Financial Advisor's Calculations Accurate re: VFINX v their Fund?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Kennedy
Posts: 49
Joined: Mon Nov 10, 2014 2:47 pm

Financial Advisor's Calculations Accurate re: VFINX v their Fund?

Postby Kennedy » Wed Apr 19, 2017 1:04 pm

So my father-in-law met recently with a financial advisor in Florida who states he is a fiduciary. The FA gave my FIL a paper that had calculated how much money he would have left the last trading day of 2015 had he invested $1M in VFINX the first trading day of 2000. There was an assumption that $50,000 had been withdrawn on an annual basis, all dividends/earnings were reinvested, but there is no allowance for external advisory fees. The end balance was around $355,000 on the last trading day of 2015.

The paper also showed an alternate scenario, but this time the money was invested in whatever investment their company uses. The paper doesn't say anything about advisory fees, but the FA did tell my FIL that they like to use Sterling something-or-other for their investments. The end balance for this scenario is almost $1.2M.

The FA told my FIL that it is best to avoid extreme highs and extreme lows, and that is what their investment offers.

My FIL is asking me what I think. Here are my thoughts: 1) how much in fees will the FA take from the $1.2M; 2) couldn't my FIL accomplish much of the same thing (avoid highs/lows) by diversifying with a combination of total stock market index and total bond market index fund? 3) What investments does the FA use?

Did the FA cherry-pick the days to make the returns from the VFINX look worse by starting the scenario just before the tech crash? My FIL is ready to invest with this guy. What, specifically, should I tell him regarding the FA's calculations?

Grt2bOutdoors
Posts: 16358
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Financial Advisor's Calculations Accurate re: VFINX v their Fund?

Postby Grt2bOutdoors » Wed Apr 19, 2017 1:23 pm

Kennedy wrote:So my father-in-law met recently with a financial advisor in Florida who states he is a fiduciary. The FA gave my FIL a paper that had calculated how much money he would have left the last trading day of 2015 had he invested $1M in VFINX the first trading day of 2000. There was an assumption that $50,000 had been withdrawn on an annual basis, all dividends/earnings were reinvested, but there is no allowance for external advisory fees. The end balance was around $355,000 on the last trading day of 2015.
It's true, I ran it in portfolio visualizer. Except there is just one problem with that - no one in their right and sane mind including that of a "fidicuiary" would place 100% of the clients monies on one horse, EVER!!! A true fiduciary would always put the interests of the client before their own and this chap is not doing that, instead they are cherry picking time periods to provide the worst of outcomes as to seal the deal.

I ran a subsitute portfolio, bare with me: $500,000 (to account for time value of money - inflation adjusted) with a similar annual withdrawal rate of 5% in the Vanguard 500 Index account beginning January 1, 1986. In that time frame we had the famous 1987 crash, the internet debacle of 2000, September 11th, then the infamous crash on March 9, 2000 and subsequent market rise. You may want to sit down to let these "terrible results, just terrible I tell you" sink in. The ending balance as of December 31, 2015 is $4,616,710 including reinvestment of dividends/interest and after fees.

The paper also showed an alternate scenario, but this time the money was invested in whatever investment their company uses. The paper doesn't say anything about advisory fees, but the FA did tell my FIL that they like to use Sterling something-or-other for their investments. The end balance for this scenario is almost $1.2M.
What was the composition of the investment portfolio? Why so little? :oops: Have the adviser provide your father-in-law with a written document that states investment is "guaranteed" to make money after withdrawals and fees. He will never get that document, instead your father in law is going to get taken to the money cleaners - money from your f-i-l's wallet is going to be irrevocably lost forever.
The FA told my FIL that it is best to avoid extreme highs and extreme lows, and that is what their investment offers.
In other words, the "fidicuiary" has a magic crystal ball and is able to correctly predict not only when to avoid the highs or lows but they can also give you the winning number and horses name for the running of the Kentucky Derby in a few weeks, right? :oops:

My FIL is asking me what I think. Here are my thoughts: 1) how much in fees will the FA take from the $1.2M; 2) couldn't my FIL accomplish much of the same thing (avoid highs/lows) by diversifying with a combination of total stock market index and total bond market index fund? 3) What investments does the FA use?The FA is using a combination of snake-oil and smoke and mirrors. RUN away from this charlatan!!

Did the FA cherry-pick the days to make the returns from the VFINX look worse by starting the scenario just before the tech crash? My FIL is ready to invest with this guy. What, specifically, should I tell him regarding the FA's calculations?

Of course he cherry picked the years, tell him to run the same portfolio I did - January 1, 1986 to December 31, 2015. He'll never do it. IMO, the FA has the makings of a swindler. Read the book - Where are the Customer's Yachts? You should ask the FA to have him show you his.
:greedy :moneybag
Last edited by Grt2bOutdoors on Wed Apr 19, 2017 1:24 pm, edited 1 time in total.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

User avatar
EyeYield
Posts: 536
Joined: Tue Sep 18, 2012 6:43 pm
Location: Extremistan

Re: Financial Advisor's Calculations Accurate re: VFINX v their Fund?

Postby EyeYield » Wed Apr 19, 2017 1:24 pm

Kennedy wrote:The paper also showed an alternate scenario, but this time the money was invested in whatever investment their company uses.

Were there any specifics given as to what that investment was?
If there was only a comparison of a real fund to a fictional fund, I guess this FA could make any claims he wanted.
"The stock market is a giant distraction from the business of investing." - Jack Bogle

keystone
Posts: 410
Joined: Tue Aug 28, 2012 12:34 pm

Re: Financial Advisor's Calculations Accurate re: VFINX v their Fund?

Postby keystone » Wed Apr 19, 2017 1:25 pm

I get the sense this is going to be an entertaining thread.

Without knowing what the investment is, it's hard to say but most likely it involved a lot of risk (assuming the FA was being honest in the first place) and the time period was cherry picked.

NotWhoYouThink
Posts: 1054
Joined: Fri Dec 26, 2014 4:19 pm

Re: Financial Advisor's Calculations Accurate re: VFINX v their Fund?

Postby NotWhoYouThink » Wed Apr 19, 2017 1:26 pm

The advisor can probably also accurately predict the outcome of the 2000-2016 World Series, Stanley cup, Super Bowl, presidential election......
If you had bet based on these predictions, you would have scads of money now.

This is nothing special. Anyone can go back through historical data and pick a portfolio that would outperform some other portfolio. Nothing magic in this at all.

It would be fun to go back to what this firm was recommending to clients like your father in 2000. Probably nothing like what they say now he should have invested in.

Grt2bOutdoors
Posts: 16358
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Financial Advisor's Calculations Accurate re: VFINX v their Fund?

Postby Grt2bOutdoors » Wed Apr 19, 2017 1:30 pm

NotWhoYouThink wrote:The advisor can probably also accurately predict the outcome of the 2000-2016 World Series, Stanley cup, Super Bowl, presidential election......
If you had bet based on these predictions, you would have scads of money now.

This is nothing special. Anyone can go back through historical data and pick a portfolio that would outperform some other portfolio. Nothing magic in this at all.

It would be fun to go back to what this firm was recommending to clients like your father in 2000. Probably nothing like what they say now he should have invested in.


In the year 2000?, my bet is the adviser was just graduating high school. :)
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

Jack FFR1846
Posts: 5098
Joined: Tue Dec 31, 2013 7:05 am

Re: Financial Advisor's Calculations Accurate re: VFINX v their Fund?

Postby Jack FFR1846 » Wed Apr 19, 2017 1:39 pm

Does your father now have $500k to invest? Well, then, have him give that $500k to the adviser and ask that he invest it all in his magical fund on the first trading day of 2000.


If he can't do that, he's talking nonsense.
Bogle: Smart Beta is stupid

User avatar
Svensk Anga
Posts: 324
Joined: Sun Dec 23, 2012 5:16 pm

Re: Financial Advisor's Calculations Accurate re: VFINX v their Fund?

Postby Svensk Anga » Wed Apr 19, 2017 3:43 pm

Ask the advisor what portfolio they were recommending on 1/1/2000, with supporting documentation of course. Bet it performed somewhat differently from the after-the-fact cherry picked portfolio.

deltaneutral83
Posts: 279
Joined: Tue Mar 07, 2017 4:25 pm

Re: Financial Advisor's Calculations Accurate re: VFINX v their Fund?

Postby deltaneutral83 » Wed Apr 19, 2017 3:58 pm

Your father in law should feel used and abused if the FA gave him a cherry picked 15 year chart of one fund. In fact it may not have been a mutual fund, it was probably AAPL.

lack_ey
Posts: 5412
Joined: Wed Nov 19, 2014 11:55 pm

Re: Financial Advisor's Calculations Accurate re: VFINX v their Fund?

Postby lack_ey » Wed Apr 19, 2017 4:04 pm

The calculation for investing in Vanguard S&P 500 for that period seems right, though the fact that they only show results through the end of 2015 doesn't particularly inspire confidence. If they ran the numbers 2000-2015, surely they have the facilities to update it through 2016, right? This seems to be a central claim of the pitch and fairly trivial to do. Is this guy just parroting somebody else's figures?

For reference, investing in Vanguard total bond over the same period would end up over $1.1 million after the withdrawals as specified. There are a lot of things that could have been done 2000-2015 to provide pretty good returns, better than the S&P 500. Here's showing a fairly stable ride up to $2.3 million:
https://www.portfoliovisualizer.com/bac ... tion7_3=35

Doug E. Dee
Posts: 43
Joined: Sun Jan 08, 2017 7:18 pm

Re: Financial Advisor's Calculations Accurate re: VFINX v their Fund?

Postby Doug E. Dee » Thu Apr 20, 2017 5:59 am

Ask why settle for $1.2m when you could easily do better.

Here's a couple off the shelf ideas, 100% Fidelity Balanced and 50/50 Wellington/Wellesley.

https://www.portfoliovisualizer.com/bac ... tion4_3=50

random_walker_77
Posts: 406
Joined: Tue May 21, 2013 8:49 pm

Re: Financial Advisor's Calculations Accurate re: VFINX v their Fund?

Postby random_walker_77 » Thu Apr 20, 2017 9:56 am

I like this FA's approach -- it's really smart marketing. Then again, I've always enjoyed reading about scams.

The problem is that the S&P 500 index (VFINX) is just the market return, almost by definition. 20% of funds do better. This FA is basically saying, why settle for VFINX-- if you beat the market, you can do so much better. He's cherry picking the fund and the time range. In hindsight, you can always pick something better. The problem is that all research suggests that no one can be counted on to beat the market in the future. Even superstars falter (or depending on your view, run out of luck).

What I've learned is that you have to be ok with getting "just" the average returns of the market. This is investing, not a casino. Read "A Random Walk down Wall Street". And that if you get the average return, you do much better than most investors.

The industry also understands this at some level, and "Beating the market" is a powerful selling mantra. Have you heard the story about the broker who calls up 100 potential clients saying stock xyz is going up, and another 100 saying stock xyz is going down? Then 3 months later, they call up the 100 for which they were right, and repeat the exercise, telling 50 one thing and the other 50 the opposite? Soon, they've got 12 clients who think they're a genius.

In a similar vein, mutual funds start up all the time, and correspondingly, underperforming funds get shut down. Vanguard did a study and noted that over a 15 year period, nearly half of mutual funds got shut down!
https://personal.vanguard.com/pdf/s362.pdf

random_walker_77
Posts: 406
Joined: Tue May 21, 2013 8:49 pm

Re: Financial Advisor's Calculations Accurate re: VFINX v their Fund?

Postby random_walker_77 » Thu Apr 20, 2017 10:02 am

Oh, and just because the FA says they're a fiduciary, doesn't mean that they're a fiduciary for the client but rather for their firm. Or that they're not a full time fiduciary for the client. Yes, that's a real distinction! I also think this is brilliant -- a fiduciary who silently and temporarily stops being a fiduciary when they recommend funds for investment http://www.cnbc.com/2017/02/14/when-you ... ciary.html. Caveat emptor!

The other smart business practice is that they don't ever present a bill. Or if they present a bill, it's only for the advisory fee, but they don't send you the much larger $5000+ bill that comes back to them as a 12b-1 kickback. It's so much better to just silently take the money out of earnings, rather than give the client a bill.

pkcrafter
Posts: 11676
Joined: Sun Mar 04, 2007 12:19 pm
Location: CA
Contact:

Re: Financial Advisor's Calculations Accurate re: VFINX v their Fund?

Postby pkcrafter » Thu Apr 20, 2017 11:05 am

ALERT!!
The FA told my FIL that it is best to avoid extreme highs and extreme lows, and that is what their investment offers.

Big equity indexed annuity about to be pitched. Don't waste time discussing anything with this salesman.

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.


Return to “Investing - Help with Personal Investments”

Who is online

Users browsing this forum: 2b2, Bing [Bot], ElwoodBlues, h8ER, JohnML, lgerla, mhalley, mister_sparkle, Prokofiev, Svensk Anga, theheel, Yahoo [Bot] and 83 guests