Friend's Father's Financial Advisor - 100% Bonds Last 10 Years

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ef11
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Friend's Father's Financial Advisor - 100% Bonds Last 10 Years

Post by ef11 »

Hello!

I was talking to a friend's father that is in his late 50s and he mentioned how his financial advisor only invest in corporate bonds. This was very surprising to me, so I started asking more questions. Apparently this advisor doesn't believe in ANY equity exposure and trades individual corporate bonds in client accounts, no matter what their age or risk tolerance. I was completely mind blown hearing this.

He told me that because interest rates have been so low, his accounts have been in 50-100% cash over the last few years. He also stated that even in his taxable accounts, he does the same trading which generates short-term capital gains. My mind is getting more blown by the minute.

Apparently the advisor buys the bonds when they are below par value and then tries to sell them 4-5% higher to collect some interest and also a capital gain. He had a folder of his year end statements, doesn't take any money out, and it looked like he had received about 3.5% annualized returns since 2015!

What in the world is going on here? This seems like complete mismanagement of client's money. He apparently has over $100 MM in assets he manages in this manner...I'm blown away.

What are the communities thoughts on an advisor that positions clients' money this way?
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Re: Friend's Father's Financial Advisor - 100% Bonds Last 10 Years

Post by livesoft »

I think his clients do not like equities, so he appeases them or they found each other for a marriage made in heaven.
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Re: Friend's Father's Financial Advisor - 100% Bonds Last 10 Years

Post by Onlineid3089 »

Sounds awful to me, but your friend's father seems to know what is going on so to him it may be a feature, not a bug.
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Re: Friend's Father's Financial Advisor - 100% Bonds Last 10 Years

Post by whereskyle »

ef11 wrote: Fri Apr 30, 2021 9:43 am Hello!

I was talking to a friend's father that is in his late 50s and he mentioned how his financial advisor only invest in corporate bonds. This was very surprising to me, so I started asking more questions. Apparently this advisor doesn't believe in ANY equity exposure and trades individual corporate bonds in client accounts, no matter what their age or risk tolerance. I was completely mind blown hearing this.

He told me that because interest rates have been so low, his accounts have been in 50-100% cash over the last few years. He also stated that even in his taxable accounts, he does the same trading which generates short-term capital gains. My mind is getting more blown by the minute.

Apparently the advisor buys the bonds when they are below par value and then tries to sell them 4-5% higher to collect some interest and also a capital gain. He had a folder of his year end statements, doesn't take any money out, and it looked like he had received about 3.5% annualized returns since 2015!

What in the world is going on here? This seems like complete mismanagement of client's money. He apparently has over $100 MM in assets he manages in this manner...I'm blown away.

What are the communities thoughts on an advisor that positions clients' money this way?
It is at least conceivable that he appeals to clients who are so concerned with avoiding risk to principal that they refuse to touch equities. Many, many people with plenty of money wouldn't trust the stock market with a dime.
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ef11
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Re: Friend's Father's Financial Advisor - 100% Bonds Last 10 Years

Post by ef11 »

Yes, I understand the comments made so far.

The father told me that he had brought up getting some stock exposure over the last several years but the advisors input is always that stocks always crash and they are too risky and he will never buy any stocks for anyone. So it seems he is not only implementing this strategy for people that want no stock exposure, but actively convincing his clients that the stock market is terrible and will always crash.

I just don't see how anyone can be satisfied with 3% returns over the last 5 years...and the advisor tells him he can take 6% of his account value when he retires without dipping into his principal. Which is clearly not true.
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Re: Friend's Father's Financial Advisor - 100% Bonds Last 10 Years

Post by retired@50 »

Your friend's father still has free will doesn't he?

If he's that dissatisfied he can fire the adviser and walk away. There are plenty of other advisers who will put him in stocks.

For what it's worth, Bill Gross of PIMCO fame did okay by playing around with bonds. It's not for everyone, but it can work.

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Re: Friend's Father's Financial Advisor - 100% Bonds Last 10 Years

Post by JoeRetire »

ef11 wrote: Fri Apr 30, 2021 9:43 am What are the communities thoughts on an advisor that positions clients' money this way?
My thoughts are to never take advice from a friend's father's financial advisor.
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Re: Friend's Father's Financial Advisor - 100% Bonds Last 10 Years

Post by illumination »

Is the 3.5% annualized return after fees? I just checked the return of BND since 2015, it was 3%.

I'm guessing this type of investing is at the request of your father? Or is this how he invests for all his clients, 100% individual corporate bonds? I would argue you can't even really make a case this is truly a safe way to invest when you buy individual corporate bonds, almost another version of stock picking.

I'd encourage your dad to leave his FA and at least have some portion in equities, even 20/80 as a start would be ultra conservative in my opinion. You need to show him other options, but some people are just not interested in greater returns for greater risk.
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Re: Friend's Father's Financial Advisor - 100% Bonds Last 10 Years

Post by adamthesmythe »

There's people around here with 100% in stocks. Heck, I'll bet there are some a leveraged 100% in stocks. There are (probably elsewhere) people close to 100% in gold. This is the another tail of the distribution.

Some people around here believe they are of the One True Faith, and that all others are doomed to perdition.
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Re: Friend's Father's Financial Advisor - 100% Bonds Last 10 Years

Post by ApeAttack »

retired@50 wrote: Fri Apr 30, 2021 10:04 am Your friend's father still has free will doesn't he?
Whether free will actually exists or humans merely *feel* like they have free will is not a settled question (I fall into the latter camp). However, his friend's father probably has no external forces restricting his actions significantly, so he has freedom in that sense.
Just another lazy index investor who recently found out about I-Bonds (https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds.htm).
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Re: Friend's Father's Financial Advisor - 100% Bonds Last 10 Years

Post by MishkaWorries »

It is none of your business. Please don't inject yourself in the situation.
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Re: Friend's Father's Financial Advisor - 100% Bonds Last 10 Years

Post by SteadyOne »

If assets are indeed $100MM if I read it right, then preservation of capital is what matters for those people. 3.5% return is 3.5 million a year. And if he made it himself, he is savvy enough to decide whatever.
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Re: Friend's Father's Financial Advisor - 100% Bonds Last 10 Years

Post by Oregano »

The advisor has the right to be fixed income only and he has made it clear to his clients that is the only way he'll do it. So instead of asking this advisor year after year if he'll buy stocks, the answer is pretty obvious - get a new advisor.
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Re: Friend's Father's Financial Advisor - 100% Bonds Last 10 Years

Post by pkcrafter »

ef11 wrote:
What in the world is going on here? This seems like complete mismanagement of client's money. He apparently has over $100 MM in assets he manages in this manner...I'm blown away.
Are you saying friend's father has 100 million in assets, or are you saying the advisor has 100 million in clients' money, all in individual taxable corporate bonds?

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Re: Friend's Father's Financial Advisor - 100% Bonds Last 10 Years

Post by abuss368 »

Incredible that this was allowed! The opportunity costs alone have been huge.

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Re: Friend's Father's Financial Advisor - 100% Bonds Last 10 Years

Post by RickBoglehead »

pkcrafter wrote: Fri Apr 30, 2021 11:33 am ef11 wrote:
What in the world is going on here? This seems like complete mismanagement of client's money. He apparently has over $100 MM in assets he manages in this manner...I'm blown away.
Are you saying friend's father has 100 million in assets, or are you saying the advisor has 100 million in clients' money, all in individual taxable corporate bonds?

Paul
Pretty clearly it's the advisor that has those assets under management.
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Re: Friend's Father's Financial Advisor - 100% Bonds Last 10 Years

Post by esteen »

pkcrafter wrote: Fri Apr 30, 2021 11:33 am ef11 wrote:
What in the world is going on here? This seems like complete mismanagement of client's money. He apparently has over $100 MM in assets he manages in this manner...I'm blown away.
Are you saying friend's father has 100 million in assets, or are you saying the advisor has 100 million in clients' money, all in individual taxable corporate bonds?

Paul
I think the OP is saying the advisor has $100MM in assets he manages, spread out amongst all his clients.

I would walk away frmo that advisor in a heartbeat, but that doesn't mean your friend's father needs to. However if it is simply that he doesn't know anything about alternatives to what his advisor is pushing, you can casually suggest he look into it and give him a book or some website links where he can do his own research. Depending on your relationship with him it may be prudent to keep it at that, or maybe not even go that far. In the end, it's his money and his life.
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Re: Friend's Father's Financial Advisor - 100% Bonds Last 10 Years

Post by RickBoglehead »

The reality is that some people are willing to accept things that others are not. Sometimes, it makes us apoplectic (I have always wanted to use that word in a sentence :twisted:). Others are fine with it. Or they are clueless. What I've learned is that most people don't want someone else's input. They're willing to let an advisor do to their portfolio what you or I might never allow. One of the reasons why companies like Edward Jones is so successful.

Once you push someone to do something different, you own the results. I can promise you that you never want to own the results. I managed my mother's assets for 20 or so years. Got nothing but grief about it, and everytime I tried to get rid of things purchased in 1965, I got resistance. Finally said "bye" and it's now with some advisor who holds it at Schwab. Whereas my in-laws were very happy when I managed their funds from 2000 until they passed away a few years ago. One of the reasons why a blue collar worker's daughter, my wife, inherited a nice 6 figure sum.

Beyond mentioning The Boglehead's Guide to Investing, walk away.
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Re: Friend's Father's Financial Advisor - 100% Bonds Last 10 Years

Post by Onlineid3089 »

I agree that I would not give any advice to the friend's father. If he asked I would share what I do in general terms making sure to point out that it is just what I do and not a recommendation for him.
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Re: Friend's Father's Financial Advisor - 100% Bonds Last 10 Years

Post by 123 »

The bond market is particularly difficult for individual investors to understand and handle so it can be an excellent place for a financial advisers to make a lot of money with bond markups and bond markdowns. Individual investors really don't have a clue on whether they got a good price on a non-Treasury purchase. Everything else in the secondary bond market is really a jungle.
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Re: Friend's Father's Financial Advisor - 100% Bonds Last 10 Years

Post by Independent George »

While I would never do it, I'm actually kind of glad this advisor exists (depending on what he charges). Some people are just extremely risk averse, and this person seems to fill this niche perfectly. As long as he's honest about giving them a low growth/low volatility portfolio, and his fees are reasonable, I think this is perfectly acceptable, maybe even admirable. It's not for me (or probably anyone on this board), but it's right for some people.
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Re: Friend's Father's Financial Advisor - 100% Bonds Last 10 Years

Post by delamer »

If you feel that your friend’s father is being ripped, then gift him one of these books: https://www.bogleheads.org/RecommendedReading.php

Maybe he’ll see the light.

This chart of returns also might be an eye-opener: https://investor.vanguard.com/investing ... allocation

As others have said, apparently this advisor has found a niche with conservative investors. And there isn’t anything you can, or should, do about that.
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Re: Friend's Father's Financial Advisor - 100% Bonds Last 10 Years

Post by Money_Badger »

Your friend's father doesn't sound too bright ...nor does his advisor, so it's a marriage made in heaven.
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Re: Friend's Father's Financial Advisor - 100% Bonds Last 10 Years

Post by wolf359 »

JoeRetire wrote: Fri Apr 30, 2021 10:07 am
ef11 wrote: Fri Apr 30, 2021 9:43 am What are the communities thoughts on an advisor that positions clients' money this way?
My thoughts are to never take advice from a friend's father's financial advisor.
+1

They don't know your situation.

They don't know what your risk tolerance, goals, or finances are.

In fact, they may not be providing advice to you at all. You're just hearing how the friend's father is interpreting what his financial advisor is doing. That advice may fit the needs of his clients, but it was not provided for you.

Not sure what is actionable here. It's a post relative to what someone else is doing, and that client doesn't even want advice. It's discussion for the sake of discussion.
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ef11
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Re: Friend's Father's Financial Advisor - 100% Bonds Last 10 Years

Post by ef11 »

To be completely clear, yes it is over $100 MM in total assets for hundreds of clients.

I am of course in no way interested in taking this advice. I just thought it was really interested an advisor would treat all client's money this way.

The returns I stated were after fees, which are between 1-2% apparently and this father is paying 1% by my calculations.

The advisor is fee only, no commissions on bonds or things of that nature.

But yes, to me investing in a few individual corporate bonds seems almost as risky as picking individual stocks. Especially if trying to buy them at a discount to the par value, that would only be available on riskier debt over the past few years more than likely.

I have NO desire to interject myself, we just had a conversation and I seemed interested and appreciative of the information. I was not suggesting any type of change be made to him.

To me if you want to be 100% invested in corporate bonds though, go buy Vanguard's long term corporate bond fund VCLT, which is extremely diversified and has a 6.7% annualized return over the last 5 years, more than double what this person delivered...

Apparently he tells client's he normally earns between 6-8% and they can withdraw 6% of their portfolio per year in retirement without touching principal. That statement is really what makes me feel the advisor is completely out of touch with reality. He isn't getting 6-8%, and I can't imagine any advisor suggesting a 6% withdrawal rate regardless of allocation, not to mention a 100% bonds allocation!
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Re: Friend's Father's Financial Advisor - 100% Bonds Last 10 Years

Post by Independent George »

ef11 wrote: Fri Apr 30, 2021 1:20 pm
Apparently he tells client's he normally earns between 6-8% and they can withdraw 6% of their portfolio per year in retirement without touching principal. That statement is really what makes me feel the advisor is completely out of touch with reality. He isn't getting 6-8%, and I can't imagine any advisor suggesting a 6% withdrawal rate regardless of allocation, not to mention a 100% bonds allocation!
He probably was earning 6-8% during the thirty year bull market in bonds, as rates dropped from double-digits down to effectively negative after inflation. It's doubtful he'll earn that in the future without taking some massive risks. I'd guess it's likely the advisor truly believes in what he's doing, and genuinely doesn't see what he's doing as risky (after all, it worked in the past!); he may in fact still be acting in his clients' best interest even if he's completely, totally, catastrophically wrong.

It's a hard thing situation; I don't think the advisor is being malicious, but I do think he's dead wrong. But that, of course, is just my opinion.
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Re: Friend's Father's Financial Advisor - 100% Bonds Last 10 Years

Post by investmax »

How much does he charge per year for Asset Management? If he has a very conservative clientele and he is clear about his approach I wouldn't blame him too much. But if he charges fess of 3% per year and earns 3.5% returns that would be a bad result for now.

Again the last few years may have been down years, but he may be of the opinion that bonds rates will rise spectacularly in next few years bringing up his average. I may not agree with that approach, but it is a valid approach. Per Bogleheads principles we should not be taking result of just 1 or 2 years to make a final determination.
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Re: Friend's Father's Financial Advisor - 100% Bonds Last 10 Years

Post by investmax »

ef11 wrote: Fri Apr 30, 2021 1:20 pm I am of course in no way interested in taking this advice. I just thought it was really interested an advisor would treat all client's money this way.

The returns I stated were after fees, which are between 1-2% apparently and this father is paying 1% by my calculations.

The advisor is fee only, no commissions on bonds or things of that nature.
Sorry I missed this part out. So the fees are 1% and after subtracting that your friends father gets about 3.5% return. If this advisor has a conservative older clientele who do not want risk with equities at their age, I would not think this is too bad overall.

I mean its a 3.5% not great not terrible scenario.

You would not want to be the person to goad your friends father to pivot majorly into equities and then the market dips.
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Re: Friend's Father's Financial Advisor - 100% Bonds Last 10 Years

Post by illumination »

As a comparison , CAGR since 2015

VSCSX Vanguard Short-Term Corp Bd Idx = 2.93% CAGR
VICSX Vanguard Intermediate-Term Corporate Bond Index = 4.55% CAGR
VLTCX Vanguard Long-Term Corporate Bond Index= 5.67% CAGR

Some blend of these bond funds would not only outperform this FA, but would also have less risk than someone buying and selling individual corporate bonds. And obviously no fees except the expense ratio that's already been accounted for with those returns.
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Re: Friend's Father's Financial Advisor - 100% Bonds Last 10 Years

Post by RubyTuesday »

retired@50 wrote: Fri Apr 30, 2021 10:04 am Your friend's father still has free will doesn't he?
Not really, it just feels like he does...
I do not believe in free will. Schopenhauer's words: 'Man can do what he wants, but he cannot will what he wills,' accompany me in all situations throughout my life and reconcile me with the actions of others, even if they are rather painful to me. This awareness of the lack of free will keeps me from taking myself and my fellow men too seriously as acting and deciding individuals, and from losing my temper.

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Re: Friend's Father's Financial Advisor - 100% Bonds Last 10 Years

Post by JBTX »

Money_Badger wrote: Fri Apr 30, 2021 1:10 pm Your friend's father doesn't sound too bright ...nor does his advisor, so it's a marriage made in heaven.
There are many otherwise intelligent people out there who believe far crazier stuff than this. I'll just leave it at that.
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Re: Friend's Father's Financial Advisor - 100% Bonds Last 10 Years

Post by navyitaly »

I dont worry or care about what others that have no bearing or affect on my life do w their money.
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Re: Friend's Father's Financial Advisor - 100% Bonds Last 10 Years

Post by flyonnylon »

FA is probably taking profits on the side.

Just saying.
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Re: Friend's Father's Financial Advisor - 100% Bonds Last 10 Years

Post by abuss368 »

Money_Badger wrote: Fri Apr 30, 2021 1:10 pm Your friend's father doesn't sound too bright ...nor does his advisor, so it's a marriage made in heaven.
That may be not accurate. Perhaps the father does not know any better and could benefit from the professional advice of a different advisor.

I would be willing to give the benefit of the doubt.

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Re: Friend's Father's Financial Advisor - 100% Bonds Last 10 Years

Post by spencer99 »

Nothing in the OP makes me think this is sketchy, but slightly off-topic - In a situation like this, who would be the custodian of the numerous individual corporate bonds the advisor uses to build portfolios?

s
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Re: Friend's Father's Financial Advisor - 100% Bonds Last 10 Years

Post by celia »

ef11 wrote: Fri Apr 30, 2021 9:43 am What in the world is going on here?
Seems like this advisor has found enough clients who agree with him (although I see the possibility of "churning" here).
What are the communities thoughts on an advisor that positions clients' money this way?
I say "to each his own...".
AND, my mind is blown away by your mind being blown away... LOL :D :D :D
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Re: Friend's Father's Financial Advisor - 100% Bonds Last 10 Years

Post by mmcmonster »

It's possible that this advisor is "the bond whisperer" that other advisors use.

The bond market is complex and I wouldn't doubt that among investment advisors in an investment house you'll get a couple investors that will do all the bonds for the house. The other investors will have certain clients that only want bonds, so they point them at this guy rather than waste their time with them. In turn, this guy will give up clients that want stock exposure to his colleagues.

And it may not be just investors that want 100% bonds. He may just be responsible for 40 percent of a client's portfolio.

As for why it would be a waste of time for some advisors? If he's dealing in individual short term bonds, he's probably spending all day every day with expiring bonds and what to replace them with. A serious hassle that may not be worth the ER to some advisors.
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Re: Friend's Father's Financial Advisor - 100% Bonds Last 10 Years

Post by tomsense76 »

Wow that's pretty amazing :shock:
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Re: Friend's Father's Financial Advisor - 100% Bonds Last 10 Years

Post by Independent George »

Through 2010, this guy must have looked like an absolute genius. Depending on his age, he may well have spent thirty years providing his clients double-digit returns with minimal volatility, and saved them from three massive drawdowns.

Will this continue? Almost certainly not; 1981-2010 was the historical aberration, not the norm. But that thirty year period constitutes the entire investing life for a great many people; they're probably grateful for this amazing advisor. And if inflation spikes in the next couple years, leading to a sharp rise in interest rates followed by many years of gradual decline, he may live long enough to look like a genius once again.

It's exactly like when I argue with sports fans about how "wins" and "championships" are actually terrible measures of a player or team's skills - we might have this irrefutable, sophisticated, forward-looking theoretical knowledge backed by dozens of experts, but it runs contrary to the actual experience of a great many people.
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Re: Friend's Father's Financial Advisor - 100% Bonds Last 10 Years

Post by ef11 »

spencer99 wrote: Sat May 01, 2021 6:54 pm Nothing in the OP makes me think this is sketchy, but slightly off-topic - In a situation like this, who would be the custodian of the numerous individual corporate bonds the advisor uses to build portfolios?

s
The accounts are held at Fidelity.
mmcmonster wrote: Sat May 01, 2021 8:20 pm It's possible that this advisor is "the bond whisperer" that other advisors use.

The bond market is complex and I wouldn't doubt that among investment advisors in an investment house you'll get a couple investors that will do all the bonds for the house. The other investors will have certain clients that only want bonds, so they point them at this guy rather than waste their time with them. In turn, this guy will give up clients that want stock exposure to his colleagues.

And it may not be just investors that want 100% bonds. He may just be responsible for 40 percent of a client's portfolio.

As for why it would be a waste of time for some advisors? If he's dealing in individual short term bonds, he's probably spending all day every day with expiring bonds and what to replace them with. A serious hassle that may not be worth the ER to some advisors.
Yes, he may be managing 40% of certain client's portfolios and they keep the other 60% elsewhere, but it isn't the case for the person mentioned in the OP.
Independent George wrote: Sat May 01, 2021 11:24 pm Through 2010, this guy must have looked like an absolute genius. Depending on his age, he may well have spent thirty years providing his clients double-digit returns with minimal volatility, and saved them from three massive drawdowns.

Will this continue? Almost certainly not; 1981-2010 was the historical aberration, not the norm. But that thirty year period constitutes the entire investing life for a great many people; they're probably grateful for this amazing advisor. And if inflation spikes in the next couple years, leading to a sharp rise in interest rates followed by many years of gradual decline, he may live long enough to look like a genius once again.

It's exactly like when I argue with sports fans about how "wins" and "championships" are actually terrible measures of a player or team's skills - we might have this irrefutable, sophisticated, forward-looking theoretical knowledge backed by dozens of experts, but it runs contrary to the actual experience of a great many people.
The advisor apparently started in the mid-2000s with this strategy and he is in his 70s now.

I agree that some people may want to be 100% in bonds, and that is ok. But from what I heard this advisor actively lobbies against any investment in the stock market, even when the client asked about wanting some. He was told the stock market is going to crash and he would lose all of his money. So he is pushing clients away from the market, keeping over 75% of the clients money sitting in cash due to low rates, and telling them they can take 6% distribution without touching principal. Just seems to be a very misguided situation.

If he is 100% bonds and he tells clients that's the only thing worth investing in..ok...but don't tell them they can distribute 6% without touching principal, there is just no way.
50% S&P 500 IDX ER .01% | 10% Ext Mkt ER .04% | 10% Small Cap Value ER .15% | 20% International TM ER .08% | 10% Vang Total Bond Market ER .03%
Independent George
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Re: Friend's Father's Financial Advisor - 100% Bonds Last 10 Years

Post by Independent George »

ef11 wrote: Mon May 03, 2021 9:03 am The advisor apparently started in the mid-2000s with this strategy and he is in his 70s now.

I agree that some people may want to be 100% in bonds, and that is ok. But from what I heard this advisor actively lobbies against any investment in the stock market, even when the client asked about wanting some. He was told the stock market is going to crash and he would lose all of his money. So he is pushing clients away from the market, keeping over 75% of the clients money sitting in cash due to low rates, and telling them they can take 6% distribution without touching principal. Just seems to be a very misguided situation.

If he is 100% bonds and he tells clients that's the only thing worth investing in..ok...but don't tell them they can distribute 6% without touching principal, there is just no way.
Ok, this takes it from "too conservative for my tastes" to "solidly irresponsible and irrational". It sounds to me like he got spooked by the dot com crash and started moving to bonds, and then 2008 crash became a lesson in confirmation bias. The 6% withdrawals is especially baffling to me; there's just no way I can make that math work without an 8-10% yield on bonds, which would be junk bonds - maybe justifiable in a bond fund, but almost certainly not if he's trading individual bonds. That is probably more risky than stocks.
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DWesterb2iz2
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Re: Friend's Father's Financial Advisor - 100% Bonds Last 10 Years

Post by DWesterb2iz2 »

I was talking to our contact guy at Scwab (advisor? Dunno.We don’t pay him a fee or ask advice. He was just assigned to us), the one time we went to the office.

We got to talking about conservative strategies of wealthy investors and he said, “oh I have some clients who I’m pretty sure live surrounded by bottled water, sacks of cash, and gold bars in underground caves.”
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Re: Friend's Father's Financial Advisor - 100% Bonds Last 10 Years

Post by alfaspider »

This has to be one of those cases where people don't understand how much they are paying their "guy." A 1% fee doesn't sound too bad, until you realize you are paying a full 1/3 of your income to the guy at 3% returns :oops: Even worse when he has people sitting in cash.

I'm guessing he's pushing people away from equities because bonds are what he knows and what he's built his brand around. He's making $1 million a year doing it, so he has no incentive to change.
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