Boiler Room Tactics for Fee-only Advisors

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Boiler Room Tactics for Fee-only Advisors

Postby Rick Ferri » Tue Apr 03, 2012 9:44 am

I was recently asked to check out a fee-only advisor for someone who was thinking about going to work for this firm. The advisor charges over 2.0% in management fees for small accounts, and 1.3% in fees for accounts of $1 million. How does any fee-only advisor justify such fees? That's a question that even the advisors who charge these high fees grapple with.

Never fear, help is near. In true boiler-room fashion, a new whitepaper by State Street Global Advisors (SSgA) provide advisors with answers.

Boiler Room Tactics for Fee-only Advisors

Warning: Read this only if you have a strong stomach.

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Re: Boiler Room Tactics for Fee-only Advisors

Postby ddb » Tue Apr 03, 2012 9:56 am

Rick, how do you propose that a fee-only advisor provide services to a client with, say, $100,000 of investable assets, in a manner that is both fair to the client and provides a sustainable (and profitable) business model for the advisor?
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Re: Boiler Room Tactics for Fee-only Advisors

Postby Beagler » Tue Apr 03, 2012 10:02 am

For small accounts, how about an hourly fee?
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Re: Boiler Room Tactics for Fee-only Advisors

Postby Rick Ferri » Tue Apr 03, 2012 10:57 am

ddb,

Several services have popped up over the past few years that will manage small amounts for a small fee. The problem is that few people know about these firms. Small fees mean small marketing budgets. I'm not at liberty to list or comment on any of those firms due to legal issues, but other Bogleheads probably have some ideas. An hourly fee works well also as Beagler noted.

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Re: Boiler Room Tactics for Fee-only Advisors

Postby ddb » Tue Apr 03, 2012 11:10 am

Beagler wrote:For small accounts, how about an hourly fee?


An hourly fee is a great model for the client, but very difficult for an advisor to build a sustainable practice. This is not to say that it hasn't or can't be done, but it's tough (see Allan Roth's firm Wealth Logic as a good example of how it CAN be done).

Rick Ferri wrote:Several services have popped up over the past few years that will manage small amounts for a small fee. The problem is that few people know about these firms. Small fees mean small marketing budgets. I'm not at liberty to list or comment on any of those firms due to legal issues, but other Bogleheads probably have some ideas. An hourly fee works well also as Beagler noted.


You're avoiding the question. I didn't ask you to name a firm, but rather how the relationship should work. For a person with a $100K account, do you want to see retainer fee, hourly fee, AUM fee? For whichever you think is appropriate, how much should the fee be?

- DDB
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Re: Boiler Room Tactics for Fee-only Advisors

Postby Rick Ferri » Tue Apr 03, 2012 11:13 am

ddb wrote:
Rick Ferri wrote:Several services have popped up over the past few years that will manage small amounts for a small fee. The problem is that few people know about these firms. Small fees mean small marketing budgets. I'm not at liberty to list or comment on any of those firms due to legal issues, but other Bogleheads probably have some ideas. An hourly fee works well also as Beagler noted.


You're avoiding the question. I didn't ask you to name a firm, but rather how the relationship should work. For a person with a $100K account, do you want to see retainer fee, hourly fee, AUM fee? For whichever you think is appropriate, how much should the fee be?

- DDB


It's a difficult question that I have considered many times over the years. My answer is that I don't have a good answer. Sorry.

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Re: Boiler Room Tactics for Fee-only Advisors

Postby pkcrafter » Tue Apr 03, 2012 11:31 am

Thanks Rick. Here's another study along those same lines -- Advisors fail undercover sting.

“We document that advisors fail to ‘de-bias’ their clients and often reinforce biases that are in their interests,” the authors found. “Advisors encourage returns-chasing behavior and push for actively managed funds that have higher fees, even if the client starts with a well-diversified, low-fee portfolio.”


http://www.advisorone.com/2012/04/02/most-advisors-caught-failing-clients-in-research-s

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Re: Boiler Room Tactics for Fee-only Advisors

Postby Random Musings » Tue Apr 03, 2012 11:38 am

Say it ain't so, Wharton. Although I'm not surprised.

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Re: Boiler Room Tactics for Fee-only Advisors

Postby baw703916 » Tue Apr 03, 2012 12:08 pm

The papers highlight a sizable gap between the value clients place on advisor expertise and the value that advisors themselves place on their own worth. Needless to say, advisors think very highly of themselves. A similar gap was found between how well clients think their advisors are doing and the advisors’ much higher opinion of their performance.


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Re: Boiler Room Tactics for Fee-only Advisors

Postby EmergDoc » Tue Apr 03, 2012 12:54 pm

For a small account there are several reasonable ways to run an advisory practice:

1) Flat fee $1-2K per year I've blogged about one doing this for docs. http://whitecoatinvestor.com/an-intervi ... y-planner/
2) Hourly rate
3) % of assets that starts high and gets lower. Take a look at Betterment for an example. It starts at 0.35%. You don't get the level of services you would get from a higher cost firm, but the price is right.
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Re: Boiler Room Tactics for Fee-only Advisors

Postby nisiprius » Tue Apr 03, 2012 1:07 pm

For many investors, the ideal advisor would be one who takes a young, inexperienced client, sets them up with something reasonable, and gradually trains them and teaches them how to manage it for themselves.

(Shrug) That applies to many kinds of professional services, come to think of it. It just isn't a very good business model for the professional. There's no reason why an 18-year-old with her first job shouldn't go to H&R Block to do her 1040-EZ for her... once.

Come to think of it I can't think of many professionals that do follow a model of weaning clients off of their services. Certainly, it is almost impossible to see a medical specialist and not get told to stop at the front desk on your way out to schedule a six-month followup.
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Re: Boiler Room Tactics for Fee-only Advisors

Postby ddb » Tue Apr 03, 2012 1:23 pm

Rick Ferri wrote:
ddb wrote:
Rick Ferri wrote:Several services have popped up over the past few years that will manage small amounts for a small fee. The problem is that few people know about these firms. Small fees mean small marketing budgets. I'm not at liberty to list or comment on any of those firms due to legal issues, but other Bogleheads probably have some ideas. An hourly fee works well also as Beagler noted.


You're avoiding the question. I didn't ask you to name a firm, but rather how the relationship should work. For a person with a $100K account, do you want to see retainer fee, hourly fee, AUM fee? For whichever you think is appropriate, how much should the fee be?


It's a difficult question that I have considered many times over the years. My answer is that I don't have a good answer. Sorry.


Thank you for the honest answer. If you do not have a proposed alternative, then do you think it's fair to criticize an advisor who charges whatever fee you deem inappropriate? i.e. it sounds like you're saying, "You're doing things wrong, but I don't know how you could do any better."

Certainly, advances in portfolio monitoring software have made this perhaps an achievable goal - I can envision a firm (maybe one already exists) that charges a flat fee per account*. In exchange for the flat fee, they get a continuously monitored and rebalanced account utilizing ETFs. The advisor could set up, say, 10 model portfolios (5 regular, 5 tax-efficient, no more than 4-5 holdings in each model in order to minimize transaction costs), and place each client into a model based on the "age in bonds" rule. Then the advisor could buy good reporting and billing software, and rebalancing software. The client would miss out on things like tax-efficient asset allocation (i.e. allocation across accounts) and tax-loss harvesting, and the service wouldn't be customized, but still vastly better than would they'd get from most other firms.

*For fees, I'm thinking something like $500 per household, with an account size minimum of $5,000. Clients pay transaction costs levied by custodian (~$8/trade, so probably max of $64/year/account).

A firm like this could run with 1-2 professionals, and scale support staff as # of client households increses. Initial budget could be something like this. Would require startup capital, but I think this could take off nicely.

- DDB
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Re: Boiler Room Tactics for Fee-only Advisors

Postby Rick Ferri » Tue Apr 03, 2012 2:03 pm

I think that advisors have a fiduciary responsibility to keep client fees low. This means assessing the overall impact of fees on a potential client's returns. A $500 fee may be appropriate for a $100,000 investor (0.5% of assets) but the same fee is not appropriate for a $25,000 investor (2.0% of assets). My firm has a minimum annual fee per household of $2,500. On our website there is a stated household asset minimum of $500,000. This doesn't stop people who have $100,000 to $400,000 from contacting us. I tell those people that it's not worth hiring us because our fee would be too high.

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Re: Boiler Room Tactics for Fee-only Advisors

Postby ddb » Tue Apr 03, 2012 2:10 pm

Rick Ferri wrote:I think that advisors have a fiduciary responsibility to keep client fees low. This means assessing the overall impact of fees on a potential client's returns. A $500 fee may be appropriate for a $100,000 investor (0.5% of assets) but the same fee is not appropriate for a $25,000 investor (2.0% of assets). My firm has a minimum annual fee per household of $2,500. On our website there is a stated household asset minimum of $500,000. This doesn't stop people who have $100,000 to $400,000 from contacting us. I tell those people that it's not worth hiring us because our fee would be too high.

Rick Ferri


A fiduciary responsibility does not require a fiduciary to "keep client fees low". I do think a fiduciary obliation entails ensuring receiving good value for fees paid relative to other alternatives. There's nothing inherently wrong with an investor paying a few hours worth or labor to keep their portfolio on track. Take Allan Roth, as an example - his hourly fee is $350 (per his firm's Disclosure Brochure), so a $500 annual fee would be equivalent to paying for only 1.43 hours per year. This seems like a good deal (assuming a competent professional), even if the portfolio is valud only at $25K. Really, what's a better alternative for an investor ill-equipped to DIY?

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Re: Boiler Room Tactics for Fee-only Advisors

Postby Rick Ferri » Tue Apr 03, 2012 2:14 pm

A fiduciary acts in the best interest of clients and this includes fees. If an advisor cannot make money on a client by charging a reasonable fee, then the advisor should not take the client. IMO, for portfolio management services only, a fee of 0.5% or less is reasonable.

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Re: Boiler Room Tactics for Fee-only Advisors

Postby tetractys » Tue Apr 03, 2012 2:44 pm

ddb wrote:Rick, how do you propose that a fee-only advisor provide services to a client with, say, $100,000 of investable assets, in a manner that is both fair to the client and provides a sustainable (and profitable) business model for the advisor?

I imagine taking care of relatively small portfolios, possibly in a simplified way, would be a great avenue to clients with bigger portfolios. In other words, cheap advertising. It would be up to the adviser to treat all their clients fairly, of course, and not judge them by size. The fact is, any truly worthy pursuit feeds itself--cornucopia wise. -- Tet
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Re: Boiler Room Tactics for Fee-only Advisors

Postby Jerry_lee » Tue Apr 03, 2012 3:00 pm

What are the total costs at an advisory firm that provides no guidance on if or when you need to review your estate plan, no input on whether you've taken the necessary risk management steps (protection against potential litigants, unforeseen healthcare costs, or premature death), no comment on if you have taken the appropriate wealth transfer steps, doesn't council you about the potential advantages of diversifying more broadly across small cap and value dimensions, allows you to hold far-too-conservative 50% equity or less asset allocations because you cannot help but obsessing about short term volatility, or that has undercut your liquidity ratio by taking on excessive interest rate and credit risk on the 'safe' side of you balanced portfolio?

These are all potential pitfalls I see every day, and all these "hidden" costs are well north of 1-2% per year. For the investor with $1M or more, they are better off paying 0.5% to 0.75% per year and not cutting corners.
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Re: Boiler Room Tactics for Fee-only Advisors

Postby ResNullius » Tue Apr 03, 2012 3:24 pm

I think almost all financial advisors are frauds and crooks, but that's just me. On the other hand, there are many people who just want to be told what to do, and frauds and crooks are more than happy to help them out. Most people simply don't realize how little their financial advisor actually knows about financial planning and investing. Live and learn. As Clint Eastwood once said, "even worms need to eat."
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Re: Boiler Room Tactics for Fee-only Advisors

Postby ddb » Tue Apr 03, 2012 3:30 pm

Rick Ferri wrote:A fiduciary acts in the best interest of clients and this includes fees. If an advisor cannot make money on a client by charging a reasonable fee, then the advisor should not take the client. IMO, for portfolio management services only, a fee of 0.5% or less is reasonable.

Rick Ferri


Okay, then by your definitions, the majority of investors should not work with an investment advisor. Most people don't have $100K, and almost no ethical advisor can run a sustainable business with revenue of less than $500/client/year.

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Re: Boiler Room Tactics for Fee-only Advisors

Postby Rick Ferri » Tue Apr 03, 2012 3:32 pm

Jerry_Lee,

I disagree. A vast majority of advisors are providing only investment management services, i.e. they manage portfolios.

That being said, the wealth management services you are talking about would require higher payments, but not a higher portfolio management fee. The cost for legal advice, tax advice, detailed financial planning, insurance advice, etc. should be billed separately and charged as a retainer or hourly fee. At the very least these extra services should be separate line items on a client invoice. Seperating investment fees from other fees is clean and offers full disclosure. It is the only fair way to bill for ancillary services.

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Re: Boiler Room Tactics for Fee-only Advisors

Postby ResNullius » Tue Apr 03, 2012 3:32 pm

ddb wrote:
Rick Ferri wrote:A fiduciary acts in the best interest of clients and this includes fees. If an advisor cannot make money on a client by charging a reasonable fee, then the advisor should not take the client. IMO, for portfolio management services only, a fee of 0.5% or less is reasonable.

Rick Ferri


Okay, then by your definitions, the majority of investors should not work with an investment advisor. Most people don't have $100K, and almost no ethical advisor can run a sustainable business with revenue of less than $500/client/year.

- DDB


I think you just confirmed why most financial advisors rip their clients off at every turn.
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Re: Boiler Room Tactics for Fee-only Advisors

Postby Rick Ferri » Tue Apr 03, 2012 3:33 pm

ddb wrote:Okay, then by your definitions, the majority of investors should not work with an investment advisor. Most people don't have $100K, and almost no ethical advisor can run a sustainable business with revenue of less than $500/client/year.

- DDB


That appears to be the unfortunate truth.

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Re: Boiler Room Tactics for Fee-only Advisors

Postby tetractys » Tue Apr 03, 2012 4:59 pm

Actually advisors like Rick, et. all our other mentor advisors on this forum no less, do a great job for many of us for absolutely no fees. And as a matter of fact they are the payers for their own good advice with their valuable time and effort.

I count them as my invaluable advisors, no boiler rooms necessary. I wish them paying clients, deserved notoriety, and all kinds of other good fortune and happiness in compensation. -- Tet
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Re: Boiler Room Tactics for Fee-only Advisors

Postby Clearly_Irrational » Tue Apr 03, 2012 5:21 pm

I've actually considered becoming a financial advisor and I'm still struggling with this issue. How do I charge people a fee large enough to make it worth my time when I know that even small percentages can significantly impact their long term performance? I know a number of people who either got no advice or really bad advice that could have really used my help, even if it was somewhat expensive for them because the alternative was so much worse. Just to give an example, two couples I know had financial advisors that put them in 100% stocks AT RETIREMENT so that when the crisis hit, their portfolio got slammed big time.
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Re: Boiler Room Tactics for Fee-only Advisors

Postby GregLee » Tue Apr 03, 2012 5:27 pm

nisiprius wrote:Certainly, it is almost impossible to see a medical specialist and not get told to stop at the front desk on your way out to schedule a six-month followup.

In the last few years, I've had one doctor tell me not to schedule another yearly appointment, but just call if I have a problem (that was a radiation oncologist). Then another rescheduled me from appointments every 6 months to once a year (that was a urologist). Then another rescheduled me from appointments every 3 months to every 6 months (a medical oncologist). So it does happen. I also had a radiologist suggest to me that I rethink having yearly CT scans, since they do carry some risk. I can't think of any time when I ever got the impression that a doctor was trying to maintain me as a client. So I think it is possible for professionals to have ethics.
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Re: Boiler Room Tactics for Fee-only Advisors

Postby baw703916 » Tue Apr 03, 2012 5:31 pm

Never ask a barber if you need a haircut.
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Re: Boiler Room Tactics for Fee-only Advisors

Postby leo383 » Wed Apr 04, 2012 7:45 am

We have married couple friends who have begun seeing a financial adviser. They have assets far below $100k, and have probably negative net worth due to large amounts of debt.

The adviser is charging them $800 total for four visits, over one or two years depending on the couple's needs. The adviser has them prioritizing their debts, organizing payment schedules, and offering advice on 401(k) and college funding. So far, so good.

It's basically $800 to get the boat headed in the right direction.

I think it has so far been great for this couple, although I am kind of waiting for the other shoe to drop. :)

Isn't a $800/case, four appointment model workable?
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Re: Boiler Room Tactics for Fee-only Advisors

Postby Clearly_Irrational » Wed Apr 04, 2012 11:58 am

leo383 wrote:Isn't a $800/case, four appointment model workable?


I've pondered that, and if that was the entirety of your business model I don't think so. At least not on a local basis anyways. I think you'd have a hard time generating enough new clients to keep your pipeline full so that you'd make enough to stay in business. Perhaps if you scaled it out to some sort of national model where you had a call center and the advisor(s) met with people using skype. Even there, marketing would be a challenge.

Even if we ignore overhead and taxes and assume that the advisor is comfortable making the national median household income of $50,000 a year (which is pretty paltry for the sort of expertise required) we're talking about six brand new customers every single month. Add back in taxes and overhead and now you're talking about more like 10 new customers every month. Make it a more worthwhile wage of $100k and you're talking 20 new customers a month, throw in office support, some leeway for slack times, etc. and you're probably talking about a realistic need to bring in a new client every single day just to stay afloat. I don't think that kind of volume is realistic unless I'm seriously overestimating how hard it is to find new clients. Oh, and on that system the advisor is probably working 70-80 hour weeks if we assume a standard appointment length of two hours plus some time for back office stuff. (which completely ignores the massive amount of marketing time you're going to need to invest)

If you're going to do an appointment model, I think you'd have to quadruple your rates. At $400 an hour you could probably make it work, that's a setup that's more similar to how attorneys and lawyers do it. At that rate though I think you're going to scare off the $100k in assets folks, so I'm not sure that's really an improvement from their perspective. I'm not an expert on all this though, I'm sure there are some advisors on this board who could provide more accurate feedback.
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Re: Boiler Room Tactics for Fee-only Advisors

Postby brick-house » Wed Apr 04, 2012 8:11 pm

Anybody heard of Wealthfront? Looks like they are providing a cheap and easy way to do MPT based investing and rebalancing, no matter how big or small the investable balance...

https://www.wealthfront.com/

https://www.wealthfront.com/static/docu ... epaper.pdf

The first $25,000 you invest on Wealthfront comes with no advisory fee. Our advisory fee on investments over $25,000 is just 0.25% a year, while traditional financial advisors charge annual fees of at least 1.0%. Over 10 years those extra fees add up to more than a 10% drag on your investments!


What's to keep me from investing $10,000 with you and then mimicking trades for my $250,000 portfolio at a discount broker?
Nothing. But that kind of sounds like a pain in the neck when we only charge you an annual advisory fee of 0.25% to take care of all the trades in your account, as well as the periodic rebalancing. That being said you are welcome to copy anything we do if you would rather do it yourself.


Why do you recommend so many Vanguard ETFs?
We regularly survey the ETF landscape (of which there are over 1,000) and rank ETFs in each asset class using the objective criteria described in the FAQ below titled “How do you pick ETFs?“ Vanguard ETFs often come out on top. We receive no compensation for recommending Vanguard products or any other ETFs.


We believe the next best option to having your portfolio managed by Wealthfront is investing in Vanguard’s target date funds. Other target date funds aren’t nearly as good (primarily due to their much higher cost). There are three ways to compare the Wealthfront service to the Vanguard target date funds: cost, expected return and risk.
1. Vanguard’s target date funds typically employ Index funds that have average expense ratios of approximately 0.18%. Wealthfront’s recommended ETFs have an average cost of approximately 0.15%. Since Wealthfront doesn’t charge an advisory fee on your first $25,000 invested and then only charges 0.25% on your assets that exceed $25,000, its total cost will be lower for accounts smaller than $28,409.
2. Wealthfront employs more asset classes (6) than Vanguard’s target date funds (3). According to our simulations, our six optimally mixed relatively uncorrelated asset classes should outperform Vanguard’s three optimally mixed asset classes by at least 0.50% per year which should more than make up for the higher fees charged on accounts larger than $28,409.
3. Target date funds do not take the buyer’s specific risk tolerance into consideration when choosing an asset mix. Therefore the return on the target date fund might be too high or too low for a particular buyer’s risk tolerance. Wealthfront’s approach is to customize portfolios for each client’s specific risk tolerance. While intangible, risk should be one of your most important considerations when investing your money.
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Re: Boiler Room Tactics for Fee-only Advisors

Postby Rick Ferri » Wed Apr 04, 2012 10:37 pm

Wealthfront looks like an interesting startup. It reminds me of another startup called Betterment. The idea is to manage small accounts in index funds and ETFs at a low fee.

The brochure says Wealthfront got $10 million in venture funding from a group and more money from private individual investors. I understand Betterment also got big bucks.

WOW! That's all I can say. WOW! The people who are throwing tens of millions at these startup companies that have no clients and no assets under management must know something about the low fee advisor business that I don't know. I've only been doing this for 13 years and have $1.1 billion under management.

I know the financials behind running a low fee advisor business. I started mine with $50,000, and that was after gaining more than 10 years experience working with smaller investors. I can't begin to understand $10+ mill in STARTUP funding for a company where no one has any experience doing this. Honestly, can someone explain this to me because I am lost. What am I missing?

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Re: Boiler Room Tactics for Fee-only Advisors

Postby boglestan » Thu Apr 05, 2012 12:36 am

Rick Ferri wrote: I can't begin to understand $10+ mill in STARTUP funding for a company where no one has any experience doing this. Honestly, can someone explain this to me because I am lost. What am I missing?

They're leveraging the web for what it's good at: ease of use and scalability. That gives them potential for huge growth.

As for their lack of experience... for some people that's not such a negative. Experience doesn't always lead to competence or strong ethics, and the traditional financial industry doesn't exactly have a pristine reputation among the public.
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Re: Boiler Room Tactics for Fee-only Advisors

Postby stratton » Thu Apr 05, 2012 12:53 am

Rick Ferri wrote:I can't begin to understand $10+ mill in STARTUP funding for a company where no one has any experience doing this. Honestly, can someone explain this to me because I am lost. What am I missing?

At 0.5% ER they need $2 billion in assets to collect $10 million. At 0.25% ER they need $4 billion in assets under management or about 4x what your firm has. :shock:

Rick, maybe they'll hire you as a consultant for $600 an hour. :P

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Re: Boiler Room Tactics for Fee-only Advisors

Postby danieljquirk » Thu Apr 05, 2012 3:21 am

Their location in Silicon Valley and board connections to the tech world probably won't hurt. They just need to gain Mark Zuckerburg as a client after the IPO. That will be $20 billion give or take.

As I understand it, Wealthfront used to have an active management approach, charging 1-2%, then figured out that wasn't a good way to manage money, and changed the business model to a low cost approach this past December.

While Wealthfront could be a bust for the VC investors, the price-point is a good deal for clients/prospects with small accounts. Their user interface is slick, clean, and pleasant.

It looks like they generally recommend Vanguard funds. One thing that appears to be different from general boglehead consensus is the outsized allocation to emerging markets, as well as small allocations to commodities.
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Re: Boiler Room Tactics for Fee-only Advisors

Postby nisiprius » Thu Apr 05, 2012 7:17 am

Wealthfront is the same company that used to be called "KaChing!" (The old name make me think of red clown noses, the new one makes me think of storm clouds raining money...)

One of their principals, Andy Rachleff, wrote a thoroughly dishonest article, John Bogle Didn't Have All the Data, name-dropping Bogle and implying that if only he'd seen the absolutely crushing table half of whose entries are "NA," he'd have changed his mind about indexing. Replete with a gratuitous illustration of some Princeton building, just in case you don't get the picture. The article all but says that university endowments spank the index just in their equity investments alone. Wealthfront's own pitch, not stated in the article, is that "At Wealthfront, we believe it is possible to identify public equity money managers who will repeatedly outperform their relevant benchmarks. We base this belief on the premier U.S. university endowments’ decades long track record of generating alpha through public equity money manager selection." In other words: universities know how to beat the market, ergo it's possible, ergo if it's possible Wealthfront must be able to do it).

Relevant forum discussion here.
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Re: Boiler Room Tactics for Fee-only Advisors

Postby johnep » Thu Apr 05, 2012 7:46 am

boglestan wrote:
Rick Ferri wrote: I can't begin to understand $10+ mill in STARTUP funding for a company where no one has any experience doing this. Honestly, can someone explain this to me because I am lost. What am I missing?

They're leveraging the web for what it's good at: ease of use and scalability. That gives them potential for huge growth.

As for their lack of experience... for some people that's not such a negative. Experience doesn't always lead to competence or strong ethics, and the traditional financial industry doesn't exactly have a pristine reputation among the public.


I could not access wealthfront.com because I am using an unsupported browser, IE8, which more people are using than IE9. Sounds like they have some work to do to effectively leverage the web.
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Re: Boiler Room Tactics for Fee-only Advisors

Postby ObliviousInvestor » Thu Apr 05, 2012 9:09 am

Boglehead Matthew Amster-Burton (mamster here on the forum) recently wrote an article for Mint.com about Wealthfront: http://www.mint.com/blog/investing/are- ... ou-012012/

Personally, I don't see the advantage of this type of service relative to simply picking the Vanguard LifeStrategy (or Target Retirement) fund that's the closest fit for your needs. (And for what it's worth, I think such funds are typically the answer to the question of what investors should do when they don't have enough money to qualify for services like Rick's or to make services like Allan's make sense. For most small investors, I think the "put it all in a low-cost all-in-one fund with a roughly suitable allocation and call it a day" approach is entirely reasonable.)
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Re: Boiler Room Tactics for Fee-only Advisors

Postby Mel Lindauer » Thu Apr 05, 2012 9:32 am

ObliviousInvestor wrote:Boglehead Matthew Amster-Burton (mamster here on the forum) recently wrote an article for Mint.com about Wealthfront: http://www.mint.com/blog/investing/are- ... ou-012012/

Personally, I don't see the advantage of this type of service relative to simply picking the Vanguard LifeStrategy (or Target Retirement) fund that's the closest fit for your needs. (And for what it's worth, I think such funds are typically the answer to the question of what investors should do when they don't have enough money to qualify for services like Rick's or to make services like Allan's make sense. For most small investors, I think the "put it all in a low-cost all-in-one fund with a roughly suitable allocation and call it a day" approach is entirely reasonable.)


Couldn't agree more that this is the simple, low-cost solution, Mike. One can see just on this thread that there's so much gnashing of the teeth and worrying about how small investors can possibly get decent help at a reasonable price, when the low-cost solution is staring us right in the face.
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Re: Boiler Room Tactics for Fee-only Advisors

Postby Rick Ferri » Thu Apr 05, 2012 11:51 am

Mel Lindauer wrote: One can see just on this thread that there's so much gnashing of the teeth and worrying about how small investors can possibly get decent help at a reasonable price, when the low-cost solution is staring us right in the face.


The challenge is educating people about inexpensive and well diversified Vanguard balanced funds. That's not going to happen if a person goes a broker/advisor or to an advisor who charges AUM fees. It could happen if an hourly as-needed advisor was selected, but there are so few of them. The Garrett Planning Network still has the largest population of hourly fee advisors, although not all Garrent members are hourly.

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Re: Boiler Room Tactics for Fee-only Advisors

Postby GregLee » Thu Apr 05, 2012 2:10 pm

Rick Ferri wrote:The challenge is educating people about inexpensive and well diversified Vanguard balanced funds. That's not going to happen if ...

It's not going to happen at all, except occasionally by accident, because as the years roll by, people come to know less and less about any given subject. One reason is that there are more and more subjects to learn about, and people get distracted. A systematic solution might be to make it easier, much easier, to invest in a plausible way, and publicize that single way. (Another solution, which is no more than a bee in my own personal bonnet, would be to extend the social security system, so that people can pay more in to get out higher payments when they retire.)
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Re: Boiler Room Tactics for Fee-only Advisors

Postby yobria » Thu Apr 05, 2012 3:50 pm

I'd say there are three parties responsible for good investment outcomes - investors, advisors, and the government. At least one is falling down on the job.

Analogy - You walk into a Turkish bazaar, and walk out with an expensive rug labelled "100% silk". You get home and discover it is actually nylon. Was that your fault for not educating yourself, the seller's fault for lying, or the govt's fault for not regulating the market?

There's no silver bullet. The solution is likely a combination of education (let's begin teaching these topics in public schools to 8 year olds) and more stringent gov't regulation (fiduciary standard for all advisors, further restrictions on, for example, 401k withdrawals). Through Medicare, Medicaid, SS, etc we've taken basic retirement funding out of the hands of the average Joe. The question is, how do we save the folks with excess savings from themselves and the investment industry?
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Re: Boiler Room Tactics for Fee-only Advisors

Postby brick-house » Fri Apr 06, 2012 8:26 pm

nisiprius wrote:

Wealthfront is the same company that used to be called "KaChing!" (The old name make me think of red clown noses, the new one makes me think of storm clouds raining money...)

One of their principals, Andy Rachleff, wrote a thoroughly dishonest article, John Bogle Didn't Have All the Data, name-dropping Bogle and implying that if only he'd seen the absolutely crushing table half of whose entries are "NA," he'd have changed his mind about indexing. Replete with a gratuitous illustration of some Princeton building, just in case you don't get the picture. The article all but says that university endowments spank the index just in their equity investments alone. Wealthfront's own pitch, not stated in the article, is that "At Wealthfront, we believe it is possible to identify public equity money managers who will repeatedly outperform their relevant benchmarks. We base this belief on the premier U.S. university endowments’ decades long track record of generating alpha through public equity money manager selection." In other words: universities know how to beat the market, ergo it's possible, ergo if it's possible Wealthfront must be able to do it).

Relevant forum discussion here.


Wealthfront recently changed their model to a low cost Vanguard ETF portfolio because the target market objected to the high fees. From an article in Financial Advisor magazine:

http://www.fa-mag.com/component/content ... nt=1&page=

Rachleff says he and the other luminaries funding Wealthfront are using an iterative process articulated in Eric Ries’ best seller The Lean Startup. The approach to building a company assumes startups will build something, learn from it and make it better.
In Wealthfront’s case, that’s meant drastically altering the company’s investment advice solution several times in the last three years. Wealthfront started off as “kaChing,” a product for managing individual securities. When Rachleff was brought in to run the company, he changed its name and its solution to offer models of diversified portfolios managed by separate account managers for fees of 50 to 200 basis points. Rachleff says its young target clients objected to the high fees, so the solution was revamped again with an innovative pricing model.
Offering a free investment solution to early adopters of technology is ingenious. These young investors will have much more than $25,000 to invest in a few years, and Wealthfront is grooming them to be clients for the next 50 years. The company is also putting assets on a platform that will be refined over time.
Wealthfront’s current incarnation will not be widely embraced in the next year or two. First, Wealthfront will focus on serving those young Silicon Valley clients. However, the firm is setting itself up to lure a broad swath of other types of clients advisors don’t want beyond Silicon Valley over the next ten years. Wealthfront and others of its ilk will learn from their mistakes and get better at providing investment advice.
You won’t even notice it’s happening. Until it is too late. The shakeout will occur gradually over the next decade, as such companies nibble at the fringes of the financial advisor universe. It won’t be “Advisor Armageddon.” Advisors who are great salespeople or highly trained professionals will continue to be valued and find success. But those who are not great salespeople and who lack professional designations and education will find it more difficult to compete. Fee compression will become more acute. The trend to professionalize the financial advice business will become stronger as the online advice incursion occurs over the next ten years.
What will be interesting to see is how online advice will affect the profession over the next generation or two. The financial advice business will not be decimated over the next decade, but two or three decades from now the ranks will have thinned.
“By the time a company like mine can make a difference is years away,” says Rachleff, who admits that older clientele still want their hands held. Yet he is part of an avant-garde that is a real competitive threat.

“We’re taking mean variance optimization, the foundation of modern portfolio theory, and putting a consumer interface on it so consumers can do it themselves,” says Rachleff.
“Making airline reservations was expensive and the reservation system was only available to travel agents,” Rachleff adds. “What Expedia and Kayak did with travel reservations, we can do with financial advice


Financial Advisor magazine is a good glimpse into the boiler room. This month features a profile of Ric Edelman. This cat charges clients with less than $450,000 a 2% fee, but won't tip his mailman.

http://www.fa-mag.com/component/content ... &Itemid=73

Edelman’s critics, in fact, say his all-in costs to investors are relatively high, for an advisor. Investors are charged a one-time fee of $800 for a financial plan, if they need one. They are then charged investment fees that are tiered, based on the dollar amount of assets they have with the firm. While a client with $1 million would pay 1.5%, those with less than $450,000 are charged 2%. The average account size at his firm is $440,000. And then there are the embedded costs for the portfolio.

Edelman claims his all-in costs are cheaper than those of his competitors because his portfolio costs are so low. Composed largely of ETFs and Dimensional Funds Advisors funds, they cost just 30 to 40 basis points. Mutual funds can cost three to five times that, he says.


On New Year’s weekend, a caller into Edelman’s radio show blasted him for saying postal workers shouldn’t ask for tips. Edelman had taken his mail carrier to task for putting an envelope in his mailbox during the holidays, despite the fact that mailmen earn an average salary of $52,000, Edelman says. “This guy is asking me for a tip for doing his job,” he says.
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Re: Boiler Room Tactics for Fee-only Advisors

Postby Rick Ferri » Sat Apr 07, 2012 6:04 pm

I wish Prof. Rachleff and Wealthfront well, even though I don't beleive they have any idea what they're doing. Advising a $25,000 client who knowns nothing about investing is typically more time consuming and labor intensive than advising to a $2.5 million client who has been around the block a few times. They haven't figued this out yet, but they will.

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Re: Boiler Room Tactics for Fee-only Advisors

Postby xerty24 » Sat Apr 07, 2012 7:09 pm

I don't see the problem with advisors charging what the market will bear. Nobody's holding a gun to your head to make you pay out 1-2% for hand holding and advise if you don't want it or think you can get the equivalent for cheaper elsewhere. Coke (soda) costs more than gasoline per gallon because people will pay up for it, not because it costs more to create.
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Re: Boiler Room Tactics for Fee-only Advisors

Postby Rick Ferri » Sun Apr 08, 2012 10:35 am

"Charge what the market will bear."

That was the argument made to me by a prominent advisor when I started my firm back in1999. I didn't buy it then and I don't buy it now. The public's ignorance about investment fees is no excuse for an advisor to charge 1% to 2%. I charge what's fair, not what the market will bear. Others can do whatever they want.

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Re: Boiler Room Tactics for Fee-only Advisors

Postby tfb » Sun Apr 08, 2012 12:08 pm

Rick Ferri wrote:I wish Prof. Rachleff and Wealthfront well, even though I don't beleive they have any idea what they're doing. Advising a $25,000 client who knowns nothing about investing is typically more time consuming and labor intensive than advising to a $2.5 million client who has been around the block a few times. They haven't figued this out yet, but they will.

Rick Ferri

They are not using expensive human advisors to advise a $25k client who knows nothing about investing. They are using computers to educate the client, propose a portfolio, and implement the portfolio. Time consuming and labor intensive don't apply as much to computers. Once programmed, computers can scale. It costs not much more to serve one client as it does to serve 10,000 clients. Human advisors can't do that. If the client doesn't insist on expensive human advisor, the client can get good advice at a cost no human advisor can deliver. These startups want to serve an underserved market. It sure beats having these clients go to a boiler room advisor.
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Re: Boiler Room Tactics for Fee-only Advisors

Postby Rick Ferri » Sun Apr 08, 2012 2:16 pm

tfb,

I understand what they are trying to do. Vanguard has been doing this for many years with balanced portfolios of index funds AND Vanguard reps will assist people for free who call the 800 number. Yet, I don't see that is has made a big dent in the people who have $25,000 to $100,000 in investment capital. Doing it 100% impersonally "by computer" isn't likely to make a dent either, especially when there another layer of fees involved.

Currently, the people running these shops seem to be living in their own little Utopian world. The concept looks wonderful on paper. Anyone not from the business would think it makes total sense, and I'm not surprised the venture capitalists who know nothing small investors would throw money at it. But my real-world experience working with individual investors since the 1980s tells me that the small-account, low-fee, Internet only advice model is an extremely difficult business to make profitable.

I believe, no, I know that every one of these firms will ultimately fail unless they broaden their focus. The model can work, but not the way they're doing it.

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Re: Boiler Room Tactics for Fee-only Advisors

Postby afan » Sun Apr 08, 2012 3:06 pm

About Wealthfront specifically, it would trouble me no end that this outfit is now preaching something rational, but only after they failed in marketing active management. As others have noted, their old advertising claims were duplicitous in the extreme. If I wanted someone to do what they offer, I would not want them.

Can automate investment advice work? Well, considering how simple the right advice is, I don't see why not. The vast majority of people should put their money in essentially the same investments. The only real question is the level of risk. Markets are unpredictable, which severely limit the precision of risk predictions, and people are uncertain as to their true risk tolerance. With these huge sources of error, a few simple questions may be about as good as one can get in making the allocation decision. Yes, if people want long one on one discussions about their finances then that is time consuming. It is also a waste of time, since they will come back to the same answer- a few low cost index funds, with Vanguard bond funds for fixed income. If people want to spend lots of money being told this, ask them to call me. But most investors would be fine with a service that worked by computer, or without the service, just asking the Vanguard reps.

By the way, I don't think it has ever been "Professor" Rachleff. He used to work at a university, but as far as I know, he was never on the faculty. He has no qualifications for even an entry level faculty position, no doctorate, let alone becoming a professor.
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Re: Boiler Room Tactics for Fee-only Advisors

Postby Rick Ferri » Sun Apr 08, 2012 3:55 pm

afan wrote:I don't think it has ever been "Professor" Rachleff. He used to work at a university, but as far as I know, he was never on the faculty. He has no qualifications for even an entry level faculty position, no doctorate, let alone becoming a professor.


Thanks for the clarification. I once worked with a former medical doctor turned stockbroker who told people he went to the highly acclaimed Wharton School of the University of Pennsylvania. He even pointed to what looked like a graduation certificate from Wharton hanging on his office wall. Upon closer examination, this certificate was for completing a one week course on investing held at the Wharton School for a non-affiliated group calling themselves Certified Investment Management Analysts (CIMA).

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Re: Boiler Room Tactics for Fee-only Advisors

Postby Jeff Rosenberger » Thu May 17, 2012 8:32 pm

I work with Andy at Wealthfront. I've never heard anyone refer to him as "Professor" Rachleff nor him claim to have a PhD. You can find Andy's bio on the Wealthfront site here -- https://www.wealthfront.com/management

He does have an MBA from the Stanford Graduate School of Business where he is on the faculty as a Lecturer in Strategic Management. See here -- http://www.gsb.stanford.edu/ces/teaching/faculty.html.

Andy has a bachelor's degree from the University of Pennsylvania where is a trustee of the university, on the board of overseers for the engineering school and vice-chair of the university endowment committee. Here are some sources from Penn's website --

https://secure.www.upenn.edu/secretary/trustees/TrusteeNameList.html
http://www.seas.upenn.edu/media/feature-rachleff.php
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Re: Boiler Room Tactics for Fee-only Advisors

Postby NateH » Fri May 18, 2012 10:20 am

EmergDoc wrote:For a small account there are several reasonable ways to run an advisory practice:

1) Flat fee $1-2K per year I've blogged about one doing this for docs. http://whitecoatinvestor.com/an-intervi ... y-planner/
2) Hourly rate
3) % of assets that starts high and gets lower. Take a look at Betterment for an example. It starts at 0.35%. You don't get the level of services you would get from a higher cost firm, but the price is right.


re: #1 -- I think a capable advisor can be found for under $1k. I found an CFP advisor that just start working with for $850 / yr flat fee. We're mostly looking for advice on insurance, household finances, planning, college savings, optimizing taxes and (last) retirement investing, all of which we set up-front. She actually starts even lower (750/yr), but we wanted many types of customized advice and are getting it for a fair price.
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