Your Thoughts On Financial Advisors?

[Marcretire]

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.

Coincidentally, I just came across this article a few moments ago that sings the praises of VG Wellington...
TheStockAdvisors.com - A Guide to Stock Advisors, Financial Newsletters, Stock Market, China Stocks, Biotech Stocks & Oil Stocks

 

[canadianteddy]

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.

I agreed whole heartedly with the above quote. Over the years we have taken advise from one financial adviser who managed to do worse that we did on our own. We consulted two others who weren't really interested in giving us advise unless we turned over our entire portfolio to them. (and weren't really interested unless we handed over 1 mill +) I've listened to various "sales pitches" from a handfull of others.

I've come to the conclusion with just a bit of self education DH & I can do pretty well on our own. Our bank has financial advisers that provide a service that will advise us on asset allocation. I am not so naive as to think they do this "free". Their modus operandi is to keep our funds in their bank.

You will make mistakes along the road but thats ok, if u learn from them.

Listen to what various FA's have to say, & remember u retain the ultimate control as to saying yes or no. No one cares more about your money than u do.

Just my 2 cents.

 

[kyounge1956]

(snip) 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. (snip)

Probably because what you want probably doesn't matter that much.

Please explain! How can I even estimate how much I need, how much to save, or how much longer it will take to get there, without any idea of likely return? jIMOH suggests 25x expenses, but isn't this based on the 4% SWR which if I understand correctly is itself based on a particular asset allocation and timespan? If that's the case, ISTM that if my AA or time span differs, I can't assume 4% is safe (or alternatively 5% or even more might be safe with a given set of parameters). If I make estimates assuming I will get (say) 15% return and 3% std dev from a portfolio with mostly cash and bonds in it, I'd end up in deep doo-doo, just like so many people who assumed that the high stock returns of the 90's would continue indefinitely.

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.

Thanks, I will check it out.

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. (snip)

I know roughly what time frame I'm looking at, so I should be able to find out how to come up with at least a realistic ballpark figure, which is more than I have now. At present I don't have even a "good enough" idea of a realistic return and volatility to plug into the Monte Carlo modeler I mentioned. Until I do I can only used the five pre-set AA's that come with it.

I also can't figure out what to expect should I leave the AA in my 457 plan as is. When I did the Asset Allocation tutorial I hd decided to go to 30% stock, 70% bonds, but with the limited selection of funds in the 457 plan, that would be difficult to do. There is only one "bond" fund available and when I did the "portfolio Xray" lesson, I discovered that it's mostly not bonds. It occurred to me that possibly the AA I have now (about 50% "stable value" and 50% cash) might be about equivalent to what I was aiming at. Right now that's just a guess, and I'd like to get to the point where it's an "educated guess", or better.

 

[jIMOh]

Please explain! How can I even estimate how much I need, how much to save, or how much longer it will take to get there, without any idea of likely return? jIMOH suggests 25x expenses, but isn't this based on the 4% SWR which if I understand correctly is itself based on a particular asset allocation and timespan? If that's the case, ISTM that if my AA or time span differs, I can't assume 4% is safe (or alternatively 5% or even more might be safe with a given set of parameters). If I make estimates assuming I will get (say) 15% return and 3% std dev from a portfolio with mostly cash and bonds in it, I'd end up in deep doo-doo, just like so many people who assumed that the high stock returns of the 90's would continue indefinitely.

I know roughly what time frame I'm looking at, so I should be able to find out how to come up with at least a realistic ballpark figure, which is more than I have now. At present I don't have even a "good enough" idea of a realistic return and volatility to plug into the Monte Carlo modeler I mentioned. Until I do I can only used the five pre-set AA's that come with it.

I also can't figure out what to expect should I leave the AA in my 457 plan as is. When I did the Asset Allocation tutorial I hd decided to go to 30% stock, 70% bonds, but with the limited selection of funds in the 457 plan, that would be difficult to do. There is only one "bond" fund available and when I did the "portfolio Xray" lesson, I discovered that it's mostly not bonds. It occurred to me that possibly the AA I have now (about 50% "stable value" and 50% cash) might be about equivalent to what I was aiming at. Right now that's just a guess, and I'd like to get to the point where it's an "educated guess", or better.

Focus first on
a) what you know
then
b) on the variables you can control
then
c) ajust to the forces of the market as needed


You know your expenses and you should state your goal as a multiple of this based on a planned withraw rate.

If you do not know the withdraw rate, run firecalc on 20X expenses, 25X expenses and 33X expenses for example to see what works based on how long your retirement is.

I am 18 years from an age 53 retirement, so I use 25X for now (to plan), knowing when I get close I might tweak it to 33X or 30X based on how long I might live. Easy to work 1-3 more years to go from 25X to 30X or 33X.

The variables you can control
1) savings rate- this has the highest factor to your success
2) asset allocation- this is the second best factor you can control.

Adjust this to the market as needed- if market is in a bull like 1997-1999 a year or three before FIRE, might be wise to take some profits. If you have a market like 2008 a year before FIRE, you might need to delay a year.

 

[LOL!]

... jIMOH suggests 25x expenses, but isn't this based on the 4% SWR which if I understand correctly is itself based on a particular asset allocation and timespan? If that's the case, ...

No that's not the case. The 4% SWR turns out works pretty much over broad ranges of asset allocations and timespans. Sure, someone will come along and try to diddle with the numbers, but they really don't change all that much.

I know roughly what time frame I'm looking at, ....

I guess I wasn't clear. By "time frame", I don't mean your time frame. I mean the time frame of the studies. Results vary whether you pick 1929 to present, 1982-2000, 1973-2006, 1954-1968, etc. In some sense, you can go data mining and get the result you want. You want bonds to outperform stocks? Pick the right time frame. You want a 30:70 asset allocation to do better than a 60:40? Pick the right time frame. You want a portfolio heavily weighted in foreign stocks to be the ideal portfolio. Pick the right time frame. You want a portfolio heavily weighted in foreign stocks to lose you the most money? Pick the right time frame.

You can't predict the future. And neither can a financial salesrep or an honest-to-God CFP/CFA/CFW. So there is no way to pick the best-performing asset allocation for you going forward. Since there is no way to do this, you should realize that you can settle for a mainstream common asset allocation and do about as well as you possibly can. Fortunately, there is a broad-minimum in the function (in the mathematical sense), so whatever you do will not be very far off what a --in hindsight-- "best" asset allocation should have been.

 

[Sarah in SC]

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

Ha's right on the money here! In my experience that is what we do most of...handholding when times get hard. And boy, my hands are plum worn down to nubs by now!

 

[samclem]

How can I even estimate how much I need, how much to save, or how much longer it will take to get there, without any idea of likely return? jIMOH suggests 25x expenses, but isn't this based on the 4% SWR which if I understand correctly is itself based on a particular asset allocation and timespan?

Yes, the 4% SWR is based on a well diversified portfolio--e.g. if you instead invest in nothing but a passbook savings account, you can't expect to withdraw 4%. There are many good books on portfolio construction and asset allocation, you've probably already read some. Bob Clyatt's book gives a concise but well-explained overview of a model portfolio and SWRs/withdrawal methods.

It's easy to get bogged down in "optimizing" your portfolio with consideration of all kinds of asset classes and consideration of their historical returns and volatility. If you want to go crazy with this, you want a "Mean Variance Optimizer" (MVO) program, and they are available. Here's are some of them. Here's an explanation of why they aren't very useful. Basically, trying to twaek these asset classes a few percentage points to get the best possble risk/return ratio in the future is an effort not worth your time. The data about the past is likely to vary enough from what will really happen in the future that fine tuning is impossible. As I think you know, no computer simulation is going to spit out a single target retirement dollar figure--there's going to be a lot of grey area. It's best to get a general idea of what has worked, pick assets with historically good returns and poor corelation to each other, and rebalance periodically. Build in enough wiggle-room (or backup plans) so that you are comfortable

jIMHO's approach to use FireCalc in an iterative manner makes sense to me.

 

[jIMOh]

The initial 4 percent SWR came from trinity study which concluded 60-40 was optimum for the 4 percent.

Common sense tells me if you use 3 percent SWR that 80-20 and living off dividends should work without even running firecalc or another calculator. I would still run the calculator to be sure.

If you use higher than 4 percent SWR, you need the calculators to know what situations your AA does not work.

 

[kyounge1956]

No that's not the case. The 4% SWR turns out works pretty much over broad ranges of asset allocations and timespans. Sure, someone will come along and try to diddle with the numbers, but they really don't change all that much.

Well, that's reassuring. Can you point me at some info on when one is getting to the edges of the range where 4% is safe?

I guess I wasn't clear. By "time frame", I don't mean your time frame. I mean the time frame of the studies. Results vary whether you pick 1929 to present, 1982-2000, 1973-2006, 1954-1968, etc. In some sense, you can go data mining and get the result you want. (snip)

I think I wasn't clear either. I know return & std dev can vary depending on the number of years of data included in the calculation. What I meant was, since I plan to be retired for 40-50 years, I should use a value calcuated using periods of decades rather than over periods of only a few years. Nor do I mean find the highest return over a 40 year period and use that, but rather, use numbers based on many 40 year periods rather than on many 5 year periods. Does that make sense?

You can't predict the future. And neither can a financial salesrep or an honest-to-God CFP/CFA/CFW. So there is no way to pick the best-performing asset allocation for you going forward. Since there is no way to do this, you should realize that you can settle for a mainstream common asset allocation and do about as well as you possibly can. Fortunately, there is a broad-minimum in the function (in the mathematical sense), so whatever you do will not be very far off what a --in hindsight-- "best" asset allocation should have been.

I know I can't predict the future, past performance is no guarantee, etc, but what else is there to go on? ISTM I can either make an estimate based on past permformance, or a totally random guess based on numbers I pull out of a hat. Is there a better way to estimate returns going forward than using past history? If so, I'm all ears!

Also, I am not trying to pick a "best" asset allocation, I just want to find a realistic, reasonable ballpark number based on my (more-conservative-than-usual) AA, to use for estimating purposes. Most of the information I've seen is for more aggressive portfolios than I want to use. If I make estimates using the return and std dev from a 50/50 stock/bond portfolio but my actual AA is 30/70, they'll be way off, won't they? And I also want to see if 50% "stable value"/50% stock is more or less equivalent in return & volatility to 30% bonds/70% stock, so I will know if I need to change the funds in my 457 in order to get where I am trying to get (E.R.) when I want to get there (in 4 years or so).

The return & volatility for a conservative AA may also tell me I am being totally unrealistic about being able to FIRE in 2012. But if that's the case, I'd rather know now than get my hopes up and then have a bitter disappointment when I thought I was going to be able to do it. If that's what I find, I will either have to re-think my AA or adjust my schedule, but at least I will know (sort of) and not be blundering around in complete darkness like I am now. I want to be able to set a realistic goal, and know (roughly) if I'm on track, falling behind, or ahead of schedule. Is that possible?

Or is your point that the difference in return & volatility between portfolios with (say) 20/80 stock/bond vs 25/75 is negligible compared to other errors that can't be eliminated, so if one of the "pre-set" portfolios on the Monte Carlo modeler is even close to my planned AA, that's as close as I'm going to get, and as close as I need to? I may have given the impression that I am talking about tweaking my AA by fractions of a percentage point trying to get the ultimate highest return while cutting risk to the bone. Not so, I am looking for information on bigger pie slices than that--multiples of five or ten percentage points for each asset.

 

[haha]

Or is your point that the difference in return & volatility between portfolios with (say) 20/80 stock/bond vs 25/75 is negligible compared to other errors that can't be eliminated, so if one of the "pre-set" portfolios on the Monte Carlo modeler is even close to my planned AA, that's as close as I'm going to get, and as close as I need to?

Over the years I have been on this forum I notice a frequently expressed desire to get more out of data than is there. See what allocations are available for choosing in Firecalc or some other respectable machine, and use one of them for your testing and for your portfolio management. If you deviate from that, you really can't predict what will happen. Unless you use some other way of predicting that you have reason to believe is valid and robust.

The other thing that matters besides allocation is what you pay for whatever you buy. When you buy a long term government bond, you know what your return is going to be. It doesn't matter if you hold until maturity, or sell it along the way. As long as you intend to keep invested in the asset class, your ytm going in is written in stone. From this it should be clear that you can't withdraw an inflation adjusted 4% from a nominal bond yielding 4%.

This is a little harder to understand with equities, but it is more or less the same. If you buy and hold rather than try to trade, over a sufficiently long period your return can be predicted by your going in price.

That is why debates about whether to sell now, or hold on, and whether this time it is diferent, etc. are so much hot air. The wad was shot when the stocks were bought.

None of this applies if you think you can sucessfully trade the swings.

Ha

 

[SteveL]

hourly fee advisors

Fee-Only Financial Planning and Advice for Everyday Life. Hourly, As-Needed Services ... The New Choice for Smart Consumers (tm).

I found a great guy through this site. Doesn't manage money, just seeks to understand your situation and give you good advice about how to manage your situation.

 

[missionfinder]

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.

Agreed. I would never go with someone who makes money from commisions, back-end paybacks, etc. I use a fee-only (not a fee-based, which still has commissions). Everything from wills, budgeting, tax planning, estate planning, lifestyle, small business planning, business coaching, insurance needs, vacation planning, savings, banking decisions, recommended reading, etc. We're in the same investments he is (everyone at his company walks the talk), with allocations adjusted for age. Investments are down this year like everyone else, but far less than the overall markets.

Flat fee was highest the first year due to getting the entire financial picture in order, and lower subsequent years because the bulk of what's done is reviewing the current picture and adjusting.

 

[jIMOh]

Agreed. I would never go with someone who makes money from commisions, back-end paybacks, etc. I use a fee-only (not a fee-based, which still has commissions). Everything from wills, budgeting, tax planning, estate planning, lifestyle, small business planning, business coaching, insurance needs, vacation planning, savings, banking decisions, recommended reading, etc. We're in the same investments he is (everyone at his company walks the talk), with allocations adjusted for age. Investments are down this year like everyone else, but far less than the overall markets.

Flat fee was highest the first year due to getting the entire financial picture in order, and lower subsequent years because the bulk of what's done is reviewing the current picture and adjusting.

Could you outline the fee structure? Send me a PM if you do not feel like posting.

Thx.

 

[HFWR]

I like FAs, with a nice chianti...

 

[canadianteddy]

I like FAs, with a nice chianti...

LOL

 

[ejman]

Also, I am not trying to pick a "best" asset allocation, I just want to find a realistic, reasonable ballpark number based on my (more-conservative-than-usual) AA, to use for estimating purposes. Most of the information I've seen is for more aggressive portfolios than I want to use. If I make estimates using the return and std dev from a 50/50 stock/bond portfolio but my actual AA is 30/70, they'll be way off, won't they? And I also want to see if 50% "stable value"/50% stock is more or less equivalent in return & volatility to 30% bonds/70% stock.

Vanguard's website has a good feature (at least at the Voyager Select level - don't know if its available at other levels) called portfolio watch where they tell you the average rate of return for basically any allocation you come up with, the best and worst years for the period 1926 to 2007 and % loss and how many years with a loss out of the 82 years in the base period. They'll also compare your actual allocation with your target.

 

[hotwired]

I have a very "high end" FA here in Waterville Maine who caters to only people with portfolios above 100K -- they use LPLs "Strategic Asset Mgmt." approach - we're 42, with FIRE date of 52 and our FA even said that because we already had enough to FIRE "today", the main aim is to "protect it" yet he recommended a GI approach which has sunk us 30% give or take -- so yes, paying for the same performance I could've gotten myself with Vanguard VERY much annoys me. They use a "tweaked" indexing plan -- all they really do is use forecasting methods to tweak the allocation a little -- ie add higher percentage to large cap when their poised to outperform, etc. We only have a FA with a SMA because my wife feels secure knowing that if anything happens to me, there's someone taking care of things, and I respected this. But I'm afraid I'm going to start taking a LOT more control.

 

[Moemg]

Wouldn't it be cheaper and smarter to educate the women with a few beginner investment books than leave her unknowing ? I've seen to many recent widows being taken advantage of my so called advisors . It's like a car you at least have to have some basic knowledge so you can access what the mechanic is saying . I'm sure most of you have smart wives who can easily pick up the basics of investing .

 

[hotwired]

clarity on point

Oh, my wife is smarter than me ... she simply has no taste for investing, nor (so she says) the stomach for it. It would take someone far smarter than my FP to take advantage of her!!

 

[freebird5825]

Wouldn't it be cheaper and smarter to educate the women with a few beginner investment books than leave her unknowing ? I've seen to many recent widows being taken advantage of my so called advisors . It's like a car you at least have to have some basic knowledge so you can access what the mechanic is saying . I'm sure most of you have smart wives who can easily pick up the basics of investing .

a strong SECOND from me on selling type FAs and widows being taken advantage of. it happens, but not to this kid. oh the phone calls i fielded...and threw the football right back at 'em in a perfect spiral. it was one of my rare joys.
to answer the original post, my FA method was a fee only based planner - CFP or not at all for me, being the credentials snob that I am . then i carried on independently while educating myself by reading no less than a dozen books over 6 years. Read those books, ladies!
i may revisit with my CFP just prior to marrying, just for a quick and dirty checkup.

 

[travelover]

..............
i may revisit with my CFP just prior to marrying, just for a quick and dirty checkup.

Ummm- you may want to restate that differently....LOL

 

[freebird5825]

Ummm- you may want to restate that differently....LOL

WHAT!? did I make a funny?
KUDOS to you for picking up on that oh-so-NOT-innocent line.
"i may revisit with my CFP just prior to marrying, just for a quick and dirty checkup."
at least i didn't say pre-nup tune-up.
your serve...

 

[Moemg]

Luckily I already knew the basics of investing when I was widowed . I also knew enough to just let things ride until my sanity returned . Some of the widows I knew were so intimidated by investing they cashed in their stocks and went to CD's . A lot of FA's are honest people but some just want to churn your account and if you do not know what is happening you are in trouble.

 

[freebird5825]

Luckily I already knew the basics of investing when I was widowed . I also knew enough to just let things ride until my sanity returned . Some of the widows I knew were so intimidated by investing they cashed in their stocks and went to CD's . A lot of FA's are honest people but some just want to churn your account and if you do not know what is happening you are in trouble.

this lady is giving us some of the best advice for those who experience tragedy, or get unmarried, or lose a job, or become disabled, or owe big taxes to the IRS right now or else, or go thru a foreclosure, or face big medical bills...
UNTIL MY SANITY RETURNED and
IF YOU DON'T KNOW WHAT IS HAPPENING and
CHURN YOUR ACCOUNT
are key phrases here.
way to go, Moemg.

 

[jIMOh]

No that's not the case. The 4% SWR turns out works pretty much over broad ranges of asset allocations and timespans. Sure, someone will come along and try to diddle with the numbers, but they really don't change all that much.

This is not my understanding of the trinity study.

100% equity needs a lower SWR than 80-20.
60-40 can have a higher withdraw rate than a more volatile 80-20 portfolio.
40-60 and 20-80 will not have the high returns of a 60-40, so although volatility is less, the returns are also significant less, so a lower SWR is needed.

Generally speaking.

It has been a while since I read the trinity study, but here was the premise as I remember:

100% equity 2% SWR would suggest you could live off dividends (IMO) and never sell a share.
80-20 3% SWR and a person could live off the dividends and interest and probably not sell a share.
60-40 was optimum because 4% withdraw rate had the portfolio generate enough returns to cover withdraws until portfolio was down to zero dollars 30 years later.
40-60 had a lower withdraw rate than 60-40 because the returns would not be high enough, so 3-3.5% was suggested.
20-80 would be a 2% withdraw rate because of inflation eating into portfolio at higher SWR.

Obviously exceptions to all of above (for given past performance)- I would question anyone suggesting 4% works on all portfolios. 100% cash and 4% SWR and 100% equity, 4% SWR do not make sense with reasonable success in most market conditions.