Author Topic: Our financial adviser's argument for active fund management  (Read 19267 times)

Frugalman19

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Re: Our financial adviser's argument for active fund management,
« Reply #50 on: December 02, 2015, 09:48:47 AM »

2) I've seen no evidence that financial advisers do a better job at preventing their clients from pulling out of the market during downturns.  In fact, I see the exact opposite effect.  Vanguard released a report showing that of their self-managed clients, more than 80% stayed the course during the 'great recession'.  In contrast, actively managed funds drastically increased their cash holdings and sold off tons of equities.  Professional advisers can be even more prone to pulling out their clients money than individual investors.  They are interested in what the next quarter shows and want to stop the bleeding.

3) I believe that most people 'don't have the guts' (as you say) to take on their own investments because there is an ongoing marketing campaign to make people think investing is harder than it really is.  Basic investing can be very simple, and simple strategies built wealth and typically beat out the majority of complicated strategies.  Otherwise, actively managed funds wouldn't trail indexes year after year, decade after decade.

Consulting a financial adviser can be very useful for some people.  But not for a percentage of the total portfolio.

I dont think you could be farther off base. I'm so glad you brought up Vanguard, because they have a great report on the Alpha an advisor adds to someone portfolio and they say on average, someone that has an advisor does 3% better than those without. I will attach the link. I can say from actual experience through 2008, we manage about 400 families and we only had 2 people pull their money out of the market. But, we had probably close to 40-50 families want to. Those will be clients for life now because their money has tripled since then. 

https://advisors.vanguard.com/VGApp/iip/site/advisor/researchcommentary/article/IWE_InvResValueAdvisorsAlpha

Go to page 9 for the breakdown.


You have an extremely biased opinion on how "easy" investing, the average person sees their account go down 10% and they truly feel like they have "lost" that money. It is a very scary feeling, especially if its your life savings. Just because it might be easy for you to rationalize that its simply market fluctuation, thats not how most people feel. Has nothing to do with marketing, its simple behavioral finance. For example, my mother has an account with me, and no matter how much education I have given her, she still freaks out every time there is a market correction and her son in a financial planner. You should take a step back and realize that you are the minority when it comes to managing your life savings.

As for the 100k vs. 1,000k account, "most of the time" the management fee is greatly reduced, but in general, those that have alot more under management have alot more needs, like I said in the previous post, its things like tax planning, insurance reviews, estate planning etc.. that the fee covers, its not simply managing money.
« Last Edit: December 02, 2015, 10:43:01 AM by Awgolfer »

Frugalman19

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Re: Our financial adviser's argument for active fund management,
« Reply #51 on: December 02, 2015, 09:50:00 AM »
Consulting a financial adviser can be very useful for some people.  But not for a percentage of the total portfolio.

This.

Okay, I can agree that some clients can benefit from hand holding by an adviser, but why does an adviser need to charge the client for his advice based on a percentage of the client's assets? Is it 10x more work for an adviser to come up with a portfolio of ETFs for a client who has $1MM than it is for him to create a portfolio for a client who has $100K? Of course not!

It's a rip off! And legitimate advisers who charge a fee for their services need to stand up and speak out about it.

Recently I sat down with my brother to look over his portfolio of mutual funds which had been chosen for him by his adviser who was charging him 1% on top of 1-2% management fees for 8 funds! His situation was almost identical to the OPs, just the management fees on the funds were a little lower, but still ridiculous.

Anyone who is paying 1% to an adviser and 1%+ to a mutual fund(s) is getting ripped off IMO. If there were no other, better alternatives, then it wouldn't be so bad, but it's super easy to create a portfolio of ETFs or mutual funds on your own with an expense ratio of .05%. It's called VTSAX or VTI.

It sounds like @Awgolfer is letting his clients off a little more cheaply by putting them into ETFs, but it's still costing them ~1.25%/year. That's 25x more expensive than just buying VTSAX and holding it. If you look at the two charts next to each other, one portfolio with everything in VTSAX @ .05% ER, and the other chart with the best portfolio of ETFs that @Awgolfer can come up with for his clients, there will be NO COMPARISON! VTSAX will win every time, because it has lower fees.

@Awgolfer, you say that 95% of an adviser's value to a client is in holding their hands and convincing them not to sell when the market tanks. Okay, why would you need to charge clients a percentage of assets invested to do that? Is it really more work to convince someone with a lot of money invested not to sell than it is to convince somebody with just a little bit of money? I would think it would be the opposite. As people get older, have more money invested, have met more times with their financial advisers year after year after year, they would eventually get it, and not need as much hand holding. It seems to me like the ones you'd really have to babysit would be the younger people who were just starting out with investing...

I have been speaking this whole time lol.

Frugalman19

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Re: Our financial adviser's argument for active fund management,
« Reply #52 on: December 02, 2015, 10:05:26 AM »
Consulting a financial adviser can be very useful for some people.  But not for a percentage of the total portfolio.

@Awgolfer, you say that 95% of an adviser's value to a client is in holding their hands and convincing them not to sell when the market tanks. Okay, why would you need to charge clients a percentage of assets invested to do that? Is it really more work to convince someone with a lot of money invested not to sell than it is to convince somebody with just a little bit of money? I would think it would be the opposite. As people get older, have more money invested, have met more times with their financial advisers year after year after year, they would eventually get it, and not need as much hand holding. It seems to me like the ones you'd really have to babysit would be the younger people who were just starting out with investing...

I can give you 100 examples, but I will give you one in particular, that happened 2 days ago. Like I said before its what we tell the clients to do/not to do. Not just staying invested, we are financial experts, and finance has more to do than just investment return.

Ok heres an example,
Client comes in because their parents are getting ill and they are going to be needing in home care and need advice about what do. They had gone to the country controller and got a quick claim deed to move ownership from their parents name into their name, for convenience purposes for when she passes. She does not have a taxable estate and they are the only children. Well, the house was bought in 1965 for $20,000. The current home value is around $1.2 million.
I tell the STOP!!! leave the title in the mothers name, because when she passes, my clients will get a step up in basis on the property to the fair market value and will be able to sell it with no tax. So that 20 minute appointment saved my client roughly $240,000 in taxes.
Thats just one example
« Last Edit: December 02, 2015, 10:45:39 AM by Awgolfer »

mizzourah2006

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Re: Our financial adviser's argument for active fund management
« Reply #53 on: December 02, 2015, 10:17:15 AM »
While I agree with most people's comments saying that active funds won't outperform more times than not I do have a problem with how most of these "study" results are calculated. They compare active funds to passive funds in Year 1. The one's that beat get to stay in for year 2 and the one's that don't get removed, rinse, repeat.

I don't care about beating the market every year, I care about beating the market over my investment time horizon.

Here is an example. Let's say I am an active manager and in year 1 I return 14% and the S&P (my benchmark) returns 11%. I win. Then let's say year 2 comes along and I return 9% and the S&P returns 11%. I lose. But did I really lose? I beat my benchmark over 2 years. It becomes a regression to the mean problem with how the "how many active funds beat the market" studies are calculated. Obviously the probability of any one fund beating the market year in and year out for 15-20 years is almost impossible. But the probability that any one fund outperforms the market over those 15-20 years is not as large a rock to climb. Technically using the common comparison methodology Warren Buffett is no better than the market as Berkshire has under-performed the market in many years.

Bottom line, my issue is with the idea that beating the market every year needs to be the goal to prove an active fund is worthwhile.

fattest_foot

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Re: Our financial adviser's argument for active fund management
« Reply #54 on: December 02, 2015, 11:43:46 AM »
Awgolfer, I'm curious about your comments regarding the illegality of charging a management fee and loaded funds, whether this is a new regulation; possibly something passed post-2008.

I was just thinking that it's possible this is something that was perfectly legal to do 10 years ago, but no longer is, and that's why there may be confusion.

Shane

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Re: Our financial adviser's argument for active fund management,
« Reply #55 on: December 02, 2015, 11:46:46 AM »
Ok heres an example,
Client comes in because their parents are getting ill and they are going to be needing in home care and need advice about what do. They had gone to the country controller and got a quick claim deed to move ownership from their parents name into their name, for convenience purposes for when she passes. She does not have a taxable estate and they are the only children. Well, the house was bought in 1965 for $20,000. The current home value is around $1.2 million.
I tell the STOP!!! leave the title in the mothers name, because when she passes, my clients will get a step up in basis on the property to the fair market value and will be able to sell it with no tax. So that 20 minute appointment saved my client roughly $240,000 in taxes.
Thats just one example

As I said earlier, I'm not arguing that financial advisers don't provide a useful service. My only problem with their business model is that they charge a flat % of assets invested, rather than charging a fee for services. In the scenario you described above, if you offered your services for an hourly rate, your clients could've made an appointment with you, come in, asked their estate planning questions, you would've told them to wait until after their parents died to transfer title of their home, and your clients would've paid you your hourly rate for the time it took you to meet with them. To me, that would be more fair.

Like financial advisers, attorneys also provide valuable advice to their clients, but you only pay an attorney when you use his services, not every year, no matter whether you need advice or not. Recently, I sought the advice of an attorney. I met with the attorney for a little less than an hour, and he charged me $275 for the consultation. I had no problem paying that money to the attorney. I felt like it was worth it. Similarly, if I had questions about financial planning, I would be fine with paying a high hourly rate to sit down with a financial planner and ask for his advice.

It seems to me like financial planners provide a valuable service to their clients, particularly at the beginning of their journey towards retirement. A good financial adviser can educate his clients on how the financial markets work, help clients to choose an appropriate asset allocation based on their risk tolerance, help clients to choose appropriate ETFs or mutual funds to invest in, etc. But, after that, there are a whole lot of years where it seems like most clients wouldn't need very much hand holding, assuming their financial advisers did a good job explaining things in the beginning. So, why pay every year for services most people only need once in awhile if ever?

I'm not doubting that expert financial advisers can be of great help to many, many people in planning out their retirement investment strategies. What I have a problem with is investment "advisers" charging clients a fee for their services every year, whether they need them or not.

Shane

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Re: Our financial adviser's argument for active fund management
« Reply #56 on: December 02, 2015, 12:08:09 PM »
While I agree with most people's comments saying that active funds won't outperform more times than not I do have a problem with how most of these "study" results are calculated. They compare active funds to passive funds in Year 1. The one's that beat get to stay in for year 2 and the one's that don't get removed, rinse, repeat.

I don't care about beating the market every year, I care about beating the market over my investment time horizon.
 

Here is an example. Let's say I am an active manager and in year 1 I return 14% and the S&P (my benchmark) returns 11%. I win. Then let's say year 2 comes along and I return 9% and the S&P returns 11%. I lose. But did I really lose? I beat my benchmark over 2 years. It becomes a regression to the mean problem with how the "how many active funds beat the market" studies are calculated. Obviously the probability of any one fund beating the market year in and year out for 15-20 years is almost impossible. But the probability that any one fund outperforms the market over those 15-20 years is not as large a rock to climb. Technically using the common comparison methodology Warren Buffett is no better than the market as Berkshire has under-performed the market in many years.

Bottom line, my issue is with the idea that beating the market every year needs to be the goal to prove an active fund is worthwhile.

I haven't seen the studies you mentioned where funds that don't outperform the index every year are thrown out. That doesn't seem to make sense to me either.

What I have seen are comparisons between investing with a low cost ETF or mutual fund, like those at Vanguard, and the more typical scenario where a client pays a 1% fee to an adviser and then another 1%+ management fee to a mutual fund company. Here's an example from Jim Collins' Stock Series:

Quote
"Suppose you have a nest egg of $100,000.  Thatís about the minimum to interest an advisor.  Letís suppose you invest it for 20 years and earn 8% per year.  You end up with $492,680.  Not bad.  Now suppose you give up 2% to a management fee.  Your net return is now 6% and after 20 years that yields $331,020.  $161,660 less.  You not only give up the 1-2% each year, you give up all the money that money would have earned compounding for you over the 20 years."

In Jim's scenario above the client paid, on average, $8K/year for the combined fees of his financial adviser and the mutual fund management fees! I wonder what that works out to as an hourly rate? If anyone would like to read the entire post on jlcollinsnh.com, it's called, "Why I don't like investment advisors." It's accessible by clicking on the link. Sorry @Awgolfer. :)

Frugalman19

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Re: Our financial adviser's argument for active fund management,
« Reply #57 on: December 02, 2015, 12:25:15 PM »
Ok heres an example,
Client comes in because their parents are getting ill and they are going to be needing in home care and need advice about what do. They had gone to the country controller and got a quick claim deed to move ownership from their parents name into their name, for convenience purposes for when she passes. She does not have a taxable estate and they are the only children. Well, the house was bought in 1965 for $20,000. The current home value is around $1.2 million.
I tell the STOP!!! leave the title in the mothers name, because when she passes, my clients will get a step up in basis on the property to the fair market value and will be able to sell it with no tax. So that 20 minute appointment saved my client roughly $240,000 in taxes.
Thats just one example

As I said earlier, I'm not arguing that financial advisers don't provide a useful service. My only problem with their business model is that they charge a flat % of assets invested, rather than charging a fee for services. In the scenario you described above, if you offered your services for an hourly rate, your clients could've made an appointment with you, come in, asked their estate planning questions, you would've told them to wait until after their parents died to transfer title of their home, and your clients would've paid you your hourly rate for the time it took you to meet with them. To me, that would be more fair.

Like financial advisers, attorneys also provide valuable advice to their clients, but you only pay an attorney when you use his services, not every year, no matter whether you need advice or not. Recently, I sought the advice of an attorney. I met with the attorney for a little less than an hour, and he charged me $275 for the consultation. I had no problem paying that money to the attorney. I felt like it was worth it. Similarly, if I had questions about financial planning, I would be fine with paying a high hourly rate to sit down with a financial planner and ask for his advice.

It seems to me like financial planners provide a valuable service to their clients, particularly at the beginning of their journey towards retirement. A good financial adviser can educate his clients on how the financial markets work, help clients to choose an appropriate asset allocation based on their risk tolerance, help clients to choose appropriate ETFs or mutual funds to invest in, etc. But, after that, there are a whole lot of years where it seems like most clients wouldn't need very much hand holding, assuming their financial advisers did a good job explaining things in the beginning. So, why pay every year for services most people only need once in awhile if ever?

I'm not doubting that expert financial advisers can be of great help to many, many people in planning out their retirement investment strategies. What I have a problem with is investment "advisers" charging clients a fee for their services every year, whether they need them or not.

Unfortunately that's the nature of the beast as of right now. It will move more to a fee. There are laws being made right now with the DOL that will change how commissions are paid. So all of theses loads we are talking about will go away. The problem is that it would not be economical for financial divisors. There is a reason things are done the way that they are. First off its the easiest way for the client, no checks need to be written, and in the case of an IRA the funds come out of the IRA to the advisor without any penalty so for those that have a cash flow issue it works best. God forbid they just made that change tot he title without thinking to seek out an advisor, it was just brought up in our quarterly review. They would most certainly not paid an hourly rate to find advice, they had no idea what they were doing was wrong.

The attorney example is a little different. There are a very large amount of attorneys, at least that I know, that have all of their clients on a yearly retainer. Which is the same thing as what I charge. There are a lot of benefits to having someone on a yearly fee, for example, when laws change, the attorney/financial advisor will have to proactively make changes for their clients, whether they are business owners or whatever.

I will say this as well, there are firms out there that do subscribe to the yearly fee model. They charge every family $10,000 a year for their services, whether they have $100k or $5 million. I have thought to move to a model like this, because as much as people don't like spending money. I need to make money to live and my intellectual capital is valuable, like the example above. The hourly fee is good, but alot of people dont know when they actually need advice, they think everything is going fine until something is pointed out in our reviews.

SO in closing I will say this, the % of assets fee structure does suck. I have always thought this. But, thats just how we get paid, it keeps us on the same side of the table as the client. Unlike making a commission or an hourly fee, once the advisor is paid they have no ties to that client. Plus you cannot make a living on hourly fees. There isnt enough hours in the day, that's why most attorneys also get a percentage of a settlement or charge a yearly retainer, because the hourly rate only keeps the lights on. Most people here are not going to hire an advisor because you are all researchers who take the time to learn this stuff. Most people want nothing to do with this.

Frugalman19

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Re: Our financial adviser's argument for active fund management
« Reply #58 on: December 02, 2015, 12:36:06 PM »
Awgolfer, I'm curious about your comments regarding the illegality of charging a management fee and loaded funds, whether this is a new regulation; possibly something passed post-2008.

I was just thinking that it's possible this is something that was perfectly legal to do 10 years ago, but no longer is, and that's why there may be confusion.

Well charging a management fee as a percentage of assets under management is fairly new concept. Meaning within the last 15 years or so. But as long as ive been around, it has been illegal. Mutual funds still have an expense ratio which is a yearly fee that everyone pays. I'm strictly talking about the load. It is even to the point where if you charge a load to someone and then move the mutual fund into a managed account, we have to reimburse the load we made on the fund.

nereo

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Re: Our financial adviser's argument for active fund management,
« Reply #59 on: December 02, 2015, 01:07:34 PM »

Unfortunately that's the nature of the beast as of right now. It will move more to a fee. There are laws being made right now with the DOL that will change how commissions are paid. So all of theses loads we are talking about will go away. The problem is that it would not be economical for financial divisors. There is a reason things are done the way that they are. First off its the easiest way for the client, no checks need to be written, and in the case of an IRA the funds come out of the IRA to the advisor without any penalty so for those that have a cash flow issue it works best. God forbid they just made that change tot he title without thinking to seek out an advisor, it was just brought up in our quarterly review. They would most certainly not paid an hourly rate to find advice, they had no idea what they were doing was wrong.

The attorney example is a little different. There are a very large amount of attorneys, at least that I know, that have all of their clients on a yearly retainer. Which is the same thing as what I charge. There are a lot of benefits to having someone on a yearly fee, for example, when laws change, the attorney/financial advisor will have to proactively make changes for their clients, whether they are business owners or whatever.

I will say this as well, there are firms out there that do subscribe to the yearly fee model. They charge every family $10,000 a year for their services, whether they have $100k or $5 million. I have thought to move to a model like this, because as much as people don't like spending money. I need to make money to live and my intellectual capital is valuable, like the example above. The hourly fee is good, but alot of people dont know when they actually need advice, they think everything is going fine until something is pointed out in our reviews.

SO in closing I will say this, the % of assets fee structure does suck. I have always thought this. But, thats just how we get paid, it keeps us on the same side of the table as the client. Unlike making a commission or an hourly fee, once the advisor is paid they have no ties to that client. Plus you cannot make a living on hourly fees. There isnt enough hours in the day, that's why most attorneys also get a percentage of a settlement or charge a yearly retainer, because the hourly rate only keeps the lights on. Most people here are not going to hire an advisor because you are all researchers who take the time to learn this stuff. Most people want nothing to do with this.

Your post seems to oscillate between defending a %-of-assets pay structure and apologizing for it.  You make a bit point in saying that it "does suck" but then say "thats [sic] just how we get paid."  Ultimately you insist that one "cannot make a living on hourly fees" which flies in the face of every professional who does get paid on a billable-hour basis.  All of that reeks of excuse-itus.

You do bring up the idea that clients who remain with financial advisers are "on the same side of the table."  A cynical person might say this is because the adviser is constantly taking money from his client's pocket, but I will assume that you meant this as being a good thing - that their goals are aligned.  Unfortuantly, this ignores the problem so many people have already pointed out - as assets grow your share grows exponentially faster than your amount of work.  A rather straightforward solution is to keep managing your clients' assets, but charge them only for the hours you actually spend on their accounts.  If a particular client's needs are complex and you spend a few hours every month reviewing them, that's reflected in billing. This is not very different from how most physicians bill their patients (or their patient's insurance providers).  Dentists, many lawyers, and tax attorneys all bill their client in a similar manner. 

Ultiamtely, you invoke the notion that the current strategy is in place to protect the average individual from himself.  "God forbid they just made that change tot he title without thinking to seek out an advisor... they had no idea what they were doing was wrong"  My political biases may show here, but I bristle at the idea that an industry 'needs' to be set up in such a manner to protect their clients.  To use an analogy, if I don't go to the dentist for routine checkups I know my oral health may suffer and I may even wind up with some very costly root-canals down the road, but I wouldn't expect my dentist to deduct some of my assets every month regardless of whether he did any work for me or not.  You suggest that most people aren't going to take the time to learn this sort of thing.  I reiterate my earlier statements that 1) basic financial planning is not hard, and 2) at most, a seasonal review by a financial adviser will do just as much as having their assets held in a %-of-assets fee model.

Frugalman19

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Re: Our financial adviser's argument for active fund management,
« Reply #60 on: December 02, 2015, 03:04:44 PM »

Unfortunately that's the nature of the beast as of right now. It will move more to a fee. There are laws being made right now with the DOL that will change how commissions are paid. So all of theses loads we are talking about will go away. The problem is that it would not be economical for financial divisors. There is a reason things are done the way that they are. First off its the easiest way for the client, no checks need to be written, and in the case of an IRA the funds come out of the IRA to the advisor without any penalty so for those that have a cash flow issue it works best. God forbid they just made that change tot he title without thinking to seek out an advisor, it was just brought up in our quarterly review. They would most certainly not paid an hourly rate to find advice, they had no idea what they were doing was wrong.

The attorney example is a little different. There are a very large amount of attorneys, at least that I know, that have all of their clients on a yearly retainer. Which is the same thing as what I charge. There are a lot of benefits to having someone on a yearly fee, for example, when laws change, the attorney/financial advisor will have to proactively make changes for their clients, whether they are business owners or whatever.

I will say this as well, there are firms out there that do subscribe to the yearly fee model. They charge every family $10,000 a year for their services, whether they have $100k or $5 million. I have thought to move to a model like this, because as much as people don't like spending money. I need to make money to live and my intellectual capital is valuable, like the example above. The hourly fee is good, but alot of people dont know when they actually need advice, they think everything is going fine until something is pointed out in our reviews.

SO in closing I will say this, the % of assets fee structure does suck. I have always thought this. But, thats just how we get paid, it keeps us on the same side of the table as the client. Unlike making a commission or an hourly fee, once the advisor is paid they have no ties to that client. Plus you cannot make a living on hourly fees. There isnt enough hours in the day, that's why most attorneys also get a percentage of a settlement or charge a yearly retainer, because the hourly rate only keeps the lights on. Most people here are not going to hire an advisor because you are all researchers who take the time to learn this stuff. Most people want nothing to do with this.

Your post seems to oscillate between defending a %-of-assets pay structure and apologizing for it.  You make a bit point in saying that it "does suck" but then say "thats [sic] just how we get paid."  Ultimately you insist that one "cannot make a living on hourly fees" which flies in the face of every professional who does get paid on a billable-hour basis.  All of that reeks of excuse-itus.

You do bring up the idea that clients who remain with financial advisers are "on the same side of the table."  A cynical person might say this is because the adviser is constantly taking money from his client's pocket, but I will assume that you meant this as being a good thing - that their goals are aligned.  Unfortuantly, this ignores the problem so many people have already pointed out - as assets grow your share grows exponentially faster than your amount of work.  A rather straightforward solution is to keep managing your clients' assets, but charge them only for the hours you actually spend on their accounts.  If a particular client's needs are complex and you spend a few hours every month reviewing them, that's reflected in billing. This is not very different from how most physicians bill their patients (or their patient's insurance providers).  Dentists, many lawyers, and tax attorneys all bill their client in a similar manner. 

Ultiamtely, you invoke the notion that the current strategy is in place to protect the average individual from himself.  "God forbid they just made that change tot he title without thinking to seek out an advisor... they had no idea what they were doing was wrong"  My political biases may show here, but I bristle at the idea that an industry 'needs' to be set up in such a manner to protect their clients.  To use an analogy, if I don't go to the dentist for routine checkups I know my oral health may suffer and I may even wind up with some very costly root-canals down the road, but I wouldn't expect my dentist to deduct some of my assets every month regardless of whether he did any work for me or not.  You suggest that most people aren't going to take the time to learn this sort of thing.  I reiterate my earlier statements that 1) basic financial planning is not hard, and 2) at most, a seasonal review by a financial adviser will do just as much as having their assets held in a %-of-assets fee model.

typing on my phone so forgive me grammar

I do defend the management fee because the alternative is far worse. Take out the do it yourselfer, just get that out of your head.

The biggest issue that this thread keeps running into is they are not understanding that people do not want to do this themselves. If you are here reading this you obviously have taken steps to do it yourself or at least educate yourself, YOU ARE THE MINORITY!! So what is the solution, you have 2 options, get charged a ridiculous commission our load with no fiduciary standard (which means the advisor doesn't have to do whats in your best interest), or pay a fee for someone to be on your side, offer advice and continue to monitor your financial life. For those that want nothing to do with investing these are your options. That is how it is, I know it would be nice if you could find someone to work on an hourly rate but its nearly impossible. I say it sucks because it does. Our industry does not have nearly a good enough reputation to charge clients an hourly rate for things that are happening behind the scenes. Also, most people wont write a check because its not normal in our industry, they want their investments taken care of and they dont want to have to fuss with billing. Here is an example, we offer for our clients to write us a check for managing retirement accounts because then it is tax deductible and it doesnt come out of their funds....500 IRAs under management, we have one client that writes a check...one!!!!

It does not fly in the face of every professional who does get paid by billable hours. I can give you an example for every profession that you listed that they do not solely make their money on an hourly basis. Lawyers I already hammered that one so that's out. Physicians, very very rare, most bill per procedure regardless of how complex even though they also bill for office visits. Go to reddit and read some threads involving doctors bills and you will change your tune. Real life example, my mother was at the doctors 3 weeks ago and the doctor gave her a hand cream, they charged $75 for the cream when you could buy the exact same cream at the drug store fore $15. I would even say that vast majority of hourly professions also have other sources of income. We do bookkeeping in our office and that it a very typical hourly billing type of business, but they even charge for w-2s, 1099's etc, thats where they make most of there take home pay.

Lastly, I will address your last comment, which you are right, our industry is just that bad and complicated that you do have to have someone to protect you. I would use the tax code for an example, if it was just a flat 10% tax for everyone it would be much easier for the average person, but that just not reality right now. So yea that sucks. Another great point that your analogy brings up is that most people know they should go to the dentist, where most people do not think about having a financial review. Just look at the saving rate amongst baby boomers and the millennials, its not a priority. You are 100% right, most financial planning is very very easy for those starting out. We dont even take on clients who dont have a substantial enough account, if they are just starting out, we will help them set up a dollar cost averaging account with vanguard or something and charge a fee. 90% of our clients are near retirement or already retired. So they do exactly what you said come in for reviews, rebalancing and they are charged a fee, its just not hourly.

adamwoods137

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Re: Our financial adviser's argument for active fund management
« Reply #61 on: December 02, 2015, 04:20:18 PM »
Exactly. There are occasionally fund managers who beat the market for a few years at a time. None have ever done it long-term.

This isn't even sort of true, many active value investing managers outperform the market for years on end.  There's an old joke about Warren Buffet as related by Charlie Munger,

Quote from: Charlie Munger
Efficient market theory [is] a wonderful economic doctrine that had a long vogue in spite of the experience of Berkshire Hathaway. In fact one of the economists who won ó he shared a Nobel Prize ó and as he looked at Berkshire Hathaway year after year, which people would throw in his face as saying maybe the market isnít quite as efficient as you think, he said, ďWell, itís a two-sigma event.Ē And then he said we were a three-sigma event. And then he said we were a four-sigma event. And he finally got up to six sigmas ó better to add a sigma than change a theory, just because the evidence comes in differently.

For reference, the probability of a six sigma event is about one per billion. 

Joel Greenblatt (30% outperformance per year for 20 years)
Charlie Munger (17% outperformance for 12 years)
Benjamin Graham (10% outperformance for 20 years)
Walter Schloss (6% outperformance for 49 years) (!)
John Templeton (2.7% outperformance for 50 years) (!) (Does 50 years count as long term?)
David Einhorn (10% for 18 years)
Warren Buffet (13% for 54 years)
(and many more...)


Finance is a funny thing.  For some reason, people don't have any problem believing that it is possible for a human being to figure out how to go to the moon, while simultaneously admitting that they personally are not a rocket scientist.  In investing, it seems like you can't tell people that it's possible for a person to do rocket science, without them running into their backyard and blowing themselves up playing with things they know nothing about.  The backlash, where otherwise smart folk defend an idea so patently false (that it is impossible to beat the market), is as absurd as insisting that the moon landings must have been faked because the average person can't figure out how to build a booster engine. 
 
The problem has never been that no-one can beat the market. The problems have always been A) that it is hard to beat the market while running a fund (rules are often onerous), and B) that it is very hard for a non-expert to correctly identify folks that will beat the market in advance.  The idea that no one can beat the market in the long run is a very useful, wrong idea.  It is good if most people believe it; because most people, when trying to beat the market, underperform very tragically. (Something like 6% or so underperformance I think).  The OP's financial advisor is probably not incentivized to lead them to managers which will outperform in the future.  The OP's advisor may not be capable of leading them to managers which will outperform in the future. Still...let's not go around making up facts.

Retire-Canada

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Re: Our financial adviser's argument for active fund management,
« Reply #62 on: December 02, 2015, 04:22:52 PM »
Plus you cannot make a living on hourly fees. There isnt enough hours in the day, that's why most attorneys also get a percentage of a settlement or charge a yearly retainer, because the hourly rate only keeps the lights on. Most people here are not going to hire an advisor because you are all researchers who take the time to learn this stuff. Most people want nothing to do with this.

As others point out that's exactly how I [engineer] and every other professional I know [nurses, doctors, lawyers get paid] by a hourly billable rate.

The only situations where an hourly rate does not work is when:

- the services you provide aren't worth enough to the client to pay it to you at that rate
- there are not enough clients who are interested in the service

In either of those situations you shouldn't be making a living doing what you do.

Telecaster

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Re: Our financial adviser's argument for active fund management,
« Reply #63 on: December 02, 2015, 04:49:34 PM »
We dont even take on clients who dont have a substantial enough account, if they are just starting out, we will help them set up a dollar cost averaging account with vanguard or something and charge a fee. 90% of our clients are near retirement or already retired. So they do exactly what you said come in for reviews, rebalancing and they are charged a fee, its just not hourly.

The quibble isn't that you are charging a flat fee, the quibble is the fee is bizarrely out of proportion for what the client is getting.   You mentioned a client with a $500,000 portfolio being charged a 1% fee.   That's $5000 for a review and rebalancing.    Maybe the first year it is complicated, but a review and rebalancing can't take more than a couple hours.   So you're charging $2500/hour for for basic stuff.  That's more than Mark Geragos charges.   If you can't charge say, $200-300/hour and make a living at it you are doing it really, really wrong. 

And what if you had a client with $2MM who needs the same review and rebalancing?  Do you do four times as much work, or do you do the same work and collect four times the fee? 

I work in consulting, and primarily bill by the hour (A good deal less than $200/hour by the way, and I do fine)  Some stuff is flat fee, mainly because it makes it easier to bid.   But the hourly rate still works out to be about the same.  Flat fee jobs aren't some big cash cow in my industry.   


Frugalman19

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Re: Our financial adviser's argument for active fund management,
« Reply #64 on: December 02, 2015, 04:52:33 PM »
Plus you cannot make a living on hourly fees. There isnt enough hours in the day, that's why most attorneys also get a percentage of a settlement or charge a yearly retainer, because the hourly rate only keeps the lights on. Most people here are not going to hire an advisor because you are all researchers who take the time to learn this stuff. Most people want nothing to do with this.

As others point out that's exactly how I [engineer] and every other professional I know [nurses, doctors, lawyers get paid] by a hourly billable rate.

The only situations where an hourly rate does not work is when:

- the services you provide aren't worth enough to the client to pay it to you at that rate
- there are not enough clients who are interested in the service

In either of those situations you shouldn't be making a living doing what you do.

Not sure you understand what we are talking about. Engineers and nurses might get paid hourly, but that is not how they make money for companies. If a nurse is in an opporating room for an hour surgery that the doctor bills at $30,000, how can you put an hourly billing on that for the nurse or the doctor for that matter. If the nurse checks me in for my physical, takes my blood pressure and my weight and shows me to my room, she does not go to a time sheet and say patient 1, 3 minutes. I would have to go into cost accounting to explain how an engineer is valued, but I can assure you it's not hourly. I don't want to dive into profit margins and billable procedure. I discussed doctors and lawyers above so I won't even waste my time on that again. Very few professions are truly hourly, seeing how I advise for a lot of doctors and business owners and have a degree in accounting I can assure you, it is very rare.

You do make a very good point about the 2 situations. You are right, but that is not My fault or the advisor. that is the fault of the complexity of our system, like my example above where a 20 minute conversation saved someone $240,000. They simply would have never known. If I billed hourly that would be roughly $720,000 an hour...hmmmm

In a way you have made my point for me, like the dentist example above, people need financial advisors for a lot of reasons, unlike a dentist they don't know when they are due for a check up. If you had a yearly review with an advisor and he charged $250 for the appointment and every time you went in he said looks great, nothing to change, people would stop going after a while. But if you go to the dentist and he says, looks like you've been flossing great job, see you in 6 months, no one complains.



Frugalman19

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Re: Our financial adviser's argument for active fund management,
« Reply #65 on: December 02, 2015, 05:07:55 PM »
We dont even take on clients who dont have a substantial enough account, if they are just starting out, we will help them set up a dollar cost averaging account with vanguard or something and charge a fee. 90% of our clients are near retirement or already retired. So they do exactly what you said come in for reviews, rebalancing and they are charged a fee, its just not hourly.

The quibble isn't that you are charging a flat fee, the quibble is the fee is bizarrely out of proportion for what the client is getting.   You mentioned a client with a $500,000 portfolio being charged a 1% fee.   That's $5000 for a review and rebalancing.    Maybe the first year it is complicated, but a review and rebalancing can't take more than a couple hours.   So you're charging $2500/hour for for basic stuff.  That's more than Mark Geragos charges.   If you can't charge say, $200-300/hour and make a living at it you are doing it really, really wrong. 

And what if you had a client with $2MM who needs the same review and rebalancing?  Do you do four times as much work, or do you do the same work and collect four times the fee? 

I work in consulting, and primarily bill by the hour (A good deal less than $200/hour by the way, and I do fine)  Some stuff is flat fee, mainly because it makes it easier to bid.   But the hourly rate still works out to be about the same.  Flat fee jobs aren't some big cash cow in my industry.

You are right and I agree with you, but that's what the industry has devised. I have posted threads in here about how to charge clients less, because honestly I do follow the mmm lifestyle and I don't need to make a lot of money. But I have to make money.

The industry is set up in such a way it's almost like the medical field. You want fair, look at a doctor that charges a client $10,000 for a cast for a broken arm if they have no insurance, but if they have insurance they bill the insurance company $3,500. Is that fair? Are you going to go set your own arm? My point is the larger powers have set this wheel in motion and for one financial advisor to change how it's run does nothing but run that advisor out of business.

For example, take a normal retiring person, they go to me for help with their 401k. I say ok I'm going to charge them hourly and be a good fair advisor. I tell them how much and that they can write me a check. They say, what? The advisor at Charles Schwabsaid we wouldn't have to ever write them s check and it was some very little percentage(1% billed annually). Ccclient leaves and goes to Charles schwab. This is the reality of the finance industry.

I will say this for your example above, let's say there is a $500,000 client, that client has 4 quarterly reviews and each review we go over various aspects of their finances and to get all the reports created and meeting prep is probably an hour or so. So it's not 2 hours a year per client, plus I have to pay the receptionist as well as keep the lights on and pay rent. It's not straight to the bottom line by any means.

Ok rant over

Retire-Canada

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Re: Our financial adviser's argument for active fund management,
« Reply #66 on: December 02, 2015, 05:20:00 PM »
Not sure you understand what we are talking about. Engineers and nurses might get paid hourly, but that is not how they make money for companies. If a nurse is in an opporating room for an hour surgery that the doctor bills at $30,000, how can you put an hourly billing on that for the nurse or the doctor for that matter.

The hospital has hourly rates for the operating room, any specialized equipment and the staff that goes into including the surgeon. The stuff that won't be billed hourly are supplies and materials utilized during the procedure and overhead/profit if it's not factored into the hourly rates.

The patient pays a fixed lump sum of $30K, but that was built from unit rates based on the typical requirements for that procedure.

It would be the equivalent if you charged $250 for an annual review meeting. Your hourly rate, your staff and your overhead/profit are factored into that for simplicity sake.

If you wanted a doctor or nurse to review your case and provide you a professional opinion they would bill you based the time it took at an agreed upon rate.

Visiting a doctor's office for a typical appointment is billed using an hourly rate based on the average time that type of visit typically takes.

If you had a client come in and want to discuss a complex issue with you you might offer to work with them for $250 for the first hour and $100/hr afterwards up to 8hrs total.

You do make a very good point about the 2 situations. You are right, but that is not My fault or the advisor. that is the fault of the complexity of our system, like my example above where a 20 minute conversation saved someone $240,000. They simply would have never known. If I billed hourly that would be roughly $720,000 an hour...hmmmm

So you think if you saved a client $240K you deserve to be paid $240K for that work? This could be part of why you are having a hard time coming up with an hourly rate.

In a way you have made my point for me, like the dentist example above, people need financial advisors for a lot of reasons, unlike a dentist they don't know when they are due for a check up. If you had a yearly review with an advisor and he charged $250 for the appointment and every time you went in he said looks great, nothing to change, people would stop going after a while. But if you go to the dentist and he says, looks like you've been flossing great job, see you in 6 months, no one complains.

You have not established that people need financial advisers. The problem you describe above is a marketing problem. If you can't convince people your service is valuable and worth what you want to be paid then you have failed at a key business function.


Frugancial Advisor

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Re: Our financial adviser's argument for active fund management
« Reply #67 on: December 02, 2015, 05:39:27 PM »
Awgolfer, I feel your pain. Unfortunately you need to remember that you're posting on a forum full of people who find investing an 'interesting hobby', and easily accept index investing as the perfect solution for every individual investor, regardless of risk tolerance and time horizon.

Is the current fee model perfect? Absolutely not. But you make a valid point in that right now it is unfortunately the best solution we have to ensure that anyone has access to proper financial advice. If you abruptly decided to start charging a flat fee for your services, you would certainly see a vast amount of investors reject your advice and instead stick with their 1% GIC rates and think nothing of it.

You'd also have clients who would stand to lose thousands of dollars in income taxes, lost credits & deductions, poorly implemented business planning, poorly executed estate transfers, overpriced insurance policies, and more. These are just a few of the things a qualified financial planner offers their clients.

Our society has created a negative connotation surrounding financial advice, and with good reason! There were days when a smiling broker sitting behind a fancy desk could essentially take 5% of a clients assets without a single fiduciary responsibility! We have come a long way, but this unfortunate reputation will take some time to overcome. The fee structure is changing, and eventually it would be wonderful to see the average client accepting of paying a dollar figure for their plan as opposed to a percentage of assets. The sad reality is, the majority of clients are not Mustachians, and know absolutely nothing about the stock market or their personal finances.

The_Dude

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Re: Our financial adviser's argument for active fund management
« Reply #68 on: December 02, 2015, 06:33:48 PM »
For anyone else reading this I'd like to point out that.

MER (management expense ratio) isn't the same thing as an adviser fee!!

Active mutual funds aren't the same thing as a financial adviser!!

While very obvious to some folks I feel like those two concepts got muddied in this thread a few times.  I also agree with the few posters that pointed out that actually some active mutual funds have beat their index over various time periods (including long ones).  It does happen!  The challenge is knowing who to pick and given the odds, it isn't easy.  It is for that last reason that I continue to have my core investment assets in index funds.  Though I have seen some actively managed mutual funds that seem to have beaten the market for long periods of time and wonder if they will continue...

EDIT:  I rolled over an old 401k to Vanguard because at the time the active funds I was in had underperformed the S&P 500.  One example is AGTHX (American Growth Fund of America).  If you look at it in the past 5 years it has slightly underperformed.  10 years it has slightly outperformed ($200 on $10K invested) but if you look at the growth of $10k since 1973 then AGTHX would be worth $2.1M compared to the S&P 500 worth $693K.  That is a HUGE difference.
« Last Edit: December 02, 2015, 06:38:47 PM by The_Dude »

Frugalman19

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Re: Our financial adviser's argument for active fund management,
« Reply #69 on: December 02, 2015, 06:35:07 PM »
Not sure you understand what we are talking about. Engineers and nurses might get paid hourly, but that is not how they make money for companies. If a nurse is in an opporating room for an hour surgery that the doctor bills at $30,000, how can you put an hourly billing on that for the nurse or the doctor for that matter.

The hospital has hourly rates for the operating room, any specialized equipment and the staff that goes into including the surgeon. The stuff that won't be billed hourly are supplies and materials utilized during the procedure and overhead/profit if it's not factored into the hourly rates.

The patient pays a fixed lump sum of $30K, but that was built from unit rates based on the typical requirements for that procedure.

It would be the equivalent if you charged $250 for an annual review meeting. Your hourly rate, your staff and your overhead/profit are factored into that for simplicity sake.

If you wanted a doctor or nurse to review your case and provide you a professional opinion they would bill you based the time it took at an agreed upon rate.

Visiting a doctor's office for a typical appointment is billed using an hourly rate based on the average time that type of visit typically takes.

If you had a client come in and want to discuss a complex issue with you you might offer to work with them for $250 for the first hour and $100/hr afterwards up to 8hrs total.

You do make a very good point about the 2 situations. You are right, but that is not My fault or the advisor. that is the fault of the complexity of our system, like my example above where a 20 minute conversation saved someone $240,000. They simply would have never known. If I billed hourly that would be roughly $720,000 an hour...hmmmm

So you think if you saved a client $240K you deserve to be paid $240K for that work? This could be part of why you are having a hard time coming up with an hourly rate.

In a way you have made my point for me, like the dentist example above, people need financial advisors for a lot of reasons, unlike a dentist they don't know when they are due for a check up. If you had a yearly review with an advisor and he charged $250 for the appointment and every time you went in he said looks great, nothing to change, people would stop going after a while. But if you go to the dentist and he says, looks like you've been flossing great job, see you in 6 months, no one complains.

You have not established that people need financial advisers. The problem you describe above is a marketing problem. If you can't convince people your service is valuable and worth what you want to be paid then you have failed at a key business function.

I'm not sure if you're serious or just arguing to argue. I'm talking about business owners, not hospitals. Doctors work for hospitals. You are trying to compare apples and oranges. You have to compare a financial advisor to a private practice Doctor. Like I said before, in the US if you get a cast on your arm, it can be $10,000 to you, or $3,500 to the insurance company, it is not an hourly rate. Doctors do not charge an hourly rate for the majority of their practice. I deal with a lot of doctors so I know how this work, in the US. In Canada it might be different.

You seem to be missing the point, you state that I need to prove that financial advisors are worth it, right after I gave an example where a financial advisor saved a client $240,000. Is that not worth it??

I don't need to market anything, I make a very good living. I was trying to argue why the industry as a whole does not charge an hourly fee. You came in too late to the argument.

Frugalman19

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Re: Our financial adviser's argument for active fund management
« Reply #70 on: December 02, 2015, 06:38:56 PM »
Awgolfer, I feel your pain. Unfortunately you need to remember that you're posting on a forum full of people who find investing an 'interesting hobby', and easily accept index investing as the perfect solution for every individual investor, regardless of risk tolerance and time horizon.

Is the current fee model perfect? Absolutely not. But you make a valid point in that right now it is unfortunately the best solution we have to ensure that anyone has access to proper financial advice. If you abruptly decided to start charging a flat fee for your services, you would certainly see a vast amount of investors reject your advice and instead stick with their 1% GIC rates and think nothing of it.

You'd also have clients who would stand to lose thousands of dollars in income taxes, lost credits & deductions, poorly implemented business planning, poorly executed estate transfers, overpriced insurance policies, and more. These are just a few of the things a qualified financial planner offers their clients.

Our society has created a negative connotation surrounding financial advice, and with good reason! There were days when a smiling broker sitting behind a fancy desk could essentially take 5% of a clients assets without a single fiduciary responsibility! We have come a long way, but this unfortunate reputation will take some time to overcome. The fee structure is changing, and eventually it would be wonderful to see the average client accepting of paying a dollar figure for their plan as opposed to a percentage of assets. The sad reality is, the majority of clients are not Mustachians, and know absolutely nothing about the stock market or their personal finances.

It's like talking about politics lol

You could save someone $100,000 from talking them off the ledge about pulling out of the market, but people will say you aren't worth the fees you charge.

Shane

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Re: Our financial adviser's argument for active fund management,
« Reply #71 on: December 02, 2015, 10:05:18 PM »
You have not established that people need financial advisers. The problem you describe above is a marketing problem. If you can't convince people your service is valuable and worth what you want to be paid then you have failed at a key business function.

I'm not sure if you're serious or just arguing to argue. I'm talking about business owners, not hospitals. Doctors work for hospitals. You are trying to compare apples and oranges. You have to compare a financial advisor to a private practice Doctor. Like I said before, in the US if you get a cast on your arm, it can be $10,000 to you, or $3,500 to the insurance company, it is not an hourly rate. Doctors do not charge an hourly rate for the majority of their practice. I deal with a lot of doctors so I know how this work, in the US. In Canada it might be different.

You seem to be missing the point, you state that I need to prove that financial advisors are worth it, right after I gave an example where a financial advisor saved a client $240,000. Is that not worth it??

I don't need to market anything, I make a very good living. I was trying to argue why the industry as a whole does not charge an hourly fee. You came in too late to the argument.

Wow. You don't need to market your services? Really? Maybe if you can't get enough clients to pay you for your services without tricking them by hiding the fees, you and others in your industry need to do a better job of educating the public so that they understand what you have to offer them. This is marketing. You obviously need to do a better job of this, because, as you've stated several times in this thread, your customers wouldn't be willing to pay you for your services if they had to write a check. The only way you can get them to pay is to hide the fees so they don't see them and don't have to think about them. This seems like a pretty precarious position for you to put yourself in. Don't you think?

Shane

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Re: Our financial adviser's argument for active fund management,
« Reply #72 on: December 02, 2015, 10:54:23 PM »
In a way you have made my point for me, like the dentist example above, people need financial advisors for a lot of reasons, unlike a dentist they don't know when they are due for a check up. If you had a yearly review with an advisor and he charged $250 for the appointment and every time you went in he said looks great, nothing to change, people would stop going after a while. But if you go to the dentist and he says, looks like you've been flossing great job, see you in 6 months, no one complains.

If financial advisers did a good job of educating their clients about investing, there would be many years when clients wouldn't need to meet with their advisers. After the first few meetings, everything should be set up on auto pilot, so that money is automatically deposited into investment accounts. After that, what is there to discuss? If clients change jobs, get a raise, want to sell their house, start a business or whatever, then they could call up their financial adviser to schedule an appointment to come in and discuss their changed circumstances. Otherwise, no fees would be charged.

If your clients wouldn't be willing to pay you sufficiently for your services for you to make a living, then you need to do a better job of marketing.

seattlecyclone

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Re: Our financial adviser's argument for active fund management
« Reply #73 on: December 02, 2015, 11:45:49 PM »
I'm not sure if you're serious or just arguing to argue. I'm talking about business owners, not hospitals. Doctors work for hospitals. You are trying to compare apples and oranges. You have to compare a financial advisor to a private practice Doctor. Like I said before, in the US if you get a cast on your arm, it can be $10,000 to you, or $3,500 to the insurance company, it is not an hourly rate. Doctors do not charge an hourly rate for the majority of their practice. I deal with a lot of doctors so I know how this work, in the US. In Canada it might be different.

Doctors don't charge a direct hourly rate, sure. It's a fee for service model. They're roughly analogous though, since a given service tends to take a pretty predictable amount of time, and services that require more time and expertise tend to be priced higher than quicker, easier things. Bottom line: the more help you need from the doctor, the more you have to pay the doctor. If you need no help from the doctor in a year, the doctor doesn't get paid.

You seem to think that you would go out of business if you tried to bring a similar model to your financial planning practice, that your clients aren't willing to pay you for your time on a per-incident basis. You know your business much better than we do. Who am I to argue with your experience in that area? It doesn't change the fact that the amount you charge under the current model scales linearly with wealth, while the amount of work you do for each client likely does not scale in this manner. We are thus not wrong to argue that this pricing model seems designed to hook people getting started with very low rates, while being very unfair to those who have been going for a while, have accumulated a fair bit of wealth, and keep paying their 1% fee even though their investments are going fine and they haven't needed to meet with you for years.

Frugalman19

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Re: Our financial adviser's argument for active fund management,
« Reply #74 on: December 03, 2015, 06:52:03 AM »
In a way you have made my point for me, like the dentist example above, people need financial advisors for a lot of reasons, unlike a dentist they don't know when they are due for a check up. If you had a yearly review with an advisor and he charged $250 for the appointment and every time you went in he said looks great, nothing to change, people would stop going after a while. But if you go to the dentist and he says, looks like you've been flossing great job, see you in 6 months, no one complains.

If financial advisers did a good job of educating their clients about investing, there would be many years when clients wouldn't need to meet with their advisers. After the first few meetings, everything should be set up on auto pilot, so that money is automatically deposited into investment accounts. After that, what is there to discuss? If clients change jobs, get a raise, want to sell their house, start a business or whatever, then they could call up their financial adviser to schedule an appointment to come in and discuss their changed circumstances. Otherwise, no fees would be charged.

If your clients wouldn't be willing to pay you sufficiently for your services for you to make a living, then you need to do a better job of marketing.

I already agreed with you on this, that's why most of our clients aren't young. It's on autopilot.

Frugalman19

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Re: Our financial adviser's argument for active fund management,
« Reply #75 on: December 03, 2015, 01:38:34 PM »
You have not established that people need financial advisers. The problem you describe above is a marketing problem. If you can't convince people your service is valuable and worth what you want to be paid then you have failed at a key business function.

I'm not sure if you're serious or just arguing to argue. I'm talking about business owners, not hospitals. Doctors work for hospitals. You are trying to compare apples and oranges. You have to compare a financial advisor to a private practice Doctor. Like I said before, in the US if you get a cast on your arm, it can be $10,000 to you, or $3,500 to the insurance company, it is not an hourly rate. Doctors do not charge an hourly rate for the majority of their practice. I deal with a lot of doctors so I know how this work, in the US. In Canada it might be different.

You seem to be missing the point, you state that I need to prove that financial advisors are worth it, right after I gave an example where a financial advisor saved a client $240,000. Is that not worth it??

I don't need to market anything, I make a very good living. I was trying to argue why the industry as a whole does not charge an hourly fee. You came in too late to the argument.

Wow. You don't need to market your services? Really? Maybe if you can't get enough clients to pay you for your services without tricking them by hiding the fees, you and others in your industry need to do a better job of educating the public so that they understand what you have to offer them. This is marketing. You obviously need to do a better job of this, because, as you've stated several times in this thread, your customers wouldn't be willing to pay you for your services if they had to write a check. The only way you can get them to pay is to hide the fees so they don't see them and don't have to think about them. This seems like a pretty precarious position for you to put yourself in. Don't you think?

Although I agree with you, you need to be a little more practical. Thats like walking into a doctors office and saying, you know what, you need to start charging per hour. I dont like how the medical field gets paid, so you need to charge less to be more fair. Come on man, get real. Do you know how many peoples lives financial advisors change for the better every day? How much money they save clients? You need to come back to reality.

I am not going to go on a marketing campaign for the whole finance industry. What I do is charge my clients an advisory fee and I invest them into very low cost investments. I give them good advice all along the way and make sure they reach their goals financially. This is the industry right now, like I said in the beginning, you have 2 choices if you are not a do it yourselfer, pay huge commissions with no ongoing relationship or have a financial quarterback where you charge a fee annually. Pick your poison. But either way, statistically people with financial advisors retire with a shitload more money. *technical term

You all want to do investments yourself here, which I applaud, but for those who dont want to or are scared to these are the options available. I may be able to change the oil on my car, but you bet your ass i pay to make sure its done right every time.

Shane

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Re: Our financial adviser's argument for active fund management,
« Reply #76 on: December 03, 2015, 04:30:56 PM »
Although I agree with you, you need to be a little more practical. Thats like walking into a doctors office and saying, you know what, you need to start charging per hour. I dont like how the medical field gets paid, so you need to charge less to be more fair. Come on man, get real. Do you know how many peoples lives financial advisors change for the better every day? How much money they save clients? You need to come back to reality.

I am not going to go on a marketing campaign for the whole finance industry. What I do is charge my clients an advisory fee and I invest them into very low cost investments. I give them good advice all along the way and make sure they reach their goals financially. This is the industry right now, like I said in the beginning, you have 2 choices if you are not a do it yourselfer, pay huge commissions with no ongoing relationship or have a financial quarterback where you charge a fee annually. Pick your poison. But either way, statistically people with financial advisors retire with a shitload more money. *technical term

You all want to do investments yourself here, which I applaud, but for those who dont want to or are scared to these are the options available. I may be able to change the oil on my car, but you bet your ass i pay to make sure its done right every time.

As I said earlier, you seem like you're trying to do the right thing, @Awgolfer. Please don't take my comments as any sort of personal attack on you or your business practices. My frustration stems from things I have seen "financial advisers" do to friends, family, the OP and others who have posted in this thread. Obviously you can't be held personally responsible for all of the bad practices of the financial industry as a whole. :)

IMO, 1.25% is still WAY too high for people to have to pay when MUCH, MUCH, lower cost alternatives are easily available to anyone willing to spend a little time reading and informing themselves. It seems to me like basic financial literacy should be taught to every child in our schools. Maybe that will happen sometime in the future.

You say that financial advisers help many people, and that may be true, but it seems difficult to quantify and prove. You also say that "statistically, people with financial advisors retire with a shitload more money." I'm taking your word that there's a correlation between having a financial adviser and retiring with a "shitload more money." If that's true, my question would be, how much did the financial advisers actually help their clients to retire with more money in the bank, and how much of the correlation was caused by other factors? For example, you mentioned earlier in the thread that your firm only takes clients who already have a minimum portfolio value to start with. Maybe many/most of the people who seek out the services of a financial adviser already have a bunch of money to begin with, that they've earned through operating a business or working at a high paying job, and they end up retiring with lots of money despite having a financial adviser, not because of it...

Someone told me a long time ago, "The best way to make a million dollars is to give $2 million to a financial adviser and let him invest it for you."

 

Frugalman19

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Re: Our financial adviser's argument for active fund management,
« Reply #77 on: December 03, 2015, 05:44:20 PM »
Although I agree with you, you need to be a little more practical. Thats like walking into a doctors office and saying, you know what, you need to start charging per hour. I dont like how the medical field gets paid, so you need to charge less to be more fair. Come on man, get real. Do you know how many peoples lives financial advisors change for the better every day? How much money they save clients? You need to come back to reality.

I am not going to go on a marketing campaign for the whole finance industry. What I do is charge my clients an advisory fee and I invest them into very low cost investments. I give them good advice all along the way and make sure they reach their goals financially. This is the industry right now, like I said in the beginning, you have 2 choices if you are not a do it yourselfer, pay huge commissions with no ongoing relationship or have a financial quarterback where you charge a fee annually. Pick your poison. But either way, statistically people with financial advisors retire with a shitload more money. *technical term

You all want to do investments yourself here, which I applaud, but for those who dont want to or are scared to these are the options available. I may be able to change the oil on my car, but you bet your ass i pay to make sure its done right every time.

As I said earlier, you seem like you're trying to do the right thing, @Awgolfer. Please don't take my comments as any sort of personal attack on you or your business practices. My frustration stems from things I have seen "financial advisers" do to friends, family, the OP and others who have posted in this thread. Obviously you can't be held personally responsible for all of the bad practices of the financial industry as a whole. :)

IMO, 1.25% is still WAY too high for people to have to pay when MUCH, MUCH, lower cost alternatives are easily available to anyone willing to spend a little time reading and informing themselves. It seems to me like basic financial literacy should be taught to every child in our schools. Maybe that will happen sometime in the future.

You say that financial advisers help many people, and that may be true, but it seems difficult to quantify and prove. You also say that "statistically, people with financial advisors retire with a shitload more money." I'm taking your word that there's a correlation between having a financial adviser and retiring with a "shitload more money." If that's true, my question would be, how much did the financial advisers actually help their clients to retire with more money in the bank, and how much of the correlation was caused by other factors? For example, you mentioned earlier in the thread that your firm only takes clients who already have a minimum portfolio value to start with. Maybe many/most of the people who seek out the services of a financial adviser already have a bunch of money to begin with, that they've earned through operating a business or working at a high paying job, and they end up retiring with lots of money despite having a financial adviser, not because of it...

Someone told me a long time ago, "The best way to make a million dollars is to give $2 million to a financial adviser and let him invest it for you."

By people with a financial advisor have more money when they retire, I mean. The financial advisor invests money properly and saves the client from themselves as well as give the right advice, like the example above, saving the client $240,000. Like I said from the beginning, people do now want to do it themselves, those are my client. I have a few engineers and a couple of people who know about investing as much as I do, but simply do not want to do it themselves, they want someone to be on their side all the time.
I never commented on this thread to justify my living. I don't think that how our industry makes their money is totally fair. But there are a lot of industries like that. I enjoy helping people and getting them to accomplish their financial goals. Do you know how many client I have now that tried to do it themselves? Then 2008 came along and they pulled out at the bottom, now they leave it up to me. Everyone on this board is all about how easy it is to invest, but most people have a very very hard time with it (mentally).
If you have a person who had $500,000 in their ira in 2007, and in 2008 the market crashes and now they have $290,000, they pull out and leave it in cash for 5 years. Then take the same person who has an advisor that talks them out of pulling out and they now have $750,000. I don't care what that advisor made, because he just saved them $460,000. There are so many cases like this, I have tax clients, not investment clients, that are still in cash from 2008. I have tax clients that moved everything to the g fund in their tsp in 2008 and are still there, in their 40's, do you know how much money they have left on the table. Don't overlook the behavioral finance aspect.