisor.

If advisor is making commissions off each of your transactions, be weary of any advice regardless. If advisor is paid a fee each time you need advice, then that system is better for you (the investor).

If advisor can help with taxes, tax planning, short term savings goals, budgeting and financial decisions (in addition to investment suggestions), then I think there is significant value to having an advisor. Fee only is the best way to go.

 

[kyounge1956]

You can figure out everything that someone like Edelman is going to do to you, so you can do it yourself. Here's a tutorial on how: http://www.early-retirement.org/forums/f28/asset-allocation-tutorial-31324-2.html#post578722

I'm frustrated with my experience so far with FAs. First I fell into the clutches of Am*riprise and got sold a VA in my Roth IRA, and I still haven't figured out what to do with it...then I went to a Fee Only planner, and due to a peculiarity of my pension (see my intro post for the details), she gave me what IMO is a gross overestimate of the "magic number" (how much I need in my nest egg to retire). So I am out quite a bit of money and still don't know what I was trying to find out.

I've read and followed the Asset Allocation tutorial, but ran into a snag with determining what allocation I want to use. I asked on that thread and didn't get any replies, so I'll try it again here. The piece of the puzzle I am missing is info on what return and standard deviation I can reasonably expect from a given asset allocation, based on historical data. I might be able to get this info from the fee-only planner, but it will cost me every time I want to do a "what if" scenario. Can anyone tell me a website or computer program I can use to figure this out? I've found a website that does Monte Carlo simulations and can more accurately model my pension than the software my FA was using, so once I have some return/std dev data I will finally be able to figure out my "magic number".

 

[jIMOh]

I'm frustrated with my experience so far with FAs. First I fell into the clutches of Am*riprise and got sold a VA in my Roth IRA, and I still haven't figured out what to do with it...then I went to a Fee Only planner, and due to a peculiarity of my pension (see my intro post for the details), she gave me what IMO is a gross overestimate of the "magic number" (how much I need in my nest egg to retire). So I am out quite a bit of money and still don't know what I was trying to find out.

I've read and followed the Asset Allocation tutorial, but ran into a snag with determining what allocation I want to use. I asked on that thread and didn't get any replies, so I'll try it again here. The piece of the puzzle I am missing is info on what return and standard deviation I can reasonably expect from a given asset allocation, based on historical data. I might be able to get this info from the fee-only planner, but it will cost me every time I want to do a "what if" scenario. Can anyone tell me a website or computer program I can use to figure this out? I've found a website that does Monte Carlo simulations and can more accurately model my pension than the software my FA was using, so once I have some return/std dev data I will finally be able to figure out my "magic number".

Magic number I shoot for is 25X expenses saved. How that number gets saved or what returns get me to that 25X number are not relevant to me- I just need to get to that number.

Most calculators are good at either predicting "when you will have enough to retire" or "how to draw down the money". Firecalc works good for drawing down, but it does not give me enough information as to how much I need to contribute to be able to draw down starting in a given year (for example).

I have not seen any calculator which takes both situations into account. When accumulating most emphasis is on taking risks to grow the portfolio. There are a finite amount of investments, primarily bonds, equities and cash, which would be used to reach this goal.

Once you have (or approach) having the 25X critical mass, there will be the withdraw portfolio. In this portfolio a person might add assets (commodities and real estate to name two) to stabalize the portfolio value (from year to year). The satablize does "hurt" returns, but IMO the goals change.

A portfolio will go through 5 phases for anyone saving to retire

1) starting out
2) accumulation
3) growth
4) stability
5) draw down

starting out you have around 1X annual expenses and your deposits might be larger than any single position you have in the account.

accumulation you have around 3-6X annual expenses and your annual deposits are more than the actual dollar amount of your single year return.

growth is when you approach 12X annual expenses and your annual return (in dollars) far exceeds the annual contributions (in dollars) you make to the account.

stability is when you reach or approach your critical mass (25X expenses or similar goal). Your goal here is low volatility and to have the yearly return in dollars meet your expense needs.

draw down is when you have to sell shares to meet income needs.

If your desired portfolio is a 5% SWR then you can back that into above (20X for stability, 10X for growth, 3-5X for accumulation and 1X for starting out). If your goal is a 3.3% SWR rate you can back 33X into stability, 16X into growth, 3-8X into accumulation and 1X into starting out. You need to know the end goal (33X, 25X, 20X or other) to know when to add asset classes, change the asset allocation or make other needed portfolio changes.

IMO it is important to see the phases because the deviation matters little when starting out or accumulating. It matters during growth to a degree, but does not really become a true risk until stability. In addition returns are relative to the phase- a 4% return when you are accumulating means little, but if the size of portfolio in growth or stability phase is high enough, that same 4% return prevents you from needing to draw down (sell) assets. Usually once you draw down, that is a point of no return (if you sell assets one year to meet income needs, it is probable you would need to sell some assets every year to meet income needs).

 

[chinaco]

[-]Shoot first and ask questions later.[/-] Use em if you need em.

BTW - a Target funds is spread across about 5 funds.

But I would recommend you educate yourself. The basics are fairly easy learn and will empower to be more confident about your decisions.

If you are a DIY... It might be a good idea to have one review your plan. VG will do a review for a low price or free if you have enough assets with them.

 

[LOL!]

I've read and followed the Asset Allocation tutorial, but ran into a snag with determining what allocation I want to use. I asked on that thread and didn't get any replies, so I'll try it again here. The piece of the puzzle I am missing is info on what return and standard deviation I can reasonably expect from a given asset allocation, based on historical data.

Probably because what you want probably doesn't matter that much. That written, you can go to www.bogleheads.org and read many, many posts where they post where to get the data, the spreadsheets, etc so you can play to heart's content. Look for posts from rodc, where I think he clearly shows that the "expect from a given asset allocation" depends on what time frame you are looking at.

Since the results vary so much based on the time frame, I think you can only get a sense that you are wasting your time trying to come up with a perfect asset allocation based on some previous time period. All you need is a "good enough" asset allocation for future time periods.

BTW, the data you want may be available from a fee-only planner, but it won't do you any good because of the nature of predicting the future.

 

[LOL!]

And Scott Burns writes on the topic: A Better Way to Tough It Out - Registered Investment Advisor

 

[Midpack]

Hi, hope everyone has a nice Thanksgiving. I'm following an index fund approach to investing and have my money in a Vanguard Target Retirement fund, so I'm well diversified. I heard a radio program with Ric Edelman, a well-known financal advisor, and began wondering if just being on auto-pilot in the Vanguard Target funds is adequate. Edelman spoke about how they put their clients into 10 or 12 different asset classes, from small value to large growth, as well as REITS, commodities and other assets classes, to provide maximum diversity. He also talked about special opportunities with convertible bonds and other more sophisticated investments. So, I began thinking that maybe I'd be better off with an advisor like Edelman or someone else who is thinking more specifically about my situaton. I'd appreciate your thoughts.

I don't believe an FA is worthwhile for most people whose asset allocation is composed of mutual funds. Determining a decent asset allocation is not nearly as difficult as many people guess, but having a plan and the discipline to stick with it is more than half the challenge. I'd suggest you read The Four Pillars of Investing by Dr. William Bernstein (my favorite) or any of those listed under General Investing on this (IMO) outstanding reading list Investment Books, most likely several of them are available at your local library. Then if you think an FA is clearly value added for you (you, not based on an FA's recommendation or salesmanship), are convinced the cost of an FA will be more than offset by improved returns), you should proceed IMO. Some people simply aren't interested in managing their own portfolio's for a variety of reasons, and that's an individual choice. It's a question that's unique to every individual, and therefore one only you can answer.