Author Topic: more questions on paying for investment advice  (Read 6053 times)

Jill the Pill

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more questions on paying for investment advice
« on: March 11, 2013, 08:18:51 AM »
My mother has a large-ish account with Fidelity.  She is afraid of making investment decisions, and it would put her in a tizzy to suggest she move the money anywhere else.  She has, however, agreed to let me make some decisions about it (though I am also an investment idiot).  I'm somewhat tempted to cover my butt and use Fidelity's advice service, but they are dodgy about how much it will cost (literature drops hints of .25% - 1.75%). 

Is this worth doing?  What if they offer advice and I don't take it?  Are they the kind of advisors people warn about, with incentives to cause lots of trades? 

The nice part is that she is letting me draw off whatever interest or dividends it makes for my kids' college savings, so I would like to do a good job, not risk any of her money, and invest morally (no weapons manufacturers, fossil fuels, major polluters, etc), so I would probably cause the advisor to pull out his or her hair in frustration. 

Whatd'ya think?

ps -- My mother is still working at 70 and has other retirement savings and pension. 

KingCoin

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Re: more questions on paying for investment advice
« Reply #1 on: March 11, 2013, 09:58:31 AM »
1) If you're going to take over stewardship of your mother's account, you owe it to everyone involved to educate yourself on the topic of investing and money management. You don't have to become an expert, but I'd say read a couple books at a minimum. Something like A Random Walk Down Wall Street by Burt Malkiel might be a good place to start. Even if you're soliciting an expert's advice, you should have at least a bare minimum of knowledge to make sure the investments are appropriate and that you're not getting fleeced.

2) "Moral" investing can substantially complicate the investment process as it precludes index investing, the most prudent method of money management. You're likely to increase expenses, required time, and potentially risk. If you decide those hurdles are worth clearing, that's fine. Just be sure you know what you're getting into.

3) Your best bet on advice may be an independent financial adviser who charges by the hour. This keeps fees transparent and conflicts of interest to a minimum. Ideally, the adviser will have a discussion with both you and your mother so that everyone is clear on investment goals and risk tolerance. I worry when part of your criteria is "not risk any of her money" which is essentially impossible unless you're willing to settle for a 1% investment return (which in it's own way presents the risk of a portfolio that shrinks relative to inflation).

Richard3

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Re: more questions on paying for investment advice
« Reply #2 on: March 22, 2013, 04:16:29 PM »

1) Unless you actively enjoy managing investments, just buy an index fund (or a handful depending what you like) and leave it alone. If I was an investment idiot I would just buy VT for all my share exposure and leave it alone. You may prefer buying a small handful of more targeted index funds, or dripping money in to VT, or buying a permanent portfolio ETF, but the basic concept is the same.

2) Moral investing is a waste of time. Buying or not buying the shares of a company that does something bad has basically no effect on that company (unless you buy them from the company when they are raising capital). Moral investing is literally just a way for people to feel like they are doing some good in the world and thereby excuse themselves for other bad habits.

3) See 1. Most advisors / share pickers don't beat the market long term. Those that do are very wealthy. I hope to become one of them. I probably won't manage it, but I enjoy the game for its own sake. It sounds like you / your mother might like a permanent portfolio type ETF since it's supposedly designed to do OK in all market conditions.

Jill the Pill

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Re: more questions on paying for investment advice
« Reply #3 on: March 22, 2013, 09:01:24 PM »
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2) Moral investing is a waste of time. Buying or not buying the shares of a company that does something bad has basically no effect on that company (unless you buy them from the company when they are raising capital). Moral investing is literally just a way for people to feel like they are doing some good in the world and thereby excuse themselves for other bad habits.

It allows me to know that my mother's retirement and children's college money is not the direct result of practices that harm the world and its people.  My kids won't go to college on the backs of FoxConn workers, for example. 

Why that might in any way "excuse . . . bad habits" is beyond me.  I have ethical investments, so I think I'll go beat up some little old ladies now? 

Divestment can only affect companies when it is widespread, true.  The 1980's divestment from companies that supported South African apartheid did have an effect. 


Crash87

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Re: more questions on paying for investment advice
« Reply #4 on: March 23, 2013, 08:33:45 AM »
Your mom and my parents sound somewhat similar, except for the age. Nice big pension to ease concerns about market fluctuations and an unnatural affitity for Fidelity.

Since my parents didn't want to leave Fidelity I had them go 80% S&P 500 index mutual fund and 20% Total Bond Market Index mutual fund. They won't be able to draw their pensions for about 5 years after they retire so I wanted them to have some amount in bonds. I chose S&P 500 for the rest because it's tax efficient, is one of the lowest fee Fidelity funds, and diversifies them over most of the market.

Richard3

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Re: more questions on paying for investment advice
« Reply #5 on: March 23, 2013, 04:58:55 PM »

It allows me to know that my mother's retirement and children's college money is not the direct result of practices that harm the world and its people.  My kids won't go to college on the backs of FoxConn workers, for example. 

Why that might in any way "excuse . . . bad habits" is beyond me.  I have ethical investments, so I think I'll go beat up some little old ladies now? 

Divestment can only affect companies when it is widespread, true.  The 1980's divestment from companies that supported South African apartheid did have an effect.

There are a number of studies that show that people who do "good" things like buy environmentally friendly products, or invest in moral funds, then view this as a license to act badly in other things. http://www.guardian.co.uk/science/2009/sep/22/brain-food or http://en.wikipedia.org/wiki/Self-licensing - nobody has studied whether or not buying a moral investment fund then increases the rate people beat up old ladies as it would probably not get past the ethics review of most universities :) but the effect I am referring to is a real thing.

Not buying Apple shares has far less effect on their corporate behaviour than not buying Apple products. Also, buying basically any mobile phone, supports some atrocious behaviour in the eastern Congo which is far worse than anything FoxConn have got up to -  http://topdocumentaryfilms.com/blood-coltan/  for example - but the licensing effect says one doesn't need to worry about that if one is not investing in Apple as one has done one's bit for today to make the world a better place (apologies for the formal phrasing, figured using "you" there might seem a little ad hominem).

Don't get me wrong, I think the world should be a better place and devote a portion of my time and money towards trying to make changes I believe in. I also know you that can't fight every battle, but my view is that moral investing is the worst kind of greenwashing.

How important do you think the divestment campaign was in ending apartheid vs the consumer boycotts, political pressure, sporting ostracization, and protest movements in the country itself? Additionally, one of the reasons it worked was that the selling put pressure on the exchange rate to put pressure on, and a weak currency makes operating a government more difficult. That's hardly an Apples to Apples comparison (pardon the pun) with not investing in one company.

Jill the Pill

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Re: more questions on paying for investment advice
« Reply #6 on: March 23, 2013, 10:12:20 PM »
Richard3, thanks for the thoughtful reply. 

My initial reaction to the green products study is that the scenario is somewhat different from the case in point because buying products in a shop and giving or taking money in a psych experiment are spur-of-the-moment decisions, and I am sure we all fail frequently at those.  But investing or big purchases like cell phones are slow decisions arrived at (in my case) after years of weighing alternatives.  And once they are made, they quickly leave one's awareness, so one is not psychologically "primed" by them. 

I do have a long-term cell phone plan, in case you are interested.  Having bought an iphone in ignorance over 4 years ago, I intend to use it until it absolutely dies beyond repair, then get a phone from Fairphone, if they live up to their promises. 

I am sure there are moral investment "products" that are as greenwashed as any laundry soap, but I cannot see the entire project as "the worst kind of greenwashing."   I don't want to own any little piece of Lockheed Martin or Exxon.  Why should I?  I still don't see what could possibly be wrong with opting out of that.   It may not help.  But, I do not believe it will hurt. 

In this country (US), and perhaps in the world, we are without a voice.  We vote, but our votes are far-between and decide between very similar candidates.  We write to our representatives, who don't listen.  We protest, but that is an increasingly scary activity.  Essentially powerless to counter the harms committed in our names, it is natural that people would turn to concepts like "vote with your pocketbook" and "divest."  It may not work.  But, voting, writing, and protest aren't working all that well either.  It's one more thing to try. 


tj

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Re: more questions on paying for investment advice
« Reply #7 on: March 23, 2013, 11:04:17 PM »
If are you that keen on social investing, I would buy the Vanguard FTSE Social Index. https://personal.vanguard.com/us/funds/snapshot?FundId=0213&FundIntExt=INT

There is not an ETF for this fund. Note: that I think this is not a financially prudent investment, but if you are that keen on the social investing thing. If you buy it at Fidelity the trade will probably cost $75.


you can use Fidelity Spartan funds for the bond portion.

Richard3

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Re: more questions on paying for investment advice
« Reply #8 on: March 24, 2013, 08:54:59 AM »

In this country (US), and perhaps in the world, we are without a voice.  We vote, but our votes are far-between and decide between very similar candidates.  We write to our representatives, who don't listen.  We protest, but that is an increasingly scary activity.  Essentially powerless to counter the harms committed in our names, it is natural that people would turn to concepts like "vote with your pocketbook" and "divest."  It may not work.  But, voting, writing, and protest aren't working all that well either.  It's one more thing to try.

My feeling is that moral investing gives the illusion of trying without even the small effect that writing to your senator would have. We're back to the licensing effect. "I don't have to write to my senator to say that I support the right of gay people to get married because writing letters is hard and doesn't work instantly but at least I don't invest in Lockheed Martin so I am still a good person."

Let's say you have to choose between buying shares in Lockheed Martin and FHCO (Female Health Company - they make female condoms which help in the fight against AIDS and improve women's control of their reproduction. A pretty socially responsible company in a good industry). If Lockheed Martin is the better investment you would do much more good for the world buying shares of Lockheed Martin and donating the difference in actual return to an anti-AIDS charity (assuming Lockheed Martin performs better than FHCO) than buying FHCO and patting yourself on the back that you don't invest in Lockheed Martin and having less money available to donate to the anti-AIDS charity.  (Disclosure, I am long FHCO but for entirely cynical reasons).


Jill the Pill

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Re: more questions on paying for investment advice
« Reply #9 on: March 24, 2013, 02:31:15 PM »
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I think this is not a financially prudent investment,
tj, how come?  I have no real way of judging.

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We're back to the licensing effect. "I don't have to write to my senator . . .  but at least I don't invest in Lockheed Martin so I am still a good person.

Yeah, I guess we will have to disagree on whether this is a real phenomenon.  Couldn't one claim with equal (in)validity that "I don't recycle, but at least I am a good person who writes my senator once in a while"?  Where does that kind of reasoning end? 

I was laughing at myself today.  "Richard3 was right!" I realized, after I took four of the lamb shank bones our grocery store offers for free at passover.  (I'm not even Jewish, but I make broth.)  This crime was clearly the result of my efforts at social investing; surely I would not have done it otherwise.   :) 

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do much more good for the world buying shares of Lockheed Martin and donating the difference in actual return to an anti-AIDS charity

I've heard this argument before, and I'm sure you've heard the various arguments against it.  Your contrast of Lockheed Martin and the AIDS charity is asymmetric, as one does not work directly against the interests of the other.  Consider instead some prominent pacifist/activist: Mandela maybe, or Al Gore (just to be controversial).  Would you consider that person a hypocrite for owning stock in Lockheed Martin? <--- not a rhetorical question



the fixer

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Re: more questions on paying for investment advice
« Reply #10 on: March 25, 2013, 01:27:27 PM »
I feel like throwing my 2 cents in here...

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I think this is not a financially prudent investment,
tj, how come?  I have no real way of judging.
First, read this: http://www.obliviousinvestor.com/socially-responsible-investing-expect-lower-returns/

The only area where I'm convinced socially responsible investing can make a good case is with fossil fuel production. That's because I strongly believe the market is improperly valuing fossil fuel companies based on their total reserves, which if all burned would be catastrophic for the planet. About 80% of all currently known coal and oil reserves have to stay in the ground over the long term or the planet is doomed, meaning we're in the middle of a gigantic bubble and those assets will eventually have to be de-valued. But I still invest in VTSAX because I see no better investments at this time, and the high amount of diversification in the index is an acceptable mitigation of this risk. I will re-evaluate if someone makes a low-cost total market fossil fuel divestment index fund/ETF.

So don't divest from weapons manufacturers and defense contractors for emotional reasons. Explore the option because you believe these companies to be over-valued, and come up with a good, quantitative justification of this (e.g. LM will be in big trouble because the military industrial complex has to come crashing down as the US deals with its deficit problems, and come up with numbers to justify this, and show that this problem is not currently priced into the market). Note that this is very difficult to do and requires a level of understanding of the industry better than the average Wall St analyst, who is experienced and working full-time competing with you. If you do this, you will have the information you need to make a rational investing decision by weighing a traditional index against the extra costs and lower expected returns of investments that exclude the area you wish to avoid. This is how you can make a decision you can live with and make money on.

FWIW, stock prices of defense contractors tanked in Jan and Feb thanks to the fiscal cliff, effectively meaning that the doomsday scenario I made up for them is already being priced in to the market. So if you purchase a market cap weighted index fund you won't really have that much of your assets in those companies anyway, and will be betting against them just like the rest of the market is right now.

Richard3

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Re: more questions on paying for investment advice
« Reply #11 on: March 25, 2013, 04:20:20 PM »
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Couldn't one claim with equal (in)validity that "I don't recycle, but at least I am a good person who writes my senator once in a while"?  Where does that kind of reasoning end? 

One could. The human ability to rationalise things is almost endless. I'm just pointing out an effect that a number of scientists (or at least psychologists) have observed, like many things in social sciences it's difficult to draw direct causal relationships. Although I bet you think you're still a good person despite misrepresenting yourself to the grocery store (assuming the intent is that they are a Passover freebie for Jewish people).

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Consider instead some prominent pacifist/activist: Mandela maybe, or Al Gore (just to be controversial).  Would you consider that person a hypocrite for owning stock in Lockheed Martin? <--- not a rhetorical question

No I would not. Manufacturing weapons is not directly opposed to supporting peace. Or do you think investing in a drug company / other medical company is you profiting from cancer?

But to answer the intended question, I wouldn't consider Al Gore to be a hypocrite if he invested in Exxon or BP shares (although I'd expect that he voted his shares in favour of pollution reduction and alternative energy if / when it comes up and that line of shareholder activism). People are far too keen to find hypocrites. Matthew 7:3 is pretty much my view on that subject.

Jill the Pill

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Re: more questions on paying for investment advice
« Reply #12 on: March 26, 2013, 09:24:16 AM »
Fixer, I did read the link.  I think the author is offering up a strawman in the idea that the motivation of social investors is "allowing the company to get access to capital at a lower interest rate."  I am personally less interested in helping out the wind farmers than in avoiding what I consider harmful.  Further, I don't understand why the concept
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If socially responsible investors are numerous/wealthy enough to succeed in materially increasing the demand for socially responsible stocks, investors will have to pay more for each dollar of socially responsible corporate earnings than for each dollar of socially irresponsible corporate earnings.
doesn't apply to any subset of stocks. 

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you are intentionally seeking lower returns. Of course, depending on your goals, that might be a tradeoff you’re happy with.
  I am ok with that, and I still can't quite crack why Richard3 thinks this is so wrong-headed.

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So don't divest from weapons manufacturers and defense contractors for emotional reasons. Explore the option because you believe these companies to be over-valued, and come up with a good, quantitative justification of this.
Now, to me, this seems like an example of Richard3's rationalization.

One could. The human ability to rationalise things is almost endless. . . . Although I bet you think you're still a good person despite misrepresenting yourself to the grocery store (assuming the intent is that they are a Passover freebie for Jewish people).

Well, the story is a little more complicated.  There was a big kerfluffle last year because the bones weren't kosher, and a number of folks contaminated their kosher kitchens.  This year they are labeled "not kosher."  I kind of just wanted to participate in the nonsense.  :)

But to your broader point: it's terribly hard, almost impossible, to get an objective perspective on the balance of good and harm you do in the world.  I know that we are particularly blind to the harm, and please forgive me if this is not true, but your defense of investing in harmful enterprises may itself be a bit of rationalization, recasting the standard for good as "what makes the most money." 

No I would not. Manufacturing weapons is not directly opposed to supporting peace. Or do you think investing in a drug company / other medical company is you profiting from cancer?

Just as supporting weapons manufacture would not be "profiting from peace" because weapons do destroy peace at every scale, supporting medical companies that destroy cancer is not "profiting from cancer."  Investing in weapons is profiting from WAR, just as investing in Union Carbide is (in part) profiting from cancer. 

I am conflicted about participating in the whole capitalist, corporate-investment system, having studied the harm it's done in the world, and the ways in which it has warped human behavior and redefined standards of value.  I don't look at ethical investing as a positive action, merely a less-wrong necessity -- a net weight on the Harm side of the balance, just a lighter one. 

My mother's account spent about 5 years at 0% so anything we do will be an improvement (I already stuck a lot in CDs).  I promise not to be self-congratulatory about it, but certain companies and industries are just deal-breakers for me.  Your wise perspective may not interpret owning their stock as hypocritical, but I would find them so: a mote in my eye, if you like. 



the fixer

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Re: more questions on paying for investment advice
« Reply #13 on: March 26, 2013, 10:14:15 AM »
Fixer, I did read the link.  I think the author is offering up a strawman in the idea that the motivation of social investors is "allowing the company to get access to capital at a lower interest rate."  I am personally less interested in helping out the wind farmers than in avoiding what I consider harmful.  Further, I don't understand why the concept
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If socially responsible investors are numerous/wealthy enough to succeed in materially increasing the demand for socially responsible stocks, investors will have to pay more for each dollar of socially responsible corporate earnings than for each dollar of socially irresponsible corporate earnings.
doesn't apply to any subset of stocks.

It only applies to a subset of stocks that was picked for some reason other than anticipation of greater returns. If you think a given sector or industry is going to outperform the overall market, you may be incidentally decreasing the cost of capital for that sector but it's in exchange for greater returns for yourself. Otherwise you're reducing cost of capital and getting no benefit.

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you are intentionally seeking lower returns. Of course, depending on your goals, that might be a tradeoff you’re happy with.
  I am ok with that, and I still can't quite crack why Richard3 thinks this is so wrong-headed.

If you are willing to make that decision, now that you know how socially responsible investing works and its consequences, that's fine.

The last remaining argument, then, is the one Richard3 is making that you aren't actually making a difference using your investment choices, and there are better options. I had a whole post written that referenced the Free Produce Movement from the 19th century abolitionists, but let me suggest this instead:

Call up the Brady Campaign, Amnesty International, NRDC, etc. and ask one of their development people if they feel it would be better for you to: a) stay away from stocks in unethical industries, or b) buy index funds and donate 1% of the total assets per year (which would be just the extra expenses you'd pay for a socially responsible fund) to their organization. I'm fairly confident that donating a few thousand per year to a handful of nonprofits is going to make a bigger impact than divestment, at least at this stage where divestment options are so limited.

chucklesmcgee

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Re: more questions on paying for investment advice
« Reply #14 on: March 26, 2013, 06:25:08 PM »
Can you handle the emotions and resentment that might arise if, for whatever reason, your mother's portfolio collapses or does poorly? As happy as I am to give people my 2 cents about investing and structuring their assets, I'm terribly leery of being put in charge of an acquaintance's assets. The potential increase in their portfolio is worth far less to me than the potential resentment that could be generated if things go poorly.

Personally, I think Fidelity advisers are going to be mediocre especially if they're going to take a cut of the account to manage your money on top of expense ratios. They aren't going to tell you anything special that an ordinary investor wouldn't know. But here's the thing: if your mother's account does poorly she'll be pointing a finger at them, not you. And that might be well worth the cost of whatever they charge.

Jill the Pill

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Re: more questions on paying for investment advice
« Reply #15 on: March 27, 2013, 08:20:41 AM »
Right on, chuckles.  That is exactly what I was thinking.  Turns out she doesn't have to pay for advice at this point, and we agreed to risk only risk 7.5% on stocks/mutual fund, so the whole thing should not collapse.  Plus, she has other retirement accounts.  This was an inheritance, she hadn't been using it, and she is willing to let me mess around with it for the kids' benefit. 

DoubleDown

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Re: more questions on paying for investment advice
« Reply #16 on: March 28, 2013, 10:43:57 AM »
In general, I believe that as one's distance from a practice increases, their moral responsibility decreases. As an example, let's say I have a strong objection to cigarette smoking. I would feel decreasingly less responsible going from CEO of a tobacco company, to a drone worker there, to an investor specifically directing funds there, to a holder of an index fund that happens to put 1% of its portfolio there, to a taxpayer that pays money to the IRS and the company benefits from certain tax breaks, and so on. And if I faced a hypothetical stark choice between letting my family starve and taking a job as a drone worker at the cigarette factory, the easy ethical choice is to take the job and do your very best work for that employer (while privately counseling my children not to smoke).

This is NOT an excuse to rationalize away our involvement or turn a blind eye. But there is definitely a point where you have to draw a line and realize that you can't help but be involved (at least indirectly) in some objectionable practices, and I'm okay with that. I mean, I drive and produce trash, even if I try to reduce the amount. If I support 99% of our country's policies, I don't stop paying taxes in protest for the 1% I don't support. And I agree that you can have much more influence by maximizing your investments (even if you disagree with some small part of where it came from) and redirecting your specific $ to causes you believe in. And taking care of your family and people in need. I look at the amount of good people like Bill Gates have been able to do with their vast wealth, and strive for some small fraction of that.

KingCoin

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Re: more questions on paying for investment advice
« Reply #17 on: March 28, 2013, 07:10:44 PM »
Turns out she doesn't have to pay for advice at this point, and we agreed to risk only risk 7.5% on stocks/mutual fund, so the whole thing should not collapse.  Plus, she has other retirement accounts.  This was an inheritance, she hadn't been using it, and she is willing to let me mess around with it for the kids' benefit.

May I ask what the other 92.5% of the money is invested in? It's important to realize that over the long term, money is cash or cash equivalents is even more risky than stocks.