My Take on Investors Going it Alone (part 2)

MoneyWatch TalkbackShare your ideas and expertise on this topic

Subscribe to this discussion via Email or RSS

•  
  1

  larry swedroe

  08/28/09 | Report as spam

  RE: My Take on Investors Going it Alone (part 2)

  Thought I would make the following comments on why I think Alan's comments are misleading and even wrong.
  
  First, without an interest in investing one would never take the time to learn how markets work, how stock prices are set and even whether passive or active investing is the winner's game. It is the interest in investing that would lead to investors to learn which is the winning strategy, passive or active investing. It is the interest that would lead them to read books like Alan's, Bill Bernstein's and mine. And without the interest investors would not know that losses of 50% like we incurred in 2008 were actually not unusual (it was the third episode like that in the last 36 years) and thus should be expected. Without the knowledge investors easily could overestimate their willingness to take risk, and doing so when the risk showed up they would likely panic and sell. We know from many studies that this is the behavior of the majority of investors. (see more below)
  
  Second, without the knowledge of the math of investing there is really no way to estimate future returns because past returns don't necessarily tell us that much, and can even be quite misleading. For example at the end of 1974 stocks had returned less than 8 percent since 1926. Yet the knowledge of the math of investing would have led to higher forecasts. And by the end of 1999, at the peak of the bubble, the market had returned over 11 percent, yet the knowledge of the math would have led one to conclude that future returns would be much lower. And without the knowledge of the math there is no way to estimate future returns nor is there any way to determine what is the prudent asset allocation.
  
  Third, the study Alan cites is about brokers as advisors. The very people Alan, Bill and I all recommend investors avoid like the plague. As Bill Bernstein says, they service customers like Bonnie and Clyde serviced banks. Investors should only work with advisors that provide a fiduciary standard of care and base their advice on the science of investing, not their opinions. My blog post of June 10 discusses how to identify a good advisor. Of course, you have to have an interest in investing to learn how to do that.
  
  http://moneywatch.bnet.com/investing/blog/wise-investing/11-principles-for-selecting-an-advisor/505/?tag=col1;blog-river
  
  Fourth, the evidence from many studies shows that the dollar weighted returns earned by investors is well below the time weighted returns earned by the very funds they invest in. Which demonstrates that if an advisor simply kept investors disciplined investors would have benefited from the advice by more than the cost of the advice. And of course there are many ways a good advisor can add value beyond keeping an investor disciplined. Of course you have to find that good advisor. And while they are in the minority based on the number of people in the industry, they are not that hard to find. Just follow the list I provide.
  
  I close with this advice: good advice doesn't have to be expensive, but bad advice will cost you dearly no matter how little you pay for it.

•  
  2

  larry swedroe

  08/28/09 | Report as spam

  RE: My Take on Investors Going it Alone (part 2)

  I wanted to also add the following
  
  All three of us, Alan, Bill and I, have written books to help investors that want to do it themselves, providing them with the knowledge and skills they need to be successful--but, the catch is you have to have an interest in investing to want to read them instead of watching some reality TV show which is what most Americans seem to prefer

•  
  3

  Allan Roth

  08/29/09 | Report as spam

  RE: My Take on Investors Going it Alone (part 2)

  As I wrote earlier, I think Larry is both brilliant and one of the few ?good guys? in investing. Unfortunately, he confuses certain issues in his arguments:
  
  First Larry claims ?without an interest in investing one would never take the time to learn how markets work, how stock prices are set and even whether passive or active investing is the winner's game.? These happen to be irrelevant and simple arithmetic is enough to settle the active passive debate. In second grade, my son was an example of Larry?s argument being flawed.
  
  Second, Larry states ?without the knowledge of the math of investing there is really no way to estimate future returns.? In actuality, one only needs to embrace capitalism in that taking a smart risk with ones money is more likely to give a long-term return than taking no risk.
  
  Third, Larry claims ?the study Alan cites is about brokers as advisers.? In the study itself, the term ?brokers? is defined much more broadly to include registered investment advisers. In fact, it includes Certified Financial Planners and I?ve seen many of my fellow CFPs do some of the most unconscionable things to their clients.
  
  Fourth, Larry notes ?the evidence from many studies shows that the dollar weighted returns earned by investors is well below the time weighted returns earned by the very funds they invest in.? Here, Larry must have just missed the part in my column that said ?My own study demonstrates that people pay a market timing penalty of about 1.5% annually by chasing whatever sector is hot.? This is to say dollar weighted returns trail time weighted but, unfortunately, advisers do no better than individuals on this front.
  
  Larry, I?m proud to be on the same side as you and Bill Bernstein when it comes to investing. I still believe investing should be simpler than even I make it, and that successful investing is about avoiding expenses and emotions.
  
  Thanks for taking the time to reply, Larry.
  

•  
  4

  larry swedroe

  08/29/09 | Report as spam

  RE: My Take on Investors Going it Alone (part 2)

  Let's take them one at a time
  
  First, while Alan is correct that all one needs is a bit of simple arithmetic to know that in aggregate active investors will lose to passive investors, that doesn't tell you anything about the ability to identify the future winners ahead of time. Perhaps there is skill involved and working hard one can find them. But you need to have an interest in investing to read the literature to know the answer. In most endeavors those with skill outperform those that don't have the skills.
  
  Also as I noted you need to know how risky stocks are so you don't take too much risk and exceed your risk tolerance. Again, an interest in investing is needed to do the research. No second grader I know has the answer to either of the two questions.
  
  Second, yes a faith in capitalism is necessary for investing in stocks. But it has nothing to do with estimating future returns. Example when P/Es have been more than 22, stocks have returned less than 5% and when PE/s less than 10 they have returned around 17%. Valuations, not a faith in capitalism, determines expected returns. And without being able to estimate returns there is simply no way to make an intelligent decision about the appropriate asset allocation. And one needs to know the math of investing, as Bill Bernstein pointed out, to estimate returns. Without doing so investors could easily take either too much equity risk, or not enough. Investors that need a 6% return can take less risk than those that need 8%. How do you know how much the equity allocation should be if you cannot estimate returns? Show me a second grader who can estimate stock returns.
  
  Third,as I stated, there are good advisors and bad ones. The studies do not differentiate between those that use advisors that recommend active managers and the active management of portfolios and those that don't. Like anything else, bad advice can cost you dearly. What investors need to know is how to find a good advisor, and one of the criteria needs to be that they base their recommendation on the science of investing (the evidence from peer reviewed journals, not their opinions).
  
  Finally, in a 2005 study by Morningstar, they found that in every case with the exception of one fund family the DWRs earned by investors was below the TWR of the funds. The one exception was a fund family that requires investors to use the right type of advisors, those that not only recommend passive strategies but also recommend disciplined, buy, hold and rebalance investing. So I agree with Allan that bad advice will cost you dearly, but good advice, while it doesn't have to be expensive, can add great value.
  
  While Allan argues that most investors, even a second grader, can do it themselves, to paraphrase the last paragraph of his post: the type of investor that can do it is rare. On that we agree.
  

•  
  5

  Rick Ferri

  08/30/09 | Report as spam

  RE: My Take on Investors Going it Alone (part 2)

  I tend to agree with Larry Swedroe on this. There are many people how should hire an advisor, but don't. Just like there are many people who should get an annual medical exam, but don't. Good intentions aside, portfolios that are no professionally managed tend to be unmanaged.
  
  Investors who want or need an advisor should seek out professional advice. But before doing so, know what you are looking for. If you hire the wrong advisor your are going to be in worse shape than if you did nothing. Here are a few tips:
  
  1) Seek out an advisor that has the same investment philosophy you believe. If you believe in passive investing, hire an advisor who follows that strategy. Don't hire a advisor who thinks they can get you into a rising market and out of a falling one because you will be disappointed.
  
  2) Hire an advisor only for the service that you want, not for the smorgasbord of services they want to sell. For example, if you are only looking for portfolio management services, hire a dedicated advisor that only offers portfolio management services. Don't hire a generalist who charges 1% or more per year for a wrap program that includes portfolio management, financial planning, tax and insurance advice. If you don't want or need those other services, don't pay for them. Pay only for what you want and need.
  
  3) Advisor fees matter! Pay a reasonable fee for portfolio management services. If you are paying a proved advisor 0.5% or less, that is a reasonable fee. If you are paying more than that, then you are paying too much and should consider switching advisors or doing it yourself.
  
  Finally, in the spirit of full discloser, everyone who has commented on the blog is a paid advisor. Alan is a paid advisor, Larry is paid advisor, I am a paid advisor, and even Bill Bernstein is a paid advisor (although he has not posted.) So, take everything in context.
  
  Rick Ferri
  

•  
  6

  bcaslave

  08/31/09 | Report as spam

  RE: My Take on Investors Going it Alone (part 2)

  Read Dan Solin's book. Or Google "couch potato's portfolio". Get those financial advisors out of your pocket! They can't predict the future any better than you can.

•  
  7

  Allan Roth

  08/31/09 | Report as spam

  RE: My Take on Investors Going it Alone (part 2)

  Larry is aware I'm in heated agreement with him that individuals chase hot performance and dollar cost weighted performance is lower than time weighted. What Larry won't seem to acknowledge is a study showing that the average adviser performance is lower than the investor going it alone. This is, in part, because advisers also chase performance.
  
  As far as Larry's claim that a good adviser can "identify the future winners ahead of time," we agree to disagree. I think it's the attempt to identify winners ahead of time that causes the dollar weighted penalty. Knowing we don't know is key!
  
  I think Rick Ferri has it right when he notes paying an adviser 0.5% or less in fees is reasonable. A good adviser can certainly add value to an average investor.
  
  Finally, I think "bcaslave" is right that predicting the short-term future of the market is really hard for both experts and others.
  
  Thanks for everyone's comments.
  
  

•  
  8

  Rick Ferri

  08/31/09 | Report as spam

  RE: My Take on Investors Going it Alone (part 2)

  Allan wrote, "What Larry won't seem to acknowledge is a study showing that the average adviser performance is lower than the investor going it alone."
  
  Sorry, Allan, I have to agree with Larry on this. I believe you are including "brokers" in your definition of advisors, and Larry is only talking about bona fide fee-only advisors. We all know that brokers are not advisors. They are not fiduciaries. They are salespeople. You should not be calling brokers "advisors" and then say "advisors" underperform investors. That is not fair to real advisors.
  
  When reviewing a portfolio, I know if a person has been doing it themselves, if a broker was making recommendations, or if a bona fide advisor put the portfolio together. I can tell you from more than two decades of experience that on average clients with bona-fide advisors do better than if they go it alone.
  
  Like Larry, I truly believe that people who use advisors get better returns than people who do not. And like Larry, I am only speaking of people who use honest to goodness fee-only advisors. Not broker variety make-believe advisors.
  
  Rick Ferri
  
  

•  
  9

  Allan Roth

  08/31/09 | Report as spam

  RE: My Take on Investors Going it Alone (part 2)

  Rick wrote, "Sorry, Allan, I have to agree with Larry on this. I believe you are including "brokers" in your definition of advisors, and Larry is only talking about bona fide fee-only advisors."
  
  The columns were about going it alone. If one doesn't go it alone, they use a professional who is compensated in several different ways, including different fee based models. I happen to believe that fee based models (which some brokers use) are better than transaction based models (which some fiduciaries use).
  
  You and Larry may be correct in that an average fee-based adviser does better than an individual going it alone, but I haven't seen a study to support or refute this hypothesis.
  
  I believe you gave good advice in the 5th comment above in selecting an adviser and I like your comment "f you are paying a proved advisor 0.5% or less, that is a reasonable fee."
  

•  
  10

  larry swedroe

  09/01/09 | Report as spam

  RE: My Take on Investors Going it Alone (part 2)

  Whoa Allan, at least get your claims correct
  
  First, on the advisors, as I said, there are good and bad advisors. So using a bad advisor is probably as bad or likely even worse than going it alone. Investors have a very good chance of identifying a good advisor if they follow the advice I gave in my column. A few pointers without repeating the column is that the advice should be based on the research, not opinions, on investing. Now that leads to the conclusion one should work with advisors that use low cost passive funds and do not try to identify the future winners,
  
  Now that totally refutes your claim about my saying I could identify future winners. I made no such claim here, nor have I ever made such a claim and in fact my columns and books are all about the inability of people to do it.
  
  Third, I did in fact cite the Morningstar study for you that showed that investors working with advisors who were using passive funds and were disciplined did outperform.
  
  And finally I will add that there are many ways a good advisor can add value well beyond the investment side. It is about integrating a well-thought-out investment plan into a well-thought-out estate tax and risk management plan. At least IMO.
  
  bcaslave
  Your premise is correct, that advisors cannot identify winners ahead of time any better than investors can. But that has nothing to do with the value a good advisor adds. It is not about identifying the future winners. Investing is about designing a plan that gives you the best odds of success of achieving that plan without exceeding your ablity, willingness or need to take risk. Then it is about choosing the best vehicles to implement the plan. Then it is about disciplined and cost and tax effective rebalancing and tax management throughout the year. And then it is about altering the plan as time passes and circumstances change (the assumptions you put into the plan). And then it is about getting the rest of the financial situation right as well.
  
  I hope that is helpful

•  
  11

  Allan Roth

  09/01/09 | Report as spam

  RE: My Take on Investors Going it Alone (part 2)

  Larry Swedroe wrote, "Whoa Allan, at least get your claims correct."
  
  Your comment "...that doesn't tell you anything about the ability to identify the future winners ahead of time" was a direct quote from the fourth comment above. I don't believe one should look for this in an adviser and, from everything else I've read from your outstanding work, I thought you agreed.
  
  I would agree with you and Rick that an adviser using a low cost passive approach can add value. I would also agree that an adviser can add value outside of investing such as risk management, taxes, and estate planning.
  
  Still, as a fee-based adviser, I'm wondering if I'm throwing in bias in my belief that we add more value than a transaction based adviser.

•  
  12

  larry swedroe

  09/01/09 | Report as spam

  RE: My Take on Investors Going it Alone (part 2)

  Allan
  I am having hard time figuring your comments out. I clearly state that one cannot predict future winners ahead of time. My books state that, my blogs state that and everything I wrote here says that, so I have no idea how you came to that conclusion
  
  what I said was this: You know that passive must collectively beat active by the simple math. But that is not enough. You also must know that past performance is not a predictor or otherwise you can simply believe that you can identify the few winners. We both hear investor say things like I know passive beats active collectively but who cares about the average active fund, I only buy the great funds--the future winners based on past performance.
  
  Without an interest in the academic literature one would not know the answer to that one. You have to have an interest to know that.
  
  The point is that the simple math doesn't tell you that you cannot identify future winners. You have to read the academic literature (or books like mine) to learn that the evidence shows that no one yet has found a way to do it.
  
  and as I stated there is NO WAY without an understanding of the math that anyone can rationally create an effective asset allocation because you cannot simply rely on past returns to estimate future returns. And I could give many other examples of how the lack of the math could lead to serious investment errors. And these involve things your second grader would not be able to handle (:-))
  
  best
  Larry

•  
  13

  MrRosemary

  09/01/09 | Report as spam

  RE: My Take on Investors Going it Alone (part 2)

  The problem with all of this is the selection bias present in the comparison between individual investor classes. I don't have any research to support what I'm about to say, but since this is the Internet, I will just say it as fact and churn away in ignorance until I am corrected -- at that point, it will devolve into name calling and empty threats.
  
  But to get there, we must begin with the opinions presented as fact.
  
  I would say that people who hire an advisor, regardless of flavor, tend to be wealthier, more sophisticated and indeed already more capable of managing their own money anyway than those that don't. These people have said, like Socrates said, "that I do not think I know what I do not know."
  
  So by virtue of their sophistication, they possess already an advantage of being able to hire someone to manage their money -- a costly venture considering the minimums most advisors accept (commonly >$100,000, but sometimes >$250,000). The very people most likely to make stupid mistakes, young people, people with a small amount of money in a 401k, do not have the ability to obtain effective money management at a time of highest need.
  
  Hence, money begets more money.
  
  I don't know if I understand the comment Larry made about using math to predict the future. I assume you mean probabilities of a given even occurring based on a series on inputs. I'm not sure about this.
  
  There's nothing magical, or mystical, about investing as far as I can tell. There's a learning curve, yes, but I don't know why this is inherently prohibitive to overcome. You can't be successful at anything you don't care about.
  
  I also have a healthy bit of skepticism about financial advisors in general, not based on any ill experience mind you. At one time, access to markets was much more prohibitive and much more restricted than it is today for the individual. But now I can trade funky currency pairs 24 hours a day. I can trade equities at any major market in the world, in their currency, at their times. I can get very good order routing without being a big time player.
  
  The field is much more level now that in the past. At the same time, I can end up in financial ruin that much quicker. Forex trading at a 50:1 leverage is pretty easy for even some blue collar guy to set up in his basement.
  
  Long story short, though there are risks, people are perfectly capable of managing their own retirement so long as they can honestly admit when they don't know what the hell they're doing, and will devote some time to figuring it out.
  
  
  
  
  
  
  

•  
  14

  larry swedroe

  09/02/09 | Report as spam

  RE: My Take on Investors Going it Alone (part 2)

  Mr Rosemary
  
  Two points here I would like to make. You should have a healthy skepticism of advisors. Hiring an advisor to play the game on the wrong ball field (trying to time the market, pick stocks, find the future winners) is as bad as investors trying to do that themselves--at least the investing part. They might still add value in terms of financial planning, estate planning, insurance, etc.
  
  The second point is about the math. As my friend Bill Bernstein points out one cannot even develop a plan, let alone adapt it over time, if one cannot estimate returns. He refers to the Gordon model as one way to do it. Without knowing how to do that there is simply no way to know one's need to take risk---and that determines how much equity risk one needs.
  
  And one also needs to know about how volatility impacts returns in the withdrawal plan and thus can impact the odds of success of a plan. You have to understand that returns are probabilistic and not deterministic, so all you can do is estimate the probabilities of success. The best way to do that is to use an MC simulator. And one needs to know how to run it and what inputs to use. And one also needs to understand history of investing to know that things that never happened can and do happen so that your plan needs to include a "plan B"
  
  There are many more examples I could give, like understanding how correlations drift and how asset classes mix together. These are all key to building a plan with the greatest odds of success and having the discipline to stay the course when things go awry. It is easy to stay disciplined when things go right, but much tougher when things don't
  
  Best
  Larry

•  
  15

  Allan Roth

  09/02/09 | Report as spam

  RE: My Take on Investors Going it Alone (part 2)

  Mr. Rosemary,
  
  Healthy skepticism is always good. Whether it's a financial adviser or any professional, trust an adviser enough to listen, but never so much to follow blindly.
  
  Thanks for your comment.

•  
  16

  Allan Roth

  09/02/09 | Report as spam

  RE: My Take on Investors Going it Alone (part 2)

  Larry,
  
  My math skills are strong. Thus, I am capable of making huge investment mistakes like Einstein and Newton.
  
  It's simple to create a diversified portfolio and we agree to disagree on the math skills required. I think second grade arithmetic is all that is required. While simple to create, I agree with you that it's not easy to stay the course on that allocation. It goes against our instincts.
  
  I agree with you that withdrawal rates, taxes, estate planning, and risk management are things an average adviser can do better than an average investor.
  
  Finally, my son is now in sixth grade - want to bet against his math skills now ?
  
  Thanks for all of your comments, Larry!

•  
  17

  larry swedroe

  09/02/09 | Report as spam

  RE: My Take on Investors Going it Alone (part 2)

  Allan
  In order to decide on an AA one must estimate returns for the various asset classes. And without a knowledge of the math of investing there is no way your son could estimate returns, nor then figure out the right AA, nor could any 6th grader I know, nor most individual investors.
  
  And as you know one must also know math skills at a higher level than 6th grade to understand how much to withdraw from a portfolio and have a reasonable odds of successfully not running out of money.
  
  Also note all of my comments have been about not the average advisor, but those advisors (firms) that bring the skills and standards of care I mentioned in my blog and in my books. Choosing an advisor without such skills can lead to just as bad results, or worse (because of the costs) than if one were to go it alone.
  
  So yes I would bet against your son's skills (:-)). Doubt he could run an MC simulation for one thing, a helpful tool to determine the right AA as well as the right withdrawal rate.
  
  Best
  Larry

•  
  18

  Allan Roth

  09/02/09 | Report as spam

  RE: My Take on Investors Going it Alone (part 2)

  Larry,
  
  I assume by AA you mean "asset allocation" but this debate may have me drinking a bit more so I may need "Alcohol Anonymous" pretty soon.
  
  Monte Carlo simulation is a great tool, but often misused. I think my math skills are pretty good, having written the Monte Carlo simulation in Jack Bogle's Little Book. Yet, my son Kevin is still a better investor than me.
  
  We agree that a good adviser charging "reasonable" fees can add value. You are one of the good guys, Larry. I just don't always agree with you but respect you enough to argue with. I do learn from you!
  
  

•  
  19

  Allan Roth

  09/02/09 | Report as spam

  Message has been deleted.

•  
  20

  Nathan Hale

  09/02/09 | Report as spam

  RE: My Take on Investors Going it Alone (part 2)

  What a great debate. Allan touched on this in one of his comments, but I agree with Warren Buffett, who said that investing is like losing weight -- simple, but not easy.
  
  There's a lot to that analogy, in my opinion. The majority of Americans are overweight, but they're unable to follow a simple strategy of eating less and exercising more. Thus they end up spending billions of dollars on dieting schemes that, at the end of the day, are successful only if they get people to eat less and exercise more.
  
  Likewise, the majority of Americans are lousy investors, and are unable to follow a simple strategy of diversifying broadly and minimizing expenses. Thus, they end up spending billions of dollars on investment schemes that, at the end of the day, are successful only to the extent that they get investors to diversify broadly and minimize expenses.
  
  I agree that a higher level of math might be necessary to help investors find the most efficient portfolio for the achievement of their long-term goals, and that a good advisor might help in building such a portfolio.
  
  Might such elegance enhance the long-term returns of such a portfolio versus a low cost, three fund portfolio -- holding the entire domestic and international stock markets, and the entire US bond market -- rebalanced annually? Perhaps. But the fact remains that the latter portfolio would be an unalloyed improvement over the strategies that most investors use.
  
  So in my view, a good advisor is like a good personal trainer -- someone who can motivate, educate, and keep you on the straight and narrow to efficiently achieve your goals. That doesn't mean, in my opinion, that individual investors can't achieve functionally equivalent results on their own.

•  
  21

  larry swedroe

  09/03/09 | Report as spam

  RE: My Take on Investors Going it Alone (part 2)

  Allan
  We also agree that MC is an important tool, and that it is often misused by those that don't understand the math behind it, and its limitations.
  
  One of the biggest problems is that people tend to focus on the odds of success, rather than the odds of failure. And they fail to develop a "plan B" if the left tail risk happens to show up, as it did in 2008.
  
  But it can be extremely useful, so much so that IMO it is hard in many cases to determine the right AA without the use of one. One example is that people often have dual goals, say not running out of money but also leaving an estate of a certain size. The right AA is different for each of those goals, with the more conservative one likely producing the highest odds of success while a more aggressive equity allocation would be the right one for the second goal. There is obviously no right answer since it will depend on the personal values of the individual. But an MC simulation can help you make that decision.
  
  Along the same lines, it can help show the odds of success of a plan with or without long term care insurance. Obviously your odds of not running out of money go up if you don't buy one and don't need one. And also the odds of leaving an estate of a certain size. But it then can show you the odds of both if you buy insurance and need it. Typically what you find is that the odds are running out of money go up by a small amount (because of the costs of the policy), but the odds of leaving a certain size estate go down much further if you don't buy it and need it. Again, without running the simulation it is hard to see how one can make the decision
  
  These are important issues and also show,as I am sure you know, that an investment plan is important but not sufficient; you need to integrate that investment plan into an overall estate, tax and risk management (insurance of all kinds) plan. I wonder how many individuals going it alone get it all right?
  
  

•  
  22

  Allan Roth

  09/03/09 | Report as spam

  RE: My Take on Investors Going it Alone (part 2)

  Larry,
  
  Planners need to focus on more than the odds of failure. The consequences of failure matter too. For example, the consequences of outliving ones money are higher than dying with a sizable portfolio.
  
  The efficient frontier can be useful in thinking of asset allocation but tiny changes in assumptions can lead to drastically different allocations. Common sense needs to also be applied.
  
  As you know, we are in heated agreement that a good planner can add value to these important issues.

•  
  23

  Allan Roth

  09/03/09 | Report as spam

  RE: My Take on Investors Going it Alone (part 2)

  Nathan,
  
  Thanks for your wise comments. I think the one common thing in my columns and all of these comments is that a good adviser can add value to an average investor.

•  
  24

  larry swedroe

  09/03/09 | Report as spam

  RE: My Take on Investors Going it Alone (part 2)

  Allan
  I completely agree. My post was not meant to be all inclusive, just examples. In fact one of my favorite expressions is that the consequences of decisions should dominate the probabilities of outcomes in making an investment decision.And that is why I mentioned the need for a "plan B." And you have to be sure you are willing and able to execute that plan in the event the risks do show up, as they did last year.
  
  And I will add, as you note MC can be and are often misused, so that is why you need to have those math skills beyond that of the second or even sixth grader (:-))
  
  
  

•  
  25

  larry swedroe

  09/03/09 | Report as spam

  RE: My Take on Investors Going it Alone (part 2)

  Allan
  
  To quote you "I think the one common thing in my columns and all of these comments is that a good adviser can add value to an average investor." That was my premise to begin with. So it appears we agree. And my blog here http://moneywatch.bnet.com/investing/blog/wise-investing/11-principles-for-selecting-an-advisor/505/?tag=col1;blog-river
  provides guidance on how to find a good advisor.
  
  Best
  Larry
  
  

•  
  26

  Allan Roth

  09/03/09 | Report as spam

  RE: My Take on Investors Going it Alone (part 2)

  Larry,
  
  I think we agree on the opinion that a good adviser can add value to an investor. This is perhaps the most important point.
  
  I think we agree to disagree on two things:
  
  1) Whether or not, as an entire class, investors going it alone do better than those using an adviser.
  
  2) The degree of math skills needed in investing.
  
  If you and I can agree to disagree on these two points, this agreement will be something to build on
  
  Larry, I so appreciate your comments on this!
  
  Thanks.
  
  Allan

•  
  27

  larry swedroe

  09/03/09 | Report as spam

  RE: My Take on Investors Going it Alone (part 2)

  Allan
  We will agree to disagree on the level of math skills needed. But I feel pretty good having Bill Bernstein on my side of the debate. Also your own comments about MC simulators as valuable tools yet it is easy to make mistakes and many misuse use it seems to contradict your own statements. And as I noted you also need to know math skills at fairly high level to know what a prudent withdrawal rate should be. But be that as it may.
  
  I don't think we disagree much on the first point you listed. I have always directed my comments towards investors using the only type of advisors they should consider--good ones--meaning those providing a fiduciary standard of care, are fee only and rely on the evidence not their opinions --which means they recommend only passive strategies and get clients to act like postage stamps--sticking to their plans until they reach their goals.
  
  There are lots of advisors that make the same mistakes individual investors make, like trying to time the market and chasing yesterday's winners. Why pay someone to make the same mistakes you can make on your own? (:-))
  
  Finally, I do want to recommend Allan's excellent new book.

•  
  28

  Allan Roth

  09/03/09 | Report as spam

  RE: My Take on Investors Going it Alone (part 2)

  Larry,
  
  Just today, I dealt with a fiduciary that had their 93 year old client in a nursing home 71% in equities before the market crash. Didn't need to run a Monte Carlo model to find that was an inappropriate allocation. Another CFP I think I mentioned, couldn't decide whether to charge the client on a transaction or fee-based model so he used both simultaneously putting his client in a vehicle with 5.29% annual fees. Sometimes I think those with a "fiduciary" relationship seem to be the worst offenders. This is not statistical evidence however.
  
  ... and I can't wait to read Larry's new book when it comes out!
  
  

•  
  29

  larry swedroe

  09/03/09 | Report as spam

  RE: My Take on Investors Going it Alone (part 2)

  Will let you have the last word, but your story only proves my point about choosing the right kind of advisor. Anyone following my guidelines would have avoided that problem
  
  And yes you can do somethings without high math. But not all. Sort of like saying you had homeowners insurance but forgot the flood insurance while living in New Orleans before Katrina.
  
  Best
  Larry

•  
  30

  Allan Roth

  09/04/09 | Report as spam

  RE: My Take on Investors Going it Alone (part 2)

  Larry,
  
  isn't there a contraction in these words
  
  "Will let you have the last word, but..."
  
  Thanks.
  
  Allan

•  
  31

  jerry.alexandratos

  09/09/09 | Report as spam

  RE: My Take on Investors Going it Alone (part 2)

  Gentlemen,
  I respectfully suggest that you are not in disagreement. You are merely not looking at the same side of the argument. Mr. Roth is saying that an intelligent, informed investor does not need an advisor to get good results. Mr. Swedroe is saying that you need the _information_ of a good advisor to make good investing decisions. You are both correct. Without the math done by good investors who are also good advisors, a reasonably educated layman cannot by definition become informed investors. They key is that we need the _information_, from books, from newsletters like Mr. Roths', from properly run 401(k) plans. To quote (or paraphrase) the great Isaac, "I can see further because I stand on the shoulders of giants." I do not need to do all of the math that Dr. Einstein performed, nor be able to reproduce his proofs, to understand and use the simple and elegant formula e=mc^2.
  Likewise, I do not need to be able to write my own Monte Carlo simulator, nor run all of the 10,000 possible variations, in order to figure out which gives me the highest probability of success. I do not need to do the same research nor have the same personal experience as Mr. Bogle to know that paying extra money to a mutual fund for "active" management will just cost me money for (at best) no better return.
  I read several sources of financial advice. I selected my own funds, both within the federal TSP and in Vanguard. When my wife and I hired a fee-only financial adviser for help managing her money, he looked at my own allocations as well. He determined that my returns were within 0.2% of his own advice, so it was not worth making any major changes. I admit that I am slightly smarter than the average bear, but the advice that I follow is not 'rocket science'. It is mainly common sense, backed by a determination to only do what makes sense not follow the herd. It makes sense to Mr. Roth's "second grader", who has not been snowed by the rather shrewd advertising of Wall Street. Like Mr. Roth said, simple, but not easy.
  Oh, why did I hire an adviser for my wife's money? I called it "marriage insurance". I slanted him towards low cost funds like Vanguard. He gave good, unbiased advice. My wife started investing during the crash (albeit queasily) and made money last year.
  So, gentlemen, you are both right, but you are not arguing the same argument from the same perspective. When one does so, I mainly agree with Mr. Roth.
  regards,
  Jerry

•  
  32

  Allan Roth

  09/09/09 | Report as spam

  RE: My Take on Investors Going it Alone (part 2)

  Jerry,
  
  Your comments are quite insightful - I just posted a new blog on where we agree and disagree.
  
  http://moneywatch.bnet.com/investing/blog/irrational-investor/smarter-retirement/543/
  
  Bottom line is that we agree on the most important point in that a good adviser can add value.
  
  Thanks for you comment.

•  
  33

  Allan Roth

  09/09/09 | Report as spam

  RE: My Take on Investors Going it Alone (part 2)

  Oops - wrong link above. It will be posted later this week. Sorry about that!

•  
  34

  Alskar

  09/09/09 | Report as spam

  Finding a Good Financial Advisor

  Larry,
  
  I'll be the first to admit that I don't channel divine truth, but in my experience it is FAR from simple (or even easy) to find a good financial adviser. Here's my experience:
  I had tried a few fee-based advisers, but found them to be less than responsive and frankly not that bright. At least two of them never went to college. When my portfolio started becoming uncomfortably large I started searching for an adviser I could trust. I searched on-and-off for at least two years interviewing over a dozen fee-only advisers that I found from industry websites, friends, Angie's list, and so on. After several of these interviews I felt like I needed a shower. Most of the others had nothing, but very basic advice to offer. One very nice, well meaning retired school teacher advised me to put all of my money in tax-free municipal bond funds (inside my tax-free IRA account). Another very nice piano teacher that "moonlighted" as a fee-only adviser suggested that I buy an annuity...from her! She apparently didn't understand the concept of "fee-only".
  Based on conversations I've had with my peers, my experience is far from unusual. The hard cold truth is simply that the vast majority of financial advisers aren't very competent. Some are out-and-out crooks. My own father had an adviser through Investor Diversified Services (IDS) which eventually became American Express and is now Ameriprise. She was churning his account hard, but my dad stayed with her until he moved to Denver mostly out of pure inertia. His new Ameriprise adviser in Denver thankfully doesn't churn his account nearly as bad, but he consistently tells my dad that he's "beating the market" by 1-5% a year. He does this by comparing my dad's portfolio to the Russell 3000 index without adjusting the index for dividends or considering the taxes my dad has to pay for the considerable turnover in his account. For his advice my dad pays 2% of his portfolio. The adviser leaves out the fact that he's also paying expense ratios on the funds he's in, some of which are just ridiculous. What kind of index ETF has an expense ratio of 0.6%!!! My dad is not sophisticated enough to understand the BS he's being sold. My mom likes the adviser because he sends her roses for her birthday ... which is nice, but for the ~$100K a year they're paying him he should be giving her a car every year for her birthday.
  So no doubt there are good, honest advisers out there, but finding the good in a pile of bad, even criminal one's is far from easy, even for somebody with considerable skills.
  

•  
  35

  Allan Roth

  09/09/09 | Report as spam

  RE: My Take on Investors Going it Alone (part 2)

  Alskar,
  
  I think you are right. It's not like you can check their track record to see their performance.
  
  Thanks for your comment.

•  
  36

  larry swedroe

  09/10/09 | Report as spam

  RE: My Take on Investors Going it Alone (part 2)

  Alskar
  
  I both agree and disagree with your comments.
  
  Where we agree; unfortunately it is far too easy to become a financial advisor in the US. Just look at the advertisements from B/Ds that are seeking new advisors, they say things like "no experience necessary." And the tests that are required are way too easy to pass. So there are far too many that don't deserve either your confidence or trust.
  
  But where we disagree is that if you follow my advice and use the list to help you find a good advisor, it would make the task much easier. Simply limiting your search to fee-only advisors that only use passive vehicles would also make the task simpler. But IMO that is not enough. Here is my suggested list of requirements.
  
  http://moneywatch.bnet.com/investing/blog/wise-investing/11-principles-for-selecting-an-advisor/505/?tag=col1;blog-river
  
  I would add that even after someone met all of the above requirements, and I do mean all, further due diligence is required. I would ask local attorneys and CPAs about the reputation of the advisory firm. The reputation should be unblemished.
  
  I hope that is helpful
  
  

•  
  37

  Allan Roth

  09/10/09 | Report as spam

  RE: My Take on Investors Going it Alone (part 2)

  Alskar.
  
  I totally agree with you. I have a client that followed every one of Larry's steps and ended up with a portfolio with costs as high as 5.29% annually. His planner was a CFP with fiduciary duty, quoted academic research, had disclosure in a few thousand pages of documents, etc.
  
  To this day, this planner believes he is a force for good. He also had attorneys and CPA that liked him because they didn't understand what he did. Truth be told, the planner didn't understand his client was paying a full 5.29% annually.
  
  

•  
  38

  Alskar

  09/10/09 | Report as spam

  Finding a Good Financial Advisor

  Larry,
  
  I feel like I did follow most of the steps you recommend when I went looking for a financial adviser. I'm a highly resourceful, highly motivated person of higher than average intelligence. Even so, I spent hours and hours shifting through the chaff and never did find the wheat. With the amount of time I spent interviewing and doing due diligence I could have read 10 good books.
  I also think it takes a solid understanding of the market and various investments to be able to properly interview and vet a potential adviser. If I have the knowledge to properly interview an adviser, why not just "go it alone"?
  At the end of my two year on-again, off-again search for an adviser I discovered that I knew more about investing than the majority of the people I was interviewing. At least I knew enough to NOT put tax free municipal bonds in my tax advantaged IRA, something that at least two advisers I interviewed didn't understand.
  The final straw came when I left my job of 15 years and I had to do something with my 401(k). I had an adviser that was recommended to me by a college, had a clean record with FINRA, and had all of the right certifications and credentials. He had about $10K of my money from a previous job. I pushed him for weeks to itemize what it was going to cost me to have him manage my money. He finally told me that it was costing me 2.35% per year! I had no idea it was that high. Even worse HE HAD NO IDEA the fees were that high. He was genuinely surprised and frankly a bit embarrassed.
  The reason that he was surprised is that the entire industry is built around keeping the fees a secret. There's a very good reason that New York attorney general Eliot Spitzer, described brokers and financial advisers as a "giant fleecing machine" (http://www.sanfranmag.com/story/best-investment-advice-youll-never-get). That reason is simply that there is no reliable data on which to base a hiring decision. In addition, there are a HOST of hidden fees. Have you ever tried to figure out what you're paying in fees on your 401(k)? I've spent hours and hours trying to dig them out, but the fees are hidden. I read the prospectus and I see 12b-1 fees described as "marketing and advertising fees". Seems simple enough, but then I find out that buried in the 12b-1 fees is something called "revenue sharing" which seems kind of egalitarian until you find out that what they're calling "revenue sharing" is really an under-the-table kickback that would be OUT AND OUT illegal in any other industry. Every employer I've ever had has had a policy against what the mutual fund industry does every day with "revenue sharing". If I asked a vendor to give me a little "something something" on the side for selecting him as our supplier, I would be shown the door before the day was out, but it's SOP (standard operating procedure) in the financial services industry.
  Here's another revelation I had in this process: The SEC isn't a agency of the US government! The foxes really are guarding the hen house. It's no wonder that every few years there's a scandal. This year we've got two: Madoff and Subprime. A few years ago, it was the "surprise" that mutual fund companies were allowing their "best" customers to trade after hours and post date the trades so they were guaranteed a gain. Then there was the "surprise" that mutual funds were allowing their best customers to trade frequently and sharing their trading expenses with the rest of the fund owners.
  So at this point wild horses couldn't drag me into the process of finding a financial adviser. My own guidance may not be perfect, but at least I have my own self-interest in mind something that is very rare (> 3 sigma) in in the financial advisers I've interviewed. I have excellent math skills, and a decent understanding of what I'm doing. That puts me in the >3 sigma ranking of financial advisers, plus I don't charge myself 5% a year!

•  
  39

  Allan Roth

  09/11/09 | Report as spam

  RE: My Take on Investors Going it Alone (part 2)

  Alskar,
  
  By coincidence, I just posted a response to Larry on another column before reading your post above. Bottom line is "I couldn't agree more with you!" See my comment #6 in the link below.
  
  http://moneywatch.bnet.com/investing/blog/irrational-investor/my-take-on-investors-going-it-alone-revisited/552/?tag=col1;blog-river

•  
  40

  larry swedroe

  09/12/09 | Report as spam

  RE: My Take on Investors Going it Alone (part 2)

  Alskar
  
  I fully agree there are many advisors that are not "good advisors." But they could not pass the tests I laid out. Your own examples demonstrate that. For example, you point out the trailing fees. Well that is a disclosure item. It must be disclosed.
  
  I suggest you read the other thread and my response to Alan here
  http://moneywatch.bnet.com/investing/blog/irrational-investor/my-take-on-investors-going-it-alone-revisited/552/#16480_79923
  
  It is unfortunate that there are so many advisors that cannot pass the tests I laid out. But that doesn't mean there are not thousands that can. And they are not that hard to find. One simple way for example is to go to the website of Dimensional Fund Advisors and search for advisors there. Now there funds IMO are the state of the art, low cost, passive, and tax efficient. The advisors there are all fee based, not commissioned and I believe they all provide a fiduciary standard of care. Now you still have to do the other due diligence I recommend, including reading the ADV.
  
  
  Best
  Larry

•  
  41

  Allan Roth

  09/12/09 | Report as spam

  RE: My Take on Investors Going it Alone (part 2)

  Larry,
  
  Regarding your statement "It is unfortunate that there are so many advisors that cannot pass the tests I laid out."
  
  I think it's unfortunate that far too many bad advisers can pass this test.
  
  

•  
  42

  Alskar

  09/12/09 | Report as spam

  RE: My Take on Investors Going it Alone (part 2)

  Hi Larry,
  
  It's much harder than you think to put your list into action. We've been talking in generalities. Let me get more specific. I see two steps that are required to put your list into action. They are:
  
  1. Find a suitable advisor to interview
  2. Determine if he or she meets criteria on your list.
  
  Let me go into these in more detail:
  
  With regard to #1:
  
  I asked friends, colleagues, and neighbors for suggestions. None of them knew any "fee only" advisors and most of them didn't even know what "fee only" meant. I search the internet for hours and hours. There are several site that are dedicated to "fee only" advisors such as www.garrettplanningnetwork.com. Garrett Planning has an interview form on their website, but nowhere does it mention the ADV form. The same applies to other websites such as www.napfa.org; www.fpaforfinancialplanning.org; www.cfp.net; and www.finra.org. For this reason I had NO IDEA that the ADV even existed until one of the 23 advisors I interviewed sent his to me. You may consider that to be ignorant or lazy, however I consider the ADV to be the best kept secret of the financial planning industry. So the for the first ~12 potential advisors I interviewed I didn't know to ask for an ADV. Once I started asking for an ADV I noticed a sudden drop in the number of return calls. I followed up on some of them and was told that "they forgot" to send the ADV. Right...forgot...more like afraid to send it. So after the first 10 or so, my list of 23 only include advisers that send me an ADV which was around 2/3 of the ones I contacted. Angie's List was no help whatsoever.
  
  With Regard to #2:
  
  It's now time to determine if they meet the criteria on your list:
  How do I know if they are following a "fiduciary standard of care"? I don't see a box on the ADV that says anything like that.
  Some of the items from your list can be taken directly off the ADV, others like "attentive service" are highly subjective and I know of no way to pre-evaluate them.
  None of the ADV forms I was sent included any disciplinary action. I don't even know where it would be included on the ADV. When I fired the advisor that was unknowingly charging me 2.35% for his service, I filed a complaint. A year later I had a buddy request his ADV. It was identical to the one he sent me, that is, no note of my complaint.
  
  So from my point of view:
  
  1. The ADV form need to become better known by consumers. Consumers need to know what it is and how to use it.
  2. There is no reliable disciplinary mechanism in-place for financial advisers.
  3. The time it would take the average person to follow your list is in the hundreds of hours. Most would need to be educated about what the items on your list mean before they could even begin.
  
  My point is simply that it's not as easy (or simple for that matter) to find a good, honest financial adviser as you make it out to be.
  
  Maybe you or Allan could write a column or book about how to do it.
  
  I will look at the Dimensional Fund website. That is a resource I didn't find in my search. I didn't even know about Dimensional Funds until I read Daniel Solin's 401(k) book.

•  
  43

  Allan Roth

  09/12/09 | Report as spam

  RE: My Take on Investors Going it Alone (part 2)

  Alskar,
  
  I'll write a column on tough questions for your adviser. Thanks for the idea!
  
  Allan

•  
  44

  Alskar

  09/12/09 | Report as spam

  RE: My Take on Investors Going it Alone (part 2)

  Allan,
  
  Glad some good came of this!
  
  I just spent an hour fooling around on FINRA's website (www.finra.org). I did a "Broker Check" on "Allan Roth", "Larry Swedroe", "Madoff", and various combinations of "Robert Allen Stanford". Here's what I found:
  
  Allan Roth isn't listed at all
  Larry Swedroe isn't listed at all
  Bernard Madoff is listed, currently unregistered. Under "Disclosure of Customer Disputes, Disciplinary, and Regulatory Events" it simple says "Yes" and lists three "event types":
  Regulatory Event
  Civil Event
  Financial
  Peter Madoff only has one "financial event"
  Shana Madoff Swanson is unregistered, but has a clean record.
  Andrew Madoff is similarly unregistered, but has a clean record.
  Robert Allen Stanford isn't listed
  
  I realize that FINRA only lists brokers (broker/dealers whatever), but I bet most people don't know that.
  
  So without more knowledge you, Larry Swedroe, and R. Allen Stanford all appear to be equivalent (unregistered)!! There's no mention of the fact that Bernard Madoff is in jail. Most of his buddies at Madoff Investments have clean records.
  
  So how can a common person tell the crooks from the good guys???
  
  I realize that you and Larry are two of the good guys (even if you disagree on this subject), but how in heavens name would the average person know that?
  
  I recently changed insurance companies because Consumer Reports listed my previous company DEAD LAST in their reviews. I thought they sucked, but here was independent confirmation.
  
  There needs to be something like Consumer Reports for financial advisors. They rated brokers in the May 2009 issue BTW. Merrill Lynch came in dead last!

•  
  45

  larry swedroe

  09/13/09 | Report as spam

  RE: My Take on Investors Going it Alone (part 2)

  Well we will have to just disagree on this. I think it is very easy to avoid the vast majority of bad advisors. You rule out any that work for firms that don't provide a fiduciary standard of care. All one has to do is ask for that. Simple question to ask and get in writing.
  
  Ruling out those that don't charge fees rules out another large majority
  
  Asking to see financial statements showing they own the same things you do, would rule out another large chunk.
  
  And asking other professionals that you respect will also help.
  
  And so will following the other rules.
  
  But they won't protect against every one--but as I said in the other thread, that is the case with any profession
  
  
  

•  
  46

  Allan Roth

  09/13/09 | Report as spam

  RE: My Take on Investors Going it Alone (part 2)

  Alskar,
  
  I never thought I'd like a comment that compared me to Madoff, but I think you make a great point. I wish regulators did a much better job of protecting the public.
  
  I love your comments - thanks so much.

•  
  47

  Alskar

  09/13/09 | Report as spam

  RE: My Take on Investors Going it Alone (part 2)

  Hi Larry,
  
  At the risk of beating a dead horse:
  
  I took your advice and went to www.dfaus.com and ask for a referral to one of their local advisors. They sent the name of three companies, but two of them were the same company doing business in two different cities, one of which is a 3+ hour drive away. So now I have two names and I'm ready to vet them against your list.
  
  Company A (the one with two offices) charges 1% for portfolio's of $1,000,000 or more. According to Company A's website they "...charge more for smaller portfolio's, but never more than 1.5%..." They require a minimum of $100K in every clients portfolio (which is fine). My portfolio is less than $400K so I suspect that I would be charged the full 1.5%. Adding in the expense ratios for the DFA funds gets me back to the "magic" 2% number known and loved by so many advisors. So Company A is out because they don't meet your 0.5% limit.
  
  Company B requires a minimum of $250K under advisement. They charge "...0.25% paid in advance each quarter..." which is something like 1% per year (more if the market is rising, less if falling). So Company B is out because they too charge more than 0.5% per year.
  
  For whatever it's worth NONE of non-hourly, fee-only advisors in my notes charge less than 1%.
  
  So I've hit a dead end again. This is EXACTLY how the process of finding an advisor went for me. Lots of wasted time digging through websites, filling out online forms to be referred to "registered advisors" only to come to a dead end.
  
  It's not as easy as you think to find an advisor.

•  
  48

  Allan Roth

  09/13/09 | Report as spam

  RE: My Take on Investors Going it Alone (part 2)

  I just reviewed a protfolio filled with great funds from Vanguard, DFA, and iShres. The adviser charged 1.79%, which put them at about a 2.2% total expense.
  
  A good portfolio at a very expensive total cost is worse than an average expense portfolio doing it yourself.

•  
  49

  larry swedroe

  09/14/09 | Report as spam

  RE: My Take on Investors Going it Alone (part 2)

  Alskar
  
  First, the fact that someone charges 1% may or may not mean it is a bad deal. It depends on the level of services you are getting and the skill provided and the value added. With DFA funds IMO you are also getting the state of the art in passive products, especially their Core funds and the Tax Aware Core funds. That alone can add value. Of course then there is the value of the advice--making sure you have the right AA, the one giving you the best chance of reaching your goal without taking too much risk; keeping you disciplined;rebalancing and tax managing throughout the year and doing so in the most cost and tax efficient way; integrating the investment plan into a well-thought-out financial plan (many investment plans go bust because of failure in areas having nothing to do with investing--like lack of sufficient of life insurance, liability insurance or long-term care insurance). And there are many other ways a good advisor can add value.
  
  Second if you search the internet you can also find advisors with access to DFA funds and have lower fees, significantly lower. Now good advice doesn't have to be expensive, but financial advice is not a commodity, so you still need to do due diligence. But you may also believe that you need very little help. And there are firms that work that way. Just need a little bit of effort to find them. On the Bogleheads Diehard site there are discussions on this all the time and people ask for references about firms they find.
  
  Third, you can also try the Garrett Network of Financial Planners and they all work by the hour and are fee only and provide I believe a fiduciary standard of care. Again, no guarantee, so due diligence still required.
  
  See, not really that hard, just need to do a bit of work. BTW, there are plenty of financial advisors that provide a fiduciary standard of care and use Vanguard funds and ETFs. Again, just need to do bit more work.
  
  What I do agree on completely is that our education system completely fails the public on this issue. And that makes it imperative that individuals don't fail themselves. They have to make the effort to protect themselves and get educated. And they must perform the needed due diligence. Just as I do when choosing doctors, lawyers, CPAs, etc.
  
  Alan--I am still interested in learning more about the case of the CFP who you stated met all my tests, including fiduciary standard and showed academic papers supporting the use of a product. Now the fiduciary standard doesn't guarantee you will get fiduciary care, but it does provide remedy in event you don't get it. And I would be interested in seeing the academic papers that supported the purchase of products you state should never have been sold.

•  
  50

  Allan Roth

  09/14/09 | Report as spam

  RE: My Take on Investors Going it Alone (part 2)

  Larry,
  
  Regarding your statement:
  
  "Alan--I am still interested in learning more about the case of the CFP who you stated met all my tests, including fiduciary standard and showed academic papers supporting the use of a product."
  
  Give me a ring and I can share some information with you. I can't give you any names as the settlement called for confidentiality.

•  
  51

  Alskar

  09/14/09 | Report as spam

  RE: My Take on Investors Going it Alone (part 2)

  Hi Larry,
  
  As I wrote in post number 42 of this thread, I contacted Garrett Planning as part of my search. I contacted six of the fee-only advisors they listed in my area. Two never returned my calls and emails. The first of the remaining four (a piano teacher that was "moonlighting" as a financial advisor) recommended that I buy an annuity from her (which is to say that she doesn't understand what "fee only" means). The second recommended buying a tax free municipal bond fund in my IRA. This is surprisingly common BTW. The third chargs 0.75% with a $6,300 per year minimum (which was WAY more than 0.75% for my portfolio). The fourth (a CPA) wanted 1.5% and seemed very confused when I asked him to explain exactly how he "consistently beat the market, year over year". He explained that he "had a guy" doing the "back office" work so he didn't didn't know the details, but he knew that what he was calling "the market" was the Russell 3000 index, but he wasn't certain if the index being used was adjusted for dividends or if it was just the change in NAV. To his credit he did mention that his portfolios were designed to be tax efficient.
  
  I totally agree that it would be easy to find an adviser that meets all of the criteria on your list as long as I'm willing to pay more than 1.5% per year for the privilege. However, the original claim was 0.5% and I have not been able to find anybody competent for 0.5% per year. The lowest rate I found was 0.75% and he had the $6,300 per year minimum. So if you've got $840K you can get 0.75%. That's not me.
  
  So the question becomes, will this competent advisor that charges 1.5% per year; and meets all of your criteria beat my 2nd Grader portfolio by at least 1.5%? That seems extremely unlikely over the long haul.
  
  My 2nd Grader Portfolio has a 1.5% built-in advantage over anything offered by an advisor charging me 1.5%. Probably more because the expense ratio on his offerings are almost certainly higher than on my all Vanguard ETF portfolio.
  
  Bringing this back to the original topic: Why shouldn't I just "Go it alone"?

•  
  52

  Allan Roth

  09/15/09 | Report as spam

  RE: My Take on Investors Going it Alone (part 2)

  Alskar,
  
  Your responses from the Garrett Planning network really surprises me. I would have expected far better.
  
  Thanks for the information.
  
  Allan

•  
  53

  Alskar

  09/16/09 | Report as spam

  RE: My Take on Investors Going it Alone (part 2)

  Yes. Finding a good financial advisor is far from easy and definitely not simple. For whatever it's worth, I had better luck with Garrett Planning than I had with most of the other organizations.
  
  From what I can tell it's very difficult to make a full-time living out of being a fee-based financial planner. I didn't take complete notes on this, but I don't think any of the advisors recommended by Garrett Planning were full-time. Most were CPA's with a side business that did financial planning.

•  
  54

  Allan Roth

  09/16/09 | Report as spam

  RE: My Take on Investors Going it Alone (part 2)

  Alskar,
  
  You can have a bad low-cost portfolio but you can't have a good high cost portfolio, in my opinion.

•  
  55

  Alskar

  09/16/09 | Report as spam

  RE: My Take on Investors Going it Alone (part 2)

  I mentioned this thread to a colleague of mine. He thinks that part of the problem I had was the fact that I was limiting my search to the Portland, Oregon area. He felt there were better advisors in larger metropolitan areas. Don't know if that's true, but it could help explain why Larry thinks it's easy and I found it difficult to find a good advisor.
  
  In any case, I'm quite pleased with how my "go it alone", 2nd Grader portofolio has performed. I rebalanced again on Monday and Tuesday (sell on Monday, buy on Tuesday). It cost me about $44 to rebalance. Gotta love that!
  
  It's probably not perfect, but it's low cost, and low maintenance. I sleep well at night too! Thanks Allan!

•  
  56

  Allan Roth

  09/16/09 | Report as spam

  RE: My Take on Investors Going it Alone (part 2)

  Here are five tough questions to ask your finanical adviser:
  
  http://moneywatch.bnet.com/investing/blog/irrational-investor/tough-questions-for-your-financial-advisor/560/?tag=col1;blog-river

•  
  57

  joreal2479

  09/28/09 | Report as spam

  RE: My Take on Investors Going it Alone (part 2)

  OMG!
  
  Who has as much interest as you in making money? Who has as much interest in your money and to losing it as you do? This is crazy, i really don't know why more people are not managing their own portfolios. I can't see why I should pay someone to move my money when i can do it all myself? It just doen't make sense.
  
  --John Mylant
  http://mylantsmoneyblog.typepad.com/

•  
  58

  Allan Roth

  09/28/09 | Report as spam

  RE: My Take on Investors Going it Alone (part 2)

  John,
  
  I tend to agree. No one cares about your money as much as you do. Another way I like to put it - an efficient portfolio of half stocks and half fixed income will earn about 3.5% over inflation, in the long run (my opinion). How much of that 3.5% do you want to give away in fees?
  
  Regards.
  
  Allan