Certified financial planner or not

[Ken11]

I actually track it quarterly, annually and for the life of the relationship (last 6 years). The period of time I was tlaking about was 1/1/2004 to 12/31/2010
60/40 Stock/Bond mix.
20% short term bond
10% intermediate bond
10% lt Bond
10% inflation protected securities fund
20% s&P 500 index
8% extended market
6% emerging
8% european
8% pacific
I'm doing the performance measurement. I'm a Qucken Hound, so I have everything to do the calculations myself. I download index fund histories and use my quicken data to do the statistical analysis myself.

My point was not that using an advisor is right or wrong. My point was that another way to look at it was from a performance return perspective. It is ok to invest the money when the ROI exists. You may not be able to tell in advance however!

Obviously, there is no guarantee on future performance, or that anyone can find someone that can outperform the market, but so far, giving him 8000/yr (.8%) per million has netted an additional 20,000/yr/MM return over a comparable asset allocation strategy & mix in index funds.

My guy charges 1.0% and has returned about 1% better than the equity index funds over the same 6 year period after deducting his fee.
So his fee has also been well worth it.

I know i dont have the interest in trying to do better than the indexes on my own. So, Im prolly sticking with him after cashing in my lump sum retirement $ later this year.

I know its not popoular with the Vanguard /index/ asset allocationj crowd. However, its seems that it is possible for a managed fund to do better than the indexes. My guy is not a stock picker. We do not partcipate in active trading strategies. However, he is a fund/fund manager picker. So, diversification is not sacrificed in the process. He also seeks out some negative correlation funds that I would never have found without him. So far so good.

 

[youbet]

My guy charges 1.0% and has returned about 1% better than the equity index funds over the same 6 year period after deducting his fee.
.

He did 1% better than which equity index funds?

 

[REWahoo]

However, its seems that it is possible for a managed fund to do better than the indexes.

Yep, it sure is - at least for a while. Six years is far from a long-term test. All it will take is one really bad year to leave a very bad taste in your mouth - plus you'll have the pleasure of paying him his fee while it happens.

That said, it is your money and some folks just don't want to manage their own portfolio for whatever reason even though the long term odds are stacked against you.* Glad you've found someone who is doing a good job for you and I hope it works out in the long run.



* Scott Burns recently interviewed John Bogle (founder of Vanguard and index funds) and noted something Bogle wrote in his book "Common Sense in Mutual Funds":

But he [Bogle] does something few in the investing world would dare to do. He stands by what he said 10 years ago. The original text is presented unchanged. New data is added to reveal what happened over the last ten years. Although the ‘90s and the ‘00s were diametric opposites for investing, the results still show that:

• costs matter,
• low-cost index funds are the surest way to achieve market returns,
• and spending money to achieve high returns rarely works.

The difference over time, he points out, is enormous. In the 40-year period ending 2008, for instance, a $10,000 investment in a low-cost S&P 500 index fund would have grown to $346,117. During the same period, the average managed domestic equity fund found grew to $201,513. The difference is more than 14 times the original investment.

 

[Ken11]

He did 1% better than which equity index funds?

Actually I should have referenced the indexes themselves.
Bothe the S&P and the DJIA were virtually dead flat over this period.

 

[Ken11]

Yep, it sure is - at least for a while. Six years is far from a long-term test. All it will take is one really bad year to leave a very bad taste in your mouth - plus you'll have the pleasure of paying him his fee while it happens.

That said, it is your money and some folks just don't want to manage their own portfolio for whatever reason even though the long term odds are stacked against you.* Glad you've found someone who is doing a good job for you and I hope it works out in the long run.



* Scott Burns recently interviewed John Bogle (founder of Vanguard and index funds) and noted something Bogle wrote in his book "Common Sense in Mutual Funds":

Well... the Bogle quote compares the index to the AVERAGE managed fund.
If your advisor can pick above average funds/fund managers? Then what?

All I can do is report my experience.
I agree that this says nothing about the future.

However, my guy is very careful/conservative and 6 years is not an insignificant amount of time.

FWIW- I am still concerned about my decision.

One more point: my guy has doen some trading to optimize my taxes.
This isnt reflected in the potfolio returns themselves.
Yes I might be able to do this myself.
However, keeping my head free and clear of such details is certainly worth something.

Of course, to each his own...

 

[REWahoo]

Well... the Bogle quote compares the index to the AVERAGE managed fund.
If your advisor can pick above average funds/fund managers? Then what?

That is a huge "If". But to answer your question, he could tout his his long term track record, raise his fees, get rich and retire early.

The trick is knowing your advisor is that long-term above average guy - you can't.

FWIW- I am still concerned about my decision.

You're preaching to the choir.

Oh, and one more thing...

Since your advisor isn't a stock picker and selects only managed funds, you do realize you are paying two layers of fees - his plus the fees the funds charge - right?

 

[Nords]

However, my guy is very careful/conservative and 6 years is not an insignificant amount of time.

Sure it is.

If ER portfolios are run by coin-flipping monkeys, then every year half of them will beat your indices and half will lag them. If this continues for six years, then it only takes 2^^6 = 64 coin-flipping monkeys for one monkey to beat the index six times in a row. But he'd be working for bananas, not for 1%.

There are over 8000 mutual funds, so sorting out the difference between a manager's skill and [-]a coin-flipping monkey[/-] luck would take at least 13 years.

IIRC Bill Miller's Legg-Mason fund managed to beat the indices for 15 consecutive years, and that's when people were beginning to think that he was showing more skill than luck. Until the "skill" part stopped happening, assuming that he had more skill than a coin-flipping monkey.

A significant drag on Miller's "skill" was the fund bloat caused by millions of "investors" throwing huge wads of currency at him. Every year he had more money to manage than he could effectively invest, even when Legg-Mason started to clamp down on the influx. "Luckily" he managed to take care of that problem over the last few years.

The issue isn't what you're going to do when your manager beats the market. The question you need to answer is what you're going to do when the coin-flipping monkey odds start catching up with him and he begins to lag the market. Will he work for bananas then, or will he still expect 1%?

And how much longer will you wait for him to start beating the odds again?

 

[Ken11]

Oh, and one more thing...

Since your advisor isn't a stock picker and selects only managed funds, you do realize you are paying two layers of fees - his plus the fees the funds charge - right?

Yeah. However, he uses very low fee funds and, in some cases he negotiates a discount based on the fact that he manages several hundred million bucks. In any case this is all baked into the results I reported.

BTW- I started out believing that a "simple" self-managed index based asset allocation strategy based on low fee funds was best. However, given that I'l be receiving my large lump sum later this year I started getting nervous about doing that. Then I realized this guy (who had been managing a much less significant sum of mine) was doing better that I would have done over this six year period even after his fee.

All I do know is that there is no sure thing.

 

[REWahoo]

All I do know is that there is no sure thing.

Unless you're the guy collecting the fee. Then you get paid whether or not you outperform the index.

 

[youbet]

Actually I should have referenced the indexes themselves.
Bothe the S&P and the DJIA were virtually dead flat over this period.

OK, that explains a lot. Many here use a blend of index funds that includes international, mid-cap, small cap, value, etc. in equities plus various fixed investments. Comparing to just the S and P and DJIA wouldn't be my way to compare. You're just saying your guy beat the S and P and DJIA indexes over the period. A portfolio of CD's would have also done that........

It sounds like you're paying a manager to structure your asset allocation and then pick funds to match. The price sounds high but if it's something you're uncomfortable doing and don't think that there is anything else you cold do with the money that would be more enjoyable than not doing that, then have at it!

Gee...... your guy makes 1% of "several hundred million!" Not a bad gig.

 

[Ken11]

OK, that explains a lot. Many here use a blend of index funds that includes international, mid-cap, small cap, value, etc. in equities plus various fixed investments. Comparing to just the S and P and DJIA wouldn't be my way to compare. You're just saying your guy beat the S and P and DJIA indexes over the period. A portfolio of CD's would have also done that........

It sounds like you're paying a manager to structure your asset allocation and then pick funds to match. The price sounds high but if it's something you're uncomfortable doing and don't think that there is anything else you cold do with the money that would be more enjoyable than not doing that, then have at it!

Gee...... your guy makes 1% of "several hundred million!" Not a bad gig.

Well, of course fixed income could've beaten the equity indices in this timeframe immediately after after the worst equity crash in several decades and as interest rates continued to fall.

That does not diminsh the fact that, on equities, my compounded annual returns were 2.59% while the indices mentioned were dead flat. Thats 1.59 pts above the advisors fee on average for each of 6 years.

However, you certainly have a good point about including international, mid and small cap components mixed in with the DJ and S&P for comparison to my results. I will need to look at that.
My guess is that this may make my relative results even more positive.

Still, I'm not dogmatic about this.

Also, to clarify: my advisors firm consists of about 8 folks. In total they manage several hundred mil in assets.

Cheers

 

[youbet]

Well, of course fixed income could've beaten the equity indices in this timeframe immediately after after the worst equity crash in several decades and as interest rates continued to fall.

Then why are you comparing your managed portfolio, which no doubt contains some fixed investments, to a 100% equity index?

Ken, as indicated in my post above, I have no problem with folks that prefer to pay for the service of having someone else manage their portfolio. But I do cringe when I hear performance comparisons to indexes which are not relavent. You're choosing to compare to the S&P500 and Dow, those are 100% domestic large cap blend. But I think you're financial advisor probably has you in a diversified portfolio which also includes small, mid and international equities as well as fixed investments. So yeah, he beat the S&P, but did he beat a typical diversified index based portfolio? In your shoes, that's what I'd want to know in order to grade this guy over time and see if the expense of employing him was justified or not.

However, you certainly have a good point about including international, mid and small cap components mixed in with the DJ and S&P for comparison to my results. I will need to look at that.
My guess is that this may make my relative results even more positive.

Dunno..... But it certainly would be a better comparison since hardly anyone, including your advisor I assume, would actually go 100% S&P500 or Dow. The S&P500 is a widely used benchmark but shouldn't be used in isolation as a gold standard.

You should also bear in mind that many money managers and many fund managers beat the S&P500 over the period in question. I own a high div value fund that's done that since inception a number of years ago. Still, I don't put all my marbles into that bucket.

Again, I have no issue with folks who research managers exstensively and then choose to use one because they feel the utility of not managing your own money is worth the expense. If it feels good for you, if it strikes you as good value, do it. My point is simply that comparing the performance of a diversified portfolio (that I assume your manager has you in) against a relatively narrow index such as the S&P 500 may not be as meaningful as you're thinking. You can't say you made 1.59% above the advisor's fee each year. You must say you hypothetically made 1.59% above the advisor's fee relative to the S&P 500 but you advisor didn't have you in a S&P500 index fund and likely you wouldn't have had yourself exclusively in it either. You can "feel" your expense is justified, but measuring it the way you are is simply stating success vs an unlikely opponent.

 

[Bestwifeever]

If you're paying a financial planner .88 or 1.00 percent to manage your money, why don't you just ask them what specific indexes they are beating. They shouldn't mind giving you that information.

 

[clifp]

Not much to add to the discussion other than to say that I agree with the skeptic about the wisdom of paying 1% for someone to picked actively managed funds.. That said your team may actually be skilled rather than lucky, but it is important to measure them correctly.

A concrete suggestion since you plan on giving them you lump sum retirement, you have a lot of leverage right now. I'd make them earn your business. First they should show how they outperformed the relevant indexes on a risk adjusted basis. (In the past 6 years less risky assets probably did better). If you want to get a 2nd opinion of are they giving you a snow job, the cynics on this board will certainly help.

Second I'd negotiate a lower fee. There is minimal additional work for managing $500K vs 1 million so I'd really push for a lower fee, An even better approach (albeit hard to get an adviser to agree to it) is some type of performance so that they get only get their 1% fee if the really outperform the benchmarks.

 

[REWahoo]

An even better approach (albeit hard to get an adviser to agree to it) is some type of performance so that they get only get their 1% fee if the really outperform the benchmarks.

Excellent suggestion.

Ken, be sure to let us know what your advisor says when you have this discussion. You'll probably want to post it here: http://www.early-retirement.org/forums/f27/its-funny-joke-thursday-20756.html

 

[FinanceDude]

Second I'd negotiate a lower fee. There is minimal additional work for managing $500K vs 1 million so I'd really push for a lower fee,

A lot of firms already do that. Hard to believe that there still are advisors that get 1% PLUS the mutual fund's ER..........

An even better approach (albeit hard to get an adviser to agree to it) is some type of performance so that they get only get their 1% fee if the really outperform the benchmarks.

A good idea in theory, but Compliance would never allow the adviser to set up that program.....you can put anything you want in an Investment Policy Statement, but Compliance still has to review and approve it.

 

[clifp]

A good idea in theory, but Compliance would never allow the adviser to set up that program.....you can put anything you want in an Investment Policy Statement, but Compliance still has to review and approve it.

I got just far enough in my CFP course to realize that what seemed completely logical to me (performance based fees) weren't allow, but not far enough to understand what if any rational there was for not allowing them.

 

[FinanceDude]

I got just far enough in my CFP course to realize that what seemed completely logical to me (performance based fees) weren't allow, but not far enough to understand what if any rational there was for not allowing them.

It probably raises the risk of litigation dramatically.........

 

[Helen]

I got just far enough in my CFP course to realize that what seemed completely logical to me (performance based fees) weren't allow, but not far enough to understand what if any rational there was for not allowing them.

Maybe performance based fees would encourage too much risk taking?