Vanguard: Advisor Alpha

[Frugancial Advisor]

Hello Mustachians!

I would really like to hear some feedback on a topic that continues to spring to mind every time I browse the Investor Alley subforum.

The census around here is that a financial planner is similar to a snake oil salesmen, trying to push expensive under-performing funds on you to rip you off and line their own pockets.

In the same breath, Vanguard is viewed as the authoritative voice on investing in low-cost broadly diversified index funds, preferably on a DIY basis within a brokerage account.

However, two strongly held beliefs collide when you take some time to review Vanguard's own white paper on Advisor Alpha. They go so far as to state that an Advisor should be able to add approximately '3% alpha' on an average annualized basis through advice which is beyond that of choosing funds and asset allocations.

So my question to you is: How much should an advisor charge? And if not per hour, would a tiered-fee which declines with the more your portfolio is valued be acceptable? I've seen posts by very intelligent people claiming that 1% all-in is worth it for a certified planner, but that 1.25% is 'unacceptable'!

For reference, Vanguard paper on Advisor Alpha (interesting read!): https://www.vanguard.com/pdf/ISGQVAA.pdf

Thanks

[Michael in ABQ]

Hello Mustachians!

I would really like to hear some feedback on a topic that continues to spring to mind every time I browse the Investor Alley subforum.

The census around here is that a financial planner is similar to a snake oil salesmen, trying to push expensive under-performing funds on you to rip you off and line their own pockets.

In the same breath, Vanguard is viewed as the authoritative voice on investing in low-cost broadly diversified index funds, preferably on a DIY basis within a brokerage account.

However, two strongly held beliefs collide when you take some time to review Vanguard's own white paper on Advisor Alpha. They go so far as to state that an Advisor should be able to add approximately '3% alpha' on an average annualized basis through advice which is beyond that of choosing funds and asset allocations.

So my question to you is: How much should an advisor charge? And if not per hour, would a tiered-fee which declines with the more your portfolio is valued be acceptable? I've seen posts by very intelligent people claiming that 1% all-in is worth it for a certified planner, but that 1.25% is 'unacceptable'!

For reference, Vanguard paper on Advisor Alpha (interesting read!): https://www.vanguard.com/pdf/ISGQVAA.pdf

Thanks

How much of those higher returns is simply keeping their clients from trying to time the market? For instance, anyone who decided to "get out of the market" after Trump got elected would have missed out on the pretty impressive run over the last year.

1% of AUM, or even 0.5% can easily add up to tens of thousands if you have a portfolio grow to a million dollars or more. It's not really aligning incentives since the financial advisor doesn't really make that much extra if they spend hours trying to get your individual portfolio to earn 12% returns when the market earns 10%. It's similar with real estate agents who have more incentive to sell your house quickly than to try and push to get an extra $10,000. After all is said and done they might only see $150 of that (half of a 6% commission with half of that going to the office) which isn't really worth their time if they could have got another listing in that time that would earn them thousands.

My professional services as a commercial real estate appraiser are typically billed at about $100 an hour but can be as much as $200 an hour. I imagine an accountant or other financial professional would expect to bill a similar amount.

[Indexer]

So my question to you is: How much should an advisor charge? And if not per hour, would a tiered-fee which declines with the more your portfolio is valued be acceptable? I've seen posts by very intelligent people claiming that 1% all-in is worth it for a certified planner, but that 1.25% is 'unacceptable'!

Vanguard advisors charge 0.3%.


Advisor's alpha assumes the investor isn't doing the things they should be doing. If they aren't rebalancing, staying disciplined, remaining tax efficient, etc. etc. then a novice investor could easily cost themselves 1-3% in annual returns. In that case you can make a strong argument that the investor would be better off paying a low cost advisor. 

[seattlecyclone]

An hourly fee to get help from someone with specialized knowledge can certainly be worth paying. I know you asked for a number that seems like a reasonable price, but I'm not sure that's really the right question. Instead I think we should view it as more akin to paying a lawyer or accountant or other professional with specialized knowledge. An average person with average needs can go to pretty much anyone. They shouldn't expect to have to pay as much as someone whose situation is more unique and might require hiring someone with a little bit more of a niche practice.

Regardless, I don't think any percentage-based fee is really justifiable. Are you going to be spending twice as much time helping your long-time clients as you did when they first spoke to you and their portfolio was half the size? Seems unlikely, especially since they probably needed a lot more advice as a new client than they do just to stay the course and stick to the plan.