Embarrassing question

[Exchme]

Emphasis added.

Good overall post. It does seem to me that the bolded above is backwards. I know what you meant, but OP is a newbie so I think it'd be wise to correct it.

You are of course correct, I wrote that backwards.

 

[Exchme]

One more quick point. Fee compounding is very deceptive math. Let's say OP needs the money in 40 years (he's young and maybe won't need this bit until mid retirement). If his portfolio return over that time prior to fees was 7%, it would be 15X as much as today. After paying the 1.55% to the adviser all that time, OP only gets 5.8X as much as today - the advisor has the rest! The advisor would take over 60% of your starting money over a lifetime - that's why they are so nice to you!

 

[TheWizard]

Late to the thread and a bit confused.
Would be good if OP Kaysmum could tell us where their various investment accounts are located right now.
By "located" I mean with which fund company (like Fidelity) if self managed or with which FA/shark company (like Edward Jones) if not self managed.

Reason for confusion is that it seems like OP has just been thinking about using this FA, bit I'm not sure...

 

[pb4uski]

One more quick point. Fee compounding is very deceptive math. ...

Yes... let's say that one has $100,000 invested for 20 years... in the first case DIY with an 8% return and in the second case with an 8% return less a 1.5% FA AUM fee:

$100,000*(1+8%)^20 = $466,096
$100,000*(1+(8%-1.5%))^20 = $352,365

Or alternatively, someone saves $15,000 a year for 35 years....
at 8% =FV(8%,35,-15000) = $2,584,752
at 8% less 1.5% AUM fee = FV(8%-1.5%,35,-15000) = $1,860,520

 

[Out-to-Lunch]

I agree with what you have said. It is a question which I ask myself sometimes. Because we retired early, we have spent a significant amount of cash which we had set aside plus unplanned liquidation of some investments to pay for our expenses, i.e. blow our budget, while waiting for SS and annuities to kick in. Still, our investments have grown significantly from when we retired 5 years ago. That is what a bull market does. Would we have done better if we had self-managed? Possibly, but my husband is happy and I am happy hence the status quo.

But now I am genuinely confused. If, as it appears, you use a FA for emotional reasons, why did you focus initially on performance? And, in particular, why did you NOT write (with my bolding to emphasize the differences):

"For a 70-30 equities-fixed income mix portfolio, if the self-managed investments gain 10% but FA-managed funds gain 9%, then you are down 2% after the 1% AUM fees. If FA-managed funds gain 8%, then it performs 3% worse than self-managed funds after FA commission is paid."

This illustrates the math just as well, and is equally likely, IMHO.

 

[RetiredHappy]

But now I am genuinely confused. If, as it appears, you use a FA for emotional reasons, why did you focus initially on performance? And, in particular, why did you NOT write (with my bolding to emphasize the differences):

"For a 70-30 equities-fixed income mix portfolio, if the self-managed investments gain 10% but FA-managed funds gain 9%, then you are down 2% after the 1% AUM fees. If FA-managed funds gain 8%, then it performs 3% worse than self-managed funds after FA commission is paid."

This illustrates the math just as well, and is equally likely, IMHO.

We use FA to ensure that we are one step removed from knee jerk reactions.

I did not say that they performed worse than self-managed. In fact we believe they have performed or exceeded our expectations wrt to performance. Why do you assume that AUM always perform worse than self-managed? It is one-sided narrative to assume that AUM perform worse than self-managed portfolio.

 

[TheWizard]

We use FA to ensure that we are one step removed from knee jerk reactions.

I did not say that they performed worse than self-managed. In fact we believe they have performed or exceeded our expectations wrt to performance. Why do you assume that AUM always perform worse than self-managed? It is one-sided narrative to assume that AUM perform worse than self-managed portfolio.

I understand the psychology part of having a FA, even with a fee based on AUM.

But it's a no brainer that holding the same investments in a self managed account will outperform those investments in an AUM fee account.

Now some funds (DFA in particular) aren't usually available in a self managed account, I understand that...

 

[RetiredHappy]

But it's a no brainer that holding the same investments in a self managed account will outperform those investments in an AUM fee account.

Now some funds (DFA in particular) aren't usually available in a self managed account, I understand that...

The issue is that as an individual, we are not going to hold the same funds as AUM. Of course if the investments are identical, then self-managed investments are going to net more, without paying for AUM fees.

Right now in one of my AUM accounts, there are 31 funds, not including the cash in money market. Individually, we don't have access to all the information that research teams have at these companies. When I peel one layer down of each holding, it makes sense as to why they buy those funds. But if I were to self-manage the funds, I would go simple with buying a couple of Vanguard ETFs.

 

[TheWizard]

The issue is that as an individual, we are not going to hold the same funds as AUM. Of course if the investments are identical, then self-managed investments are going to net more, without paying for AUM fees.

Right now in one of my AUM accounts, there are 31 funds, not including the cash in money market. Individually, we don't have access to all the information that research teams have at these companies. When I peel one layer down of each holding, it makes sense as to why they buy those funds. But if I were to self-manage the funds, I would go simple with buying a couple of Vanguard ETFs.

31 funds is enough to make my eyes water. Or glaze over. One of the two...

 

[Dtail]

The issue is that as an individual, we are not going to hold the same funds as AUM. Of course if the investments are identical, then self-managed investments are going to net more, without paying for AUM fees.

Right now in one of my AUM accounts, there are 31 funds, not including the cash in money market. Individually, we don't have access to all the information that research teams have at these companies. When I peel one layer down of each holding, it makes sense as to why they buy those funds. But if I were to self-manage the funds, I would go simple with buying a couple of Vanguard ETFs.

Makes sense.
I think the general thought process is that on the whole, the self managed portfolios will typically have a better return, but certainly not all the time even when including the fees.
RobbieB and some other frequent posters also have FA's and are very pleased with them.

 

[target2019]

31 funds is enough to make my eyes water. Or glaze over. One of the two...

Yes, we hope OP doesn't get involved in that approach. It reminds me of dear in-laws who had complete trust in one company their entire lives. The solution from the management company was the same 12 funds in four accounts. The average expense ratio was .80. The management fee was similar (actually a good deal compared to most stories around here.) The asset allocation was 80% bonds, and so on. Not the worst solution, but not something to be cheering for.

 

[easysurfer]

31 funds is enough to make my eyes water. Or glaze over. One of the two...

31 sounds about right Brings back memories when I saw the light (index, passive approach) and said there's gotta be a better way.

Must admit, I was getting plenty of paper in mail though .

 

[pb4uski]

....The professional portfolios have ranged from complex to hideously complex, the result of their need to make investing look difficult and hence intimidate their customer into staying and paying the fees. ...

.... Right now in one of my AUM accounts, there are 31 funds, not including the cash in money market. ...

31 funds is enough to make my eyes water. Or glaze over. One of the two...

Looks like Old Shooter nailed it.

 

[Out-to-Lunch]

We use FA to ensure that we are one step removed from knee jerk reactions.

Yes, yes, I acknowledged that you are using FA for emotional reasons. But I was confused why your initial justification seemed to be about performance.

I did not say that they performed worse than self-managed. In fact we believe they have performed or exceeded our expectations wrt to performance. Why do you assume that AUM always perform worse than self-managed? It is one-sided narrative to assume that AUM perform worse than self-managed portfolio.

I also was not saying they always perform worse than self-managed. As I directly stated, I think those two possibilities are roughly equally probable (before AUM).


I felt like your examples implied that they generally outperformed (at least gross, if not net) self-managed.

 

[RetiredHappy]

I also was not saying they always perform worse than self-managed. As I directly stated, I think those two possibilities are roughly equally probable (before AUM).


I felt like your examples implied that they generally outperformed (at least gross, if not net) self-managed.

There is no real data to support one over the other. I am just pointing out that alot of the illustrations assume same returns on investments for both self-directed and firm-managed funds before AUM fees. Returns vary amongst individuals and so do AUM investments.

This has nothing to do with self-directed or firm-managed, data only support staying in the market far out performs trying to time the market.

 

[OldShooter]

Good discussion and good points. I was talking to an FA once who said "If I keep my client from panicking just once or twice in down markets I will have earned all the fees that they ever paid me and all the fees that they will pay me in the future." That begs the performance question, of course, but as stated it's pretty true.

Regarding performance, I think it is accurate to characterize the vast majority of FAs as stock pickers, usually by virtue of using stock picking mutual funds. This article: https://web.stanford.edu/~wfsharpe/art/active/active.htm explains why this approach is on average mathematically guaranteed to produce market-lagging results. Other data, most prominently the semiannual S&P Manager Persistence Report Cards, shows that managers who are consistently above average are extremely rare and that their success is probably due simply to good luck. That is how I reach the generalization that FAs are very unlikely to beat a market portfolio over the long term.

 

[Errollyn]

We use FA to ensure that we are one step removed from knee jerk reactions.

The thought of logging into my brokerage account with two-factor authentication is my circuit breaker for knee jerk reactions.

 

[sengsational]

The thought of logging into my brokerage account with two-factor authentication is my circuit breaker for knee jerk reactions.

And just to make it that much more of a PITA, delete cookies before trying

My circuit breaker is all the spreadsheet updates whenever I do a transaction.

 

[athena53]

There is no real data to support one over the other. I am just pointing out that alot of the illustrations assume same returns on investments for both self-directed and firm-managed funds before AUM fees. Returns vary amongst individuals and so do AUM investments.

This has nothing to do with self-directed or firm-managed, data only support staying in the market far out performs trying to time the market.

I get your point. If an account managed by your advisor is yielding 8% and they rake off 1.5% you're still doing better than someone who's yielding 6% on a comparable self-managed portfolio.

And yeah, I know, the ceteris are rarely paribus.

 

[38Chevy454]

The key is "net of fees", which is the hurdle that a FA has to overcome. While an FA may be able to beat the market or index in a given year, it is not likely the FA can do this every year continuing into the future. It is just the law of averages that says that the FA can't stay on top each year. Now add in the FA's fees that the account has to overcome and it becomes even harder to beat a simple low or no-fee self directed approach.

The main thing that an FA has to show you is an increased bottom line after the year. Assuming the market had a decent return year, the FA has a happy client since the bottom line account value went up. What the FA doesn't show is how the account would have been 1.5% higher without the FA's fee. It's that net of fees problem again. Sure the FA may have some fancy sounding funds or individual stocks to impress the client. But in the end how did the FA's results, net of fees, compare to the overall market or index?

I do agree that an FA can provide value and a stabilizing force to prevent knee jerk reactions. That is probably worth it to some. But for many people they can educate themselves and train their thinking to avoid the knee jerk reactions. The FA may also help with tax planning or withdrawal strategies, another plus for the FA. Also something an individual can learn pretty easy if they take the time for some self-education.

 

[RetiredHappy]

Good discussion and good points. I was talking to an FA once who said "If I keep my client from panicking just once or twice in down markets I will have earned all the fees that they ever paid me and all the fees that they will pay me in the future." That begs the performance question, of course, but as stated it's pretty true.

Regarding performance, I think it is accurate to characterize the vast majority of FAs as stock pickers, usually by virtue of using stock picking mutual funds. This article: https://web.stanford.edu/~wfsharpe/art/active/active.htm explains why this approach is on average mathematically guaranteed to produce market-lagging results. Other data, most prominently the semiannual S&P Manager Persistence Report Cards, shows that managers who are consistently above average are extremely rare and that their success is probably due simply to good luck. That is how I reach the generalization that FAs are very unlikely to beat a market portfolio over the long term.

My FA does not do any stock picking. He is just a front facing relationship person. There is a team of people for various AA portfolios. My FA does various non-managed stuff for us too. There are several non-managed investments which I own for which he introduced to us for which there is no underlying fee.

 

[Exchme]

There is no real data to support one over the other. I am just pointing out that alot of the illustrations assume same returns on investments for both self-directed and firm-managed funds before AUM fees. Returns vary amongst individuals and so do AUM investments.

This has nothing to do with self-directed or firm-managed, data only support staying in the market far out performs trying to time the market.

Wha? This point has been studied to death. In time period after time period, the risk adjusted returns of something like 90% of funds end up worse than the Total Market within a decade (and of course which funds beat the market kept changing over time, so it is indistinguishable from chance). The underperformance of active funds almost exactly equals the fees. Your advisor might be generating a couple tenths of a percent of alpha but that's nearly enough to overcome the fees.

 

[RetiredHappy]

Wha? This point has been studied to death. In time period after time period, the risk adjusted returns of something like 90% of funds end up worse than the Total Market within a decade (and of course which funds beat the market kept changing over time, so it is indistinguishable from chance). The underperformance of active funds almost exactly equals the fees. Your advisor might be generating a couple tenths of a percent of alpha but that's nearly enough to overcome the fees.

What point has been studied to death? A regular guy trying to pick stocks vs. investing in total market, sure. I would buy that. But with an institution or particular AA portfolio, it gets so specific that you cannot apply generic data to.

 

[OldShooter]

Wha? This point has been studied to death. In time period after time period, the risk adjusted returns of something like 90% of funds end up worse than the Total Market within a decade (and of course which funds beat the market kept changing over time, so it is indistinguishable from chance). The underperformance of active funds almost exactly equals the fees. Your advisor might be generating a couple tenths of a percent of alpha but that's nearly enough to overcome the fees.

What he said.

There is a half-century of consistent data that says stock picking does not work.

As a starting example, Michael Jensen's 1967 paper: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=244153 "The evidence on mutual fund performance (aka professional speculators) indicates not only that these 115 mutual funds were on average not able to predict security prices well enough to outperform a buy-the-market-and-hold policy, but also that there is very little evidence that any individual fund was able to do significantly better than that which we expected from mere random chance."

Nobel Prize winner Dr. William Sharpe on active management, 1991: https://web.stanford.edu/~wfsharpe/art/active/active.htm
and a recent interview here: https://www.ishares.com/us/insights/etf-trends/qa-with-nobel-laureate-william-f-sharpe-on-indexing

Twenty years of data here: S&P SPIVA gateway: https://www.spglobal.com/spdji/en/spiva/#/
S&P Persistence gateway: https://www.spglobal.com/spdji/en/indexology/core/persistence-scorecard/

Video by Kenneth French reporting research done with his partner and Nobel winner Eugene Fama: https://famafrench.dimensional.com/videos/identifying-superior-managers.aspx

Harry Markowitz' original paper, the foundation of Modern Portfolio Theory: "Portfolio Selection" 1952 : https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1540-6261.1952.tb01525.x Here, Markowitz bases his analysis on stock prices as a random process, the implication of which is that stock pickers' successes can be due only to luck.

A book-length explanation: "Winning the Loser's Game" by Charles Ellis https://www.amazon.com/Winning-Losers-Game-Strategies-Successful-dp-1264258461/dp/1264258461 (latest edition, May 2021)

Another book: "Unconventional Success" by David Swensen https://www.amazon.com/Unconventional-Success-Fundamental-Approach-Investment/dp/0743228383

Is that enough? I have more.

 

[RetiredHappy]

What he said.

There is a half-century of consistent data that says stock picking does not work.

As a starting example, Michael Jensen's 1967 paper: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=244153 "The evidence on mutual fund performance (aka professional speculators) indicates not only that these 115 mutual funds were on average not able to predict security prices well enough to outperform a buy-the-market-and-hold policy, but also that there is very little evidence that any individual fund was able to do significantly better than that which we expected from mere random chance."

Nobel Prize winner Dr. William Sharpe on active management, 1991: https://web.stanford.edu/~wfsharpe/art/active/active.htm
and a recent interview here: https://www.ishares.com/us/insights/etf-trends/qa-with-nobel-laureate-william-f-sharpe-on-indexing

Twenty years of data here: S&P SPIVA gateway: https://www.spglobal.com/spdji/en/spiva/#/
S&P Persistence gateway: https://www.spglobal.com/spdji/en/indexology/core/persistence-scorecard/

Video by Kenneth French reporting research done with his partner and Nobel winner Eugene Fama: https://famafrench.dimensional.com/videos/identifying-superior-managers.aspx

Harry Markowitz' original paper, the foundation of Modern Portfolio Theory: "Portfolio Selection" 1952 : https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1540-6261.1952.tb01525.x Here, Markowitz bases his analysis on stock prices as a random process, the implication of which is that stock pickers' successes can be due only to luck.

A book-length explanation: "Winning the Loser's Game" by Charles Ellis https://www.amazon.com/Winning-Losers-Game-Strategies-Successful-dp-1264258461/dp/1264258461 (latest edition, May 2021)

Another book: "Unconventional Success" by David Swensen https://www.amazon.com/Unconventional-Success-Fundamental-Approach-Investment/dp/0743228383

Is that enough? I have more.

I could not read all the links, as a number of them asked to accept cookies, which I refused to accept. Based on the couple which I read through about mutual funds vs. total market returns, I get it. However, our AUM is not about stock picks. Our AUM is spread out over various sectors with different weightage.