Are institutional funds worth the cost of an adviser?

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lcrock
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Are institutional funds worth the cost of an adviser?

Post by lcrock » Thu Jul 11, 2013 4:39 pm

Hello,
I am currently working with a fee-based investment adviser that is charging almost 2% for the management of my portfolio. In the past few months I have been digging in to what they are doing as well as educating myself on the greater subject. The more I learn the more I realize they aren't really doing much for me, and for a very high cost. My plan is move away and invest on my own, I am a buy and hold index fund kind of investor. Before I do, I want to have a solid plan and rule out any reason why I should keep them.

One thing they do that I know I cannot, is have access to Institutional funds. They currently have me in a number of different DFA funds. Their claim is that even though the expense ratio is not any better than the fidelity or vanguard index funds, the funds allow a "better diversification" than other low cost funds of similar makeup.

Is this true? Is access to Dimensional funds worth the fee? This seems to be my last hangup before severing ties.

Thanks for any advice.

Bradley
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Re: Are institutional funds worth the cost of an adviser?

Post by Bradley » Thu Jul 11, 2013 8:09 pm

lcrock wrote: Is access to Dimensional funds worth the fee? This seems to be my last hangup before severing ties.

Thanks for any advice.
Short answer NO. Nothing wrong with DFA funds but 2% is way too much to pay for advice. Below is a reference of low cost advisors that can provide DFA funds if you must have them. I would suggest that you pick an advisor that charges less than .5% for AUM fee.

http://retireearlyhomepage.com/dfaadv.html
You can sum up any active fund manager’s presentation at an investor conference in one sentence: “We’re doing well, all things considered.”

JW-Retired
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Re: Are institutional funds worth the cost of an adviser?

Post by JW-Retired » Thu Jul 11, 2013 8:11 pm

lcrock wrote: Hello,
I am currently working with a fee-based investment adviser that is charging almost 2% for the management of my portfolio. In the past few months I have been digging into what they are doing as well as educating myself on the greater subject. The more I learn the more I realize they aren't really doing much for me, and for a very high cost. My plan is move away and invest on my own, I am a buy and hold index fund kind of investor. Before I do, I want to have a solid plan and rule out any reason why I should keep them.

One thing they do that I know I cannot, is have access to Institutional funds. They currently have me in a number of different DFA funds. Their claim is that even though the expense ratio is not any better than the fidelity or vanguard index funds, the funds allow a "better diversification" than other low cost funds of similar makeup.

Is this true? Is access to Dimensional funds worth the fee? This seems to be my last hangup before severing ties.

Thanks for any advice.
My goggling says the DFA fund expense ratios are typically 2x-4x higher than fidelity or vanguard index funds. Tack on the extra 2% AUM fee and they are obscenely higher (2.5% versus 0.1%). Sheer madness to invest like this.

What are you waiting for?
JW
Retired at Last

mickens16
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Re: Are institutional funds worth the cost of an adviser?

Post by mickens16 » Thu Jul 11, 2013 8:28 pm

The White Coat Investor, who posts here often did a very informative analysis on this very question. Read through and come to your own conclusions. I may add that he used a 1% advisor as a comparison.

http://whitecoatinvestor.com/dfa-vs-vanguard/

dhodson
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Re: Are institutional funds worth the cost of an adviser?

Post by dhodson » Thu Jul 11, 2013 8:36 pm

mickens16 wrote:The White Coat Investor, who posts here often did a very informative analysis on this very question. Read through and come to your own conclusions. I may add that he used a 1% advisor as a comparison.

http://whitecoatinvestor.com/dfa-vs-vanguard/
at 2% its a no brainer....it isn't worth it.

lawman3966
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Re: Are institutional funds worth the cost of an adviser?

Post by lawman3966 » Thu Jul 11, 2013 8:56 pm

On the issue of paying 2% fees, my sentiments are similar to those expressed by a famous statesman on another subject. To wit:

"You've Been Had! You've Been Took! Hoodwinked! Bamboozled! Led Astray! Run Amok! This Is What They Do!"

2% fees are an outrage regardless of what funds the advisor invests in. This forum continually sees new arrivals as they "wake up" to the ripoff they've been enduring at the large wealth management firms. You happen to be the latest person to begin learning of the importance of investment fees. I suspect you will also learn just what lengths firms will go to, to justify such ourageous fee levels.

If you continue on this path, and purchase low-fee funds at Vanguard, Fidelity, or other reputable provider, you will experience a sudden increase of 2% a year in your investment returns.

gerntz
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Re: Are institutional funds worth the cost of an adviser?

Post by gerntz » Thu Jul 11, 2013 9:07 pm

dhodson wrote:
mickens16 wrote:The White Coat Investor, who posts here often did a very informative analysis on this very question. Read through and come to your own conclusions. I may add that he used a 1% advisor as a comparison.

http://whitecoatinvestor.com/dfa-vs-vanguard/
at 2% its a no brainer....it isn't worth it.
Dat be true.

pkcrafter
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Re: Are institutional funds worth the cost of an adviser?

Post by pkcrafter » Thu Jul 11, 2013 9:12 pm

Rick Edelman, huh? No.

Ranked No. 1? It's a Barron's ranking. First off, it's by state, now let's look at the ranking criteria...
Here are America's best financial advisors, organized by state. The rankings are based on data provided by over 4,000 of the nation's most productive advisors. Factors included in the rankings: assets under management, revenue produced for the firm, regulatory record, quality of practice and philanthropic work. Investment performance isn't an explicit component because not all advisors have audited results and because performance figures often are influenced more by clients' risk tolerance than by an advisor's investment-picking abilities.
Barron's ought to be ashamed.


Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

Call_Me_Op
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Re: Are institutional funds worth the cost of an adviser?

Post by Call_Me_Op » Fri Jul 12, 2013 7:09 am

You couldn't pay me enough to use an advisor. Well, maybe you could - but you get the point.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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matjen
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Re: Are institutional funds worth the cost of an adviser?

Post by matjen » Fri Jul 12, 2013 8:03 am

Time to get a new advisor. 2% is outrageous. Go to the FINRA calculator to see what fees do to your total performance over time. I just ran it comparing two funds. One has an expense of .05. The other 1.75. If we assume you held both funds for 20 years, started with 1 million in them, and they both returned 6%, here is what you end up with...or DON'T end up with:
Fund A ends with $3,175,226 and Fund B with $2,260,074 (this exercise was to just show what costs are certain to do) Look at the total fees below!


Ticker Symbol VTI REMEX
Investment Amount $1,000,000.00 $1,000,000.00
Estimated Return You Selected 6.00% 6.00%
Holding Period 20 20

Fund Value After 20 Year(s)
$3,175,226.45 $2,260,074.34
Profit/Loss $2,175,226.45 $1,260,074.34
Total Fees & Sales Charges $18,826.97 $540,885.25
Total Fees $18,826.97 $540,885.25
Total Sales Charges $0.00 $0.00
A man is rich in proportion to the number of things he can afford to let alone.

Grt2bOutdoors
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Re: Are institutional funds worth the cost of an adviser?

Post by Grt2bOutdoors » Fri Jul 12, 2013 8:12 am

So let me understand this: You put up 100% of the capital, take 100% of the risk and if the market returns 4%, you earn less than half of that because not only are you paying your advisor 2%, but you are also paying the underlying fees charged by the DFA funds. :oops:

Run, Run as fast as you can, your advisor is making tons of money off of you and leaving you with the scraps.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

JW-Retired
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Re: Are institutional funds worth the cost of an adviser?

Post by JW-Retired » Fri Jul 12, 2013 9:06 am

This is a nice fee effect calculator you can use to see how fees will consume your retirement nest egg.
http://www.buyupside.com/calculators/feesdec07.htm
Retired at Last

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Methedras
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Re: Are institutional funds worth the cost of an adviser?

Post by Methedras » Fri Jul 12, 2013 9:08 am

Call_Me_Op wrote:You couldn't pay me enough to use an advisor. Well, maybe you could - but you get the point.
If you paid me back the 2% fee, I would agree to use an advisor. :D

KyleAAA
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Re: Are institutional funds worth the cost of an adviser?

Post by KyleAAA » Fri Jul 12, 2013 9:13 am

Not even close. Retail Vanguard index funds charge in the 0.20% range. Institutional prices are somewhere along the lines of 0.01-0.04% from what I recall. The difference is nowhere near 2%. Depending on how much money you have invested, a fee of anywhere from 0.3-1% is reasonable. 2% is never reasonable, IMO.

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William4u
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Re: Are institutional funds worth the cost of an adviser?

Post by William4u » Fri Jul 12, 2013 9:59 am

A 2% fee over 40 years will cut your portfolio by MORE THAN HALF! You will have half as much to retire on after 40 years. Instead of having $2 million, you would have less than $1 million. That is very bad.

Don't take my word for it. This is the calculation made by Vanguard here...

http://vanguardblog.com/2011/10/28/stop ... f-returns/

Bradley
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Re: Are institutional funds worth the cost of an adviser?

Post by Bradley » Fri Jul 12, 2013 10:08 am

Below is a reference and snippet from Bill Bernstein’s site. It’s as true as the day it was written.

A hoary piece of stockbroker lore has a young broker asking a senior partner at the firm about his proudest accomplishment. The reply:

"Over the years I've gradually transferred the assets of my clients to my own name."

http://www.efficientfrontier.com/ef/996/broker.htm
You can sum up any active fund manager’s presentation at an investor conference in one sentence: “We’re doing well, all things considered.”

lcrock
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Re: Are institutional funds worth the cost of an adviser?

Post by lcrock » Fri Jul 12, 2013 6:06 pm

Hi all, thanks for the replies. It sounds like the DFA's are not worth the cost I am currently paying, but maybe are with a lower cost adviser. Here are a couple more concerns I have about my adviser, lets see if you think I'm right to be concerned:

1. I have 3 accounts with them, 1 each non-tax for my spouse and I, and a taxable shared account. I thought they should treat these as 3 subsets of a larger asset allocation. They treat these as if they are 3 completely separate people, with 3 completely separate asset allocation models. When I asked why its because "we don't do that".

2. They don't want to have anything to do with my 401k, they wont factor it in to the larger allocation, even though its a good size percentage of our assets. They were very hesitant to give me any guidance on what should be in there. After a lot of nagging on my part, they basically said to pick a few low cost index funds to meet your allocation, re-balance once a year. This is essentially what prompted me to begin serious education, realizing this is essentially all they are doing for my other money, at 2%.

3. Most of our money is in tax free accounts (roll-overs and 401k), we are not millionaires. Shouldn't we have all of our bonds and REITs in the tax free accounts and the equities filling out the rest? I haven't asked them about this type of asset location yet, because I think the answer will be "we don't do that". I've seen some low cost on-line advisers specifically state they do not do this, but that is because their typical client has a much smaller percentage in their tax advantaged account, because their average balance is in the millions. In that case I can understand that it will have a very small tax advantage.

Am I asking for too much?
Thanks again for your advice.

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Ged
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Re: Are institutional funds worth the cost of an adviser?

Post by Ged » Fri Jul 12, 2013 6:28 pm

lcrock wrote:Am I asking for too much?
No. You are paying a high price for incompetence.

Basically you are getting your face ripped off.

I would advise that you work out the most cost effective way to put a stop to it, and implement it ASAP.

lcrock
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Re: Are institutional funds worth the cost of an adviser?

Post by lcrock » Fri Jul 12, 2013 6:35 pm

Thanks for the firm statement Ged.

By "cost effective", what do you mean? I'm pouring through the contract now looking for possible separation penalties or something. I'm sure there will be fees from the closure and moving of the accounts back to their original place. What other costs do I you think I may encounter? Since I have only held these accounts for less than a year, is it possible there are penalties from the funds themselves? Looks like I have some serious homework and a few serious phone calls ahead of me.

Thanks for all your help.

stlutz
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Re: Are institutional funds worth the cost of an adviser?

Post by stlutz » Fri Jul 12, 2013 6:41 pm

1. I have 3 accounts with them, 1 each non-tax for my spouse and I, and a taxable shared account. I thought they should treat these as 3 subsets of a larger asset allocation. They treat these as if they are 3 completely separate people, with 3 completely separate asset allocation models. When I asked why its because "we don't do that".
What you are thinking is the majority view around here. There are a minority who setup their desired asset allocation within each account. In short, it is something we debate around here now and then.
2. They don't want to have anything to do with my 401k, they wont factor it in to the larger allocation, even though its a good size percentage of our assets. They were very hesitant to give me any guidance on what should be in there. After a lot of nagging on my part, they basically said to pick a few low cost index funds to meet your allocation, re-balance once a year. This is essentially what prompted me to begin serious education, realizing this is essentially all they are doing for my other money, at 2%.
They can only take responsibility for funds they are managing. I think this is pretty common in the industry unless you are just paying an hourly rate as opposed to paying for the assets they are managing.
3. Most of our money is in tax free accounts (roll-overs and 401k), we are not millionaires. Shouldn't we have all of our bonds and REITs in the tax free accounts and the equities filling out the rest? I haven't asked them about this type of asset location yet, because I think the answer will be "we don't do that". I've seen some low cost on-line advisers specifically state they do not do this, but that is because their typical client has a much smaller percentage in their tax advantaged account, because their average balance is in the millions. In that case I can understand that it will have a very small tax advantage.
For the REITs, you are correct. For the bonds, the majority view is that bonds should be in tax-advantaged. There is a significant minority who argue for holding muni bonds in taxable, however. Poster tbf who write the blog "The Finance Buff" has argued for this approach.

If you have thought about and come to conclusions on questions like this, you don't need an adviser.

As for what to do with the DFA funds, the advisers who post here argue that one really shouldn't use them just to "get access" to DFA. If you need an adviser and they use DFA funds--great. They are excellent funds. Adding on an advisory fee layer does mean that even if there is some type of DFA Alpha/special sauce, that alpha will go the adviser.

My understanding from what I've read here in the past is that if you fire your adviser, you can continue to hold the DFA funds you have; you just can't add money to them.

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