Financial Advisor or Robo

[savory]

I know the forum does not prefer financial advisors but I have a question concerning financial advisers and robo advisers. I understand the financial impact advisors have on my investments but am willing to pay. I am trying to figure out how to pay less.

I have an 8+ year history with an advisor that creates his own portfolio. I am holding primarily stocks and bonds not mutual funds of a 60/40 portfolio. He has the leeway to time the market within a range of changing the ratio about 15% in either direction. Over the 8 years buying/selling has been minimal and the stock part of the portfolio has been closer to 65%.

Returns from 2010 to 2018 has been 9.2% after fees. I think I should be happy with that for a 60/40+ portfolio. The funds are weighted to USA large caps. Fixed income investments are held in individual companies.

I have negotiated a reduction in my rate but it would still be slightly more than double of a robo program. Betterment is at the top of my list if I were to change. Betterment is charging 0.25%. Betterment data shows in the same period, 2010 -2018 their increase is about 92%. I believe the financial advisor's growth is a bit higher. I do understand enough to realize if large caps out performed the total market in the last few years, the advisors account would be showing the benefit of their current investment approach vs a more total market/global approach. I am not sure if the level of risk for that approach. The adviser in general focuses on large caps but can be more diversified. They control the approach.

I am hoping you can help me think through this decision of staying where I am at or moving to the lower cost robo adviser. I will be with an adviser. I want to be sure my analysis does not miss the obvious and/or subtle questions. Obviously, if you have questions that you feel will guide your advice, I will try to answer them.

One last thing, I do not need to speak to an adviser and the money is not really needed to support our lifestyle. I treat it in the same fashion as my pre-retirement money.

Thanks

 

[ERD50]

I'm not sure the numbers are apples-apples, it would help if you could validate that, and put them in the same terms.

Your 9.2% after fees from 2010 to 2018 (I assume that is CAGR, JAN 2010, DEC 2018 - 9 years invested), would be 1.092^9 ~ 2.21x ( 121%). So if that's correct, that looks slightly better than a 60/40~65/35 index fund with annual rebalance approach ( ~ 2.05x ~ 2.12x). But that might be with a higher standard dev, with the lower diversification, and maybe higher yielding fixed income. And as you say, a different time frame might be better/worse for the FA's selection, hard to say.

What is he AA of Betterment? A 92% would be 1.92x, so under-performing the other numbers, if it is apples-apples.

OK, I have to ask, sorry. But if you have decided on an AA range, and have told your FA to stay within that, what do you gain from the FA? That's really a simple thing to do yourself.

http://bit.ly/30Io8ej << short link to portfolio analyzer

-ERD50

 

[OldShooter]

... I am hoping you can help me think through this decision of staying where I am at or moving to the lower cost robo adviser. I will be with an adviser. I want to be sure my analysis does not miss the obvious and/or subtle questions. ...

Well, maybe you should do what I did: I put a $100K test portfolio with the Schwab robot for a couple of years. Pick your favorite robot and try it (him?) out.

1) It junked up my reports with about 20 tiny positions in a variety of index-type mutual funds.

2) It required that (IIRC) about 5% be held in cash.

3) Performance results were slightly behind a simple $100K 65/35 total US/total International fund portfolio that I use as a benchmark. I would say that the performance was acceptble for someone who wanted a "fire and forget" portfolio. Certainly better than using stock-pickers.

4) I closed out the portfolio mainly do the the annoyance of seeing all those tiny position, but like any FA, the robot has to make investing look difficult an complex in order to convince the customer that the FA is worth using.

 

[savory]

I'm not sure the numbers are apples-apples, it would help if you could validate that, and put them in the same terms.

Your 9.2% after fees from 2010 to 2018 (I assume that is CAGR, JAN 2010, DEC 2018 - 9 years invested), would be 1.092^9 ~ 2.21x ( 121%). So if that's correct, that looks slightly better than a 60/40~65/35 index fund with annual rebalance approach ( ~ 2.05x ~ 2.12x). But that might be with a higher standard dev, with the lower diversification, and maybe higher yielding fixed income. And as you say, a different time frame might be better/worse for the FA's selection, hard to say.

What is he AA of Betterment? A 92% would be 1.92x, so under-performing the other numbers, if it is apples-apples.

OK, I have to ask, sorry. But if you have decided on an AA range, and have told your FA to stay within that, what do you gain from the FA? That's really a simple thing to do yourself.

http://bit.ly/30Io8ej << short link to portfolio analyzer

-ERD50

The adviser does have flexibility and it was one of the reasons I selected him after the last market decline. When I was FA shopping, they claimed to have lost less that the 60/40 market portfolio decline at the time. But they got back into the market later as well. For me, it came down to piece of mind and a sense that some market timing is worthwhile.

I think your analysis is correct. FA has a different diversification on stocks and may take on higher risk in fixed income but I really do not know. One example is Morgan Stanley providing a 5.5% yield. It was recently purchased and is due in 2021. That does not seem too risky to me but I really do not know.

 

[RobbieB]

I'm very happy with my Merrill stock pickers. They have beat the S&P 500 including their fees for 5 years straight now. I told him to go with large stable Co's with dividends. I have 70 to 80 companies and trading about 15 to 20% per year at no cost to me. The dividends get sent to my checking by them each month. I have no mutual funds and no bonds with them. Also I need to call them when I need dough so they can sell some stuff. Sounds weird eh? I can't even access my own account. But neither can any hackers.

My bonds are at Fidelity and Morgan Stanley. Totally separate and I have to call them also. I like having peeps to call.

 

[travelover]

......... He has the leeway to time the market ............

Respectfully, he does not know how to time the market, nor does anyone else over any reasonable investment horizon.

 

[samclem]

Respectfully, he does not know how to time the market, nor does anyone else over any reasonable investment horizon.

+1. If this advisor (or anyone else at his company who writes the guidance for your advisor) could really consistently time the market, they could become fabulously rich in a very short time by using options/leverage. $1000 could be turned into millions in a year or two with a string of correct, or even mostly correct, calls. They'd have no need to waste time selling investment management services to retail customers (and would be foolish to do it).

 

[ERD50]

... When I was FA shopping, they claimed to have lost less that the 60/40 market portfolio decline at the time. But they got back into the market later as well. ...

Also with respect, did they "claim" this, or did they show you what they did? And that needs to be coupled with the "got back into the market later as well". Overall, did this beat a buy & hold position?

If a professional makes a claim, I expect them to show me. If they hedge on that, they aren't a professional, IMO. Especially if they are managing my money!

... For me, it came down to piece of mind and a sense that some market timing is worthwhile.. ..

What is this 'sense' based on? I have yet to see data that can back this up. Anyone can get lucky, but can it be done reliably? Not that I'm aware of.

Agree with travelover, I wouldn't trust this unless they can produce convincing evidence, not a one time might have been lucky thing.

-ERD50

 

[ERD50]

I'm very happy with my Merrill stock pickers. They have beat the S&P 500 including their fees for 5 years straight now. I told him to go with large stable Co's with dividends. ...

I know you like your "guy(s)", but it does sound a little strange to me that you pay them to manage your account, but you are telling them what sector to go into? Shouldn't they be telling you? How did you determine that "large stable Co's with dividends" would be the best sector for you?

I see you still do some selling, so it's not a "I will only live off the income" preference/mantra that some have either. Just curious.

-ERD50

 

[gauss]

I think many people use FAs for how they make them feel rather than any testable objective results.

If the FA is lucky, the client will not run out of money and will happily not know the difference. This the relationship 'worked ' for all involved.

Unfortunately, this is not always the case. I have known two people who had traditional DB pensions which they cashed out and turned over to a FA to manage. In both cases the money did not last and they now live in mobile homes eking by on SS which they took early at 62.

Very sad.

I hope that OP winds up in the former group.

Gauss

 

[RobbieB]

I figured large stable co's would be less risky. And yes I spend all the dividends and then some. The equities are in different market segments but are all large caps.

We have regular sit downs and he asked me what my concerns were. I said I want income and I don't much like bonds. I mean if you can get about the same income and still have growth too...

 

[whenicandave]

I explored personal capital and found that they use a bunch of ETF's. I like individual positions so I can control gains. Nothing worse than a big surprise in December of capital gains. Also you got add their fee on top of what the EFT expense charge is.

 

[OldShooter]

It's very popular for people to compare their portfolio return to the total return of the S&P. But unless the portfolio is exclusively invested in the S&P this is apples and oranges.

For example, a bitcoin portfolio would have spectacularly outperformed and spectacularly underperformed in the past couple of years, just depending on what time period was chosen. Similarly, I think over the last 10 years a portfolio invested solely in non-US stocks would have underperformed, but that does not mean that picking those stocks ten years ago was unwise. It just means that the picker was unlucky. Until the nature of the portfolio and its risks is known, benchmarking against specific sectors (S&P, small cap, large cap, etc.) is meaningless. If one must compare, the ACWI or the Russell 3000 are IMO much better choices.

 

[ERD50]

... benchmarking against specific sectors (S&P, small cap, large cap, etc.) is meaningless. If one must compare, the ACWI or the Russell 3000 are IMO much better choices.

While I agree in theory, in practice the difference between IWV, VTI, and SPY is tiny. Nevertheless, I am moving from SPY to VTI when the opportunity arises.

-ERD50

 

[MikeTN]

Well, maybe you should do what I did: I put a $100K test portfolio with the Schwab robot for a couple of years. Pick your favorite robot and try it (him?) out.

1) It junked up my reports with about 20 tiny positions in a variety of index-type mutual funds.

2) It required that (IIRC) about 5% be held in cash.

3) Performance results were slightly behind a simple $100K 65/35 total US/total International fund portfolio that I use as a benchmark. I would say that the performance was acceptble for someone who wanted a "fire and forget" portfolio. Certainly better than using stock-pickers.

4) I closed out the portfolio mainly do the the annoyance of seeing all those tiny position, but like any FA, the robot has to make investing look difficult dsan complex in order to convince the customer that the FA is worth using.

I did practically the same thing. However, I note that the most aggressive portfolio allowed me had only 85% in equities. The other 15% was in a mix of bonds, gold, and Schwab MM accounts with low interest rates. While 15% is not a lot, it does reduce the potential loss in a downturn in the stock market and should be factored in. One way Schwab makes money in their Robo accounts is that they pay below market interest on their MM funds. So, if you choose a very aggressive portfolio you get only about 8% of your money tied up in these funds. However, if you choose a less aggressive portfolio you have more of it earning very low interest in Schwab MM funds and you are, in effect, paying a higher price.

 

[OldShooter]

I did practically the same thing. However, I note that the most aggressive portfolio allowed me had only 85% in equities. The other 15% was in a mix of bonds, gold, and Schwab MM accounts with low interest rates. ...

Yes. It took me quite a few tries before I was able to game their investor questionnaire into giving me an all-equity portfolio with only 5% cash. I don't remembe what specific lies I told it, though.

But to be fair, the service was "free." So the low yielding piece was engineered to be some payment for the service. 1/20th of the portfolio foregoing 2% of yield is equivalent to a 10bps fee. I don't begrudge them that but I tried like crazy to eliminate it.

 

[savory]

It's very popular for people to compare their portfolio return to the total return of the S&P. But unless the portfolio is exclusively invested in the S&P this is apples and oranges.

I do not think I agree. There can be two comparisons. One is as you say. I need to take a subset of the S&P and prove I selected the right subset. The other however is to say, if on my own, I would have selected the S&P. In that case, I want to know if someone else would select better alternatives.

My issue with FAs is that one time it is the S&P and next time the Russell XYZ. That is moving the goal post.

As for my question, perhaps the best way to look at is simply on a 60/40 portfolio type comparison. If someone has a 60/40 portfolio, how does the return that I put in my original post compare? It seems better than Betterment. But that is a sample of one. Are there other examples that should concern me in terms of actual performance from those that know the return on their portfolios over the same period? That would help me more than telling me I am being taken my my FA.

I understand the research. But I also expect it is influenced by FAs that purchase mutual funds or ETFs. The history I provided is only a few years but it is my history. The most helpful thing for me would be to provide feedback with my results. Respectfully asked.

 

[mrfeh]

For me, it came down to piece of mind and a sense that some market timing is worthwhile.

It isn't.

If you aren't willing to manage it yourself, go the robo route.

 

[pb4uski]

Not sure the right answer for you, but your FA seems to have done well for you.... for 2010-2018 a 65/35 portfolio has returns about 8.7% and your FA is beating that.

 

[Dawg52]

I would stick with your FA. He's done a good job so no need to change imo.

 

[EarlyBirdly]

My view of FA's is that their job is to take your money... to make a living for themselves and their families. I say again, their job is to take your money.

The 2-3 times I have sat down with one, in each case it took me a few days to figure out what they were really trying to do.

Yes, they gave mostly good guidance. But, after careful analysis of each situation I found the hook in all their plans. The primary goal being to attach themselves, like a parasite, to my accounts any way they could.

My last adventure, with Schwab, was discussing the very thing you ask about...The Robo accounts that they offer. A large portion of my assets are with Schwab. I liked the young man that I sat down and talked with as he had helped me with a few other questions/ideas I had in the past.


Took me a week or so, but I realized ( when he advised I move my entire portfolio into the Robo account - even with a few assets that were negative on their cost basis ) that he just wanted his name associated with my accounts.

That is a VERY short version of that story. But all my experiences were similar.

If paying attention to one's own finances is too tedious, and supporting another person's family doesn't bother you...Have at it!

To each his own and to whatever makes one happy....

Good Luck.

 

[savory]

I enjoy this forum and respect the advice. I also recommend it others. But on the question of advisers, it is filled with generalizations and points of view. I understand the generalizations are based in fact but they are still generalizations.

We all 'waste' money. Being vacation season, do you camp or stay in hotels? Do you drive or bicycle? Do you hire tour companies or manage it yourself? I just spent over two months in Europe saving expenses by doing these things. If my comments to you were your wasting money by renting a car or staying in hotels, you would think I was ridiculous and not appreciate the advice.

I am not debating FAs can be a luxury expense. But I think there are different approaches and life goals and I think some FAs might actually earn their money. The literature does not argue otherwise. It simply says it is hard to choose. I track mine closely and that is why I am considering the change.

I carefully crafted my initial post to attempt to get comments about the financial part of the investment. I do not mind the encouragement to DIY. On the other hand, even with the performance numbers shared, some responses, which I am confident are meant to be helpful, simply are not.

I share this as I expect there are others like me that hesitate to use this forum for these type of questions. I hesitated but decided to try. In the end I did get some feedback based upon market performance that I appreciate.

This is my rant - Thanks

 

[ERD50]

I enjoy this forum and respect the advice. I also recommend it others. But on the question of advisers, it is filled with generalizations and points of view. I understand the generalizations are based in fact but they are still generalizations. ...

Well, isn't providing generalizations appropriate? I'm not sure how anyone can offer much that would be useful other than generalizations. A few people saying their FA has done well is all well and good, but how does that help us? How would we find one of these superior FAs? And how do we get enough history to feel confident they will do well in various market cycles?

... We all 'waste' money. Being vacation season, do you camp or stay in hotels? Do you drive or bicycle? Do you hire tour companies or manage it yourself? I just spent over two months in Europe saving expenses by doing these things. If my comments to you were your wasting money by renting a car or staying in hotels, you would think I was ridiculous and not appreciate the advice. ...

Those aren't wastes, they were decisions based on value to the individual.

Sure, you can say you personally value an FA, but the feedback you are getting from many is that a very simple DIY portfolio takes almost zero work to set up or maintain. It strikes me as far more work to try to evaluate an FA who can do this for me. You yourself seem to be struggling with this, while I have never struggled with knowing that my broad-based index funds do just what I asked of them - track their index very, very closely. So where is the value?

... I am not debating FAs can be a luxury expense. But I think there are different approaches and life goals and I think some FAs might actually earn their money. The literature does not argue otherwise. It simply says it is hard to choose. I track mine closely and that is why I am considering the change. ...

OK, so you "think some FAs might actually earn their money"? You aren't even sure of that? I'm sure that some do, some times (random distribution predicts that), but I don't know how to pick the ones that will in the future.

Actually, the literature does argue otherwise, the literature that I have seen does not show you how to choose the above-average superior FA to assure better (or even equal) performance. W/o that, I'm stuck.

... I carefully crafted my initial post to attempt to get comments about the financial part of the investment. I do not mind the encouragement to DIY. On the other hand, even with the performance numbers shared, some responses, which I am confident are meant to be helpful, simply are not.
...

Well, DIY is a very reasonable option for just about anybody. This isn't like telling someone that has told us they don't like to use tools that they shouldn't hire a pro to put an addition on their house, they should DIY, and do all the electrical and plumbing, just read up on it. DIY portfolio is simple, like I said it seems to be even simpler than finding an FA and evaluating them. So why isn't that helpful? If you don't want to do it, that's up to you, but that doesn't make the information unhelpful.

It's more like telling someone they can replace the cabin filter in their car themselves (many can be done w/o tools), instead of paying a labor charge and markup on the filter.

... I share this as I expect there are others like me that hesitate to use this forum for these type of questions. I hesitated but decided to try. In the end I did get some feedback based upon market performance that I appreciate.

This is my rant - Thanks

Rants are fine, especially if they lead to something productive. I'm confused about exactly what you are ranting about though.

You said in OP you want to pay less, you are considering a robo-advisor. So it sure seems DIY is just an extension of that. Seems 100% appropriate to me. Fees of ~ 0.03%, and as far as we can tell, equal or better performance on average. What's your beef?

-ERD50

 

[travelover]

I enjoy this forum and respect the advice. I also recommend it others. But on the question of advisers, it is filled with generalizations and points of view. I understand the generalizations are based in fact but they are still generalizations.
............

Recognize, like religious zealots that pound on your door, we are only trying to save you from yourself.

That said, there is an entire industry devoted to creating a smokescreen of disinformation and half truths to separate people that can ill afford it, from their hard earned cash. You apparently are educated enough in the details to make a good decision, so go for it.

 

[ERD50]

Recognize, like religious zealots that pound on your door, we are only trying to save you from yourself. ...

Except in this case, OP came knocking on our door! -ERD50