Why does a Boglehead move to an adviser at 1.25% AUM?

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Polaris
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Why does a Boglehead move to an adviser at 1.25% AUM?

Post by Polaris » Wed Mar 26, 2014 3:45 pm

I have an acquaintance on another forum that I have come to respect very much as a fellow investor over the past few years. Until about a year ago, this person was a vocal proponent of low investment costs, simple and well diversified portfolios, tax efficiency, and staying the course. That changed about a year ago when they decided to move their "two comma" portfolio to the care of a financial adviser who charges 1.25% AUM. :o

Over the course of a few (hopefully) friendly discussions, some of the rationale given for making this move is:
What happens if I can no longer manage our money?

A lot of what we've talked about is shifting assets around to avoid high RMD tax rates.

His staff has access to search tools that would cost me more time and money than what I pay him.

His staff has far more knowledge of tax law than I ever will.

He does this for a living. Very successfully. I wouldn't, for a minute, think I could out invest him.

My spouse wanted a second opinion.

I find it insulting when people tell me I'm a fool for using an FA. I'm not new to investing, I've been doing quite well for 25+ years. I figured it was a good time to learn what I don't know about investing.

Despite the prevailing opinion, I'm convinced that an expert in a field can do better than an average person doing research on the internet

He's already provided value in helping to arrange our finances for retirement and death.

I think the value will come in the next downturn. I recognize that my flaw is knowing how to protect my nest egg and making moves to smooth the volatility.

1.25% times several years is minor compared to the amount my portfolio lost between '07-'09.

A guy that teaches asset allocation at one of the best business schools in the country could put together a portfolio that returns just as much or more while reducing volatility. Certainly, there are a lot of financial advisors that you and I could beat, but if this guy can beat my returns after fees, what I'm paying him becomes nil, correct?
I should say that I think that some of the above concerns are perfectly valid to be asking and that seeking help from a pro is completely appropriate. I would rather seek that advice from a fee-only CFP myself rather than having 1.25% of my assets nibbled away every year, but I am trying to objectively get a handle on the thought process of someone who has basically been a Boglehead since before the term was first coined.

So fellow Bogleheads, if you were about 50 and still working because you wanted to and not because you had to, could you see yourself abandoning the investment philosophy you very successfully employed for 25 years in favor of an academic financial guru that charges 1.25% AUM? How does one get there from here? It just seems so counter-intuitive to everything I hold dear!

Thoughts?

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Re: Why does a Boglehead move to an adviser at 1.25% AUM?

Post by livesoft » Wed Mar 26, 2014 3:53 pm

I would not pay someone for tax nor investment advice in my current situation which is really fairly simple. That does not mean I would not seek out tax and investment advice that was free.

As for this acquaintance, I predict that they will in due course discover that they can get what they need for much less than 1.25%.
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ScottW999
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Re: Why does a Boglehead move to an adviser at 1.25% AUM?

Post by ScottW999 » Wed Mar 26, 2014 3:58 pm

No. I don't think I would ever do that. 1.25% is a very large fee on an annual basis.If I could no longer handle my affairs I would either leave everything in place or have one of my children who are capable manage my investments. It will be theirs eventually anyway

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Re: Why does a Boglehead move to an adviser at 1.25% AUM?

Post by ScottW999 » Wed Mar 26, 2014 4:01 pm

A friend of mine did exactly the same thing with a big name money manager around 2005 for the sole purpose of avoiding a big downturn. The money manager failed to get him out of the market prior top the big drop in "07 - '08.

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Re: Why does a Boglehead move to an adviser at 1.25% AUM?

Post by Taylor Larimore » Wed Mar 26, 2014 4:05 pm

Polaris:

There are many good reasons for using a financial adviser. You have listed several in your opening post.

There are also good reasons for not using a financial adviser--especially one charging high fees (1.25% of assets = ~20% of average returns).

Consider the simple Three Fund Portfolio.
"Does this portfolio seem overly simplistic, even amateurish? Get over it. Over the next few decades, the overwhelming majority of all professional investors will not be able to beat it." -- William Bernstein
Best wishes.
Taylor
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HomerJ
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Re: Why does a Boglehead move to an adviser at 1.25% AUM?

Post by HomerJ » Wed Mar 26, 2014 4:15 pm

Ask him how much he intends to withdraw a year from his portfolio when he retires...

If it's 4% or 5%, point out that 25%-30% of his retirement income will be going to his advisor.

i.e. if he has $3 million at retirement, and he's pulling out $120,000 a year, his advisor will be pulling out nearly $40,000 for himself. Every year.

Ask him is he thinks it's a good deal to pay a FA that much year... Think about it.. All he needs is THREE sucker clients who will let him grab 1.25% of their 40-years-worth of savings each year, and he gets a nice 3.75% withdrawal rate on other people's savings.

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Polaris
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Re: Why does a Boglehead move to an adviser at 1.25% AUM?

Post by Polaris » Wed Mar 26, 2014 4:15 pm

Taylor Larimore wrote:Polaris:

There are many good reasons for using a financial adviser. You have listed several in your opening post.

There are also good reasons for not using a financial adviser--especially one charging high fees (1.25% of assets = ~20% of average returns).

Consider the simple Three Fund Portfolio.
"Does this portfolio seem overly simplistic, even amateurish? Get over it. Over the next few decades, the overwhelming majority of all professional investors will not be able to beat it." -- William Bernstein
Best wishes.
Taylor
You are of course, "preaching to the choir" as it were. :D I am a fan of the three fund portfolio myself (plus a dash of small cap tilt) and don't see that changing any time soon.

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Re: Why does a Boglehead move to an adviser at 1.25% AUM?

Post by Leif » Wed Mar 26, 2014 4:17 pm

A 2 comma portfolio is a min of 1,000,000, which is a min of $12,500 in fees/year. Max would be 999,999,999 or a max of $12,500,000 in fees/year

Perhaps those services listed are worth to this person. But for me I would rather use a small portion of that to hire the services needed.

Way too much in fees IMO.

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Re: Why does a Boglehead move to an adviser at 1.25% AUM?

Post by afan » Wed Mar 26, 2014 4:21 pm

ScottW999 wrote:If I could no longer handle my affairs I would either leave everything in place or have one of my children who are capable manage my investments. It will be theirs eventually anyway
+1,000

They can then spend the 1.25% per year that otherwise would have gone to the advisor.

And of course assuming that an advisor would prevent one from losing money during the downturn is the worst possible reason for hiring one.

In another thread about how much to pay an advisor, I suggested that someone who needed lots of changes might reasonably spend up to several thousand for initial planning and assistance in making the changes. After that, an annual check up for rebalancing should cost about $100. Once the investment plans is established there would be nothing else for the advisor to do.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

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Re: Why does a Boglehead move to an adviser at 1.25% AUM?

Post by MathWizard » Wed Mar 26, 2014 4:26 pm

It's probably a combination of the toll that the financial meltdown took plus the spouse's
desire to get a second opinion.

It would have to be tough going through another 07-09 with the full support of your spouse.

The difficulty lies in the fact that you pay the guy 1.25% and you are still vulnerable to the
same market volatility.

If there was a financial advisor who could predict such events reliably (I doubt that there is), that
person would have almost all the money and would not need yours.

For the advisor who says that he can tiem the market, I would point to Warren Buffet and Charlie Munger,
who say that they themselves cannot do so, and ask where is your $63 Billion if you are such a successful
market timer?

I am still confident in my abilities. If/when I can no longer do so, I'll put money in an inflation-indexed annuity
to go along with SS to cover my base expenses and puit the rest on autopilot in a broad blended fund for emergencies
and splurges, and spend my time enjoying my life.

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Re: Why does a Boglehead move to an adviser at 1.25% AUM?

Post by ScottW999 » Wed Mar 26, 2014 4:30 pm

'For the advisor who says that he can tiem the market, I would point to Warren Buffet and Charlie Munger,
who say that they themselves cannot do so, and ask where is your $63 Billion if you are such a successful
market timer?

I am still confident in my abilities. If/when I can no longer do so, I'll put money in an inflation-indexed annuity
to go along with SS to cover my base expenses and puit the rest on autopilot in a broad blended fund for emergencies
and splurges, and spend my time enjoying my life.'
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+1,000

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Re: Why does a Boglehead move to an adviser at 1.25% AUM?

Post by keanwood » Wed Mar 26, 2014 4:33 pm

While I would never pay someone to manage my money (Never say Never) I think for many people, if they find a adviser who is responsible, 1 AUM percent is a small price to pay. While most bogleheads know how easy it is to manage a 3/4 or even 5 fund portfolio we should realize that most people simply don't want to deal with it. Also while I am still young (21--truly a great year :sharebeer :sharebeer :sharebeer ) I saw my grandmother's long slow decline in mental health and while her financial advisor was NOT a good one she never had to worry about buying food or paying the mortgage etc. I believe that a good financial planer should also be able to set up automatic bill pay for these things. Furthermore a financial planer can help percent you from doing anything really stupid with your money(Hopefully).

--Keanwood



Note: While my family could have managed her money better than the financial planer did there is no way my grandma would have believed us compared to a nice looking man in a suit in a nice office with a framed pice of paper on the wall.
Spend half of your money: for you may die, save half of your money: for you may live.

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Re: Why does a Boglehead move to an adviser at 1.25% AUM?

Post by The Wizard » Wed Mar 26, 2014 4:44 pm

It appears that this acqaintance is a believer in market timing and back-room cleverness.
I'd wish him the best and move onto something more productive to focus on...
Attempted new signature...

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Re: Why does a Boglehead move to an adviser at 1.25% AUM?

Post by drzzzzz » Wed Mar 26, 2014 4:53 pm

Having thought about these same issues, i would offer that sometimes it is good to get another opinion and set of eyes especially if you are using more complex strategies and not just index funds and a 3 fund portfolio ; also as noted in the initial question, there is a level of expertise related to taxes, required minimum distributions, and how to set up estate planning that is different from just growing a retirement account and your personal assets - the aspect of how you withdraw funds to minimize taxes as you move toward retirement and how to best position your assets might well warrant talking to an adviser for that perspective; there also reaches a point where having someone else manage your funds so you can spend the time enjoying your life becomes increasingly appealing; it might make more sense however to use an adviser that charges by the hour or to use the manager to set up the funds/plan etc and then stop using them, but continue the plan they have recommended if it makes sense to you

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Re: Why does a Boglehead move to an adviser at 1.25% AUM?

Post by Wildebeest » Wed Mar 26, 2014 5:30 pm

When I read the tagline, I thought this was a joke as in "Why does the chicken cross the road ?".

Reading the post I realized the OP has a serious concern. The OP's friend may have spouted some Boglehead like language in the past but clearly is not a true and blue Boglehead. He may have talked the talk but is unable to walk the walk.The tagline should have been "Why does a reasonable and smart man, who appears to be well educated and financially together pay too much for financial advise ?".

Most of my friends and some of my family need the security of an "expert" and the more they pay, the more secure they feel they get value. At least the OP's friend is willing to engage in discussion.

Taylor's Three Fund Portfolio should be default option in every 401 K, Pension plan etc. Financial education should be taught in high school. Whole Life and Variable annuities should come with warning that they are hazardous to your financial health.
The Golden Rule: One should treat others as one would like others to treat oneself.

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Re: Why does a Boglehead move to an adviser at 1.25% AUM?

Post by steve_14 » Wed Mar 26, 2014 5:48 pm

keanwood wrote:While I would never pay someone to manage my money (Never say Never) I think for many people, if they find a adviser who is responsible, 1 AUM percent is a small price to pay.
Eh, a simple three fund portfolio takes a couple of hours per year to manage. That isn't worth $10K+ per year. Maybe $500. At most you need to pay .3% for Vanguard's advisory services.

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Re: Why does a Boglehead move to an adviser at 1.25% AUM?

Post by Calm Man » Wed Mar 26, 2014 6:14 pm

OP, I am missing the intent of your post. Is it whether you should do what your friend is doing? Whether you should try to convince him otherwise? Or (what I think it is) WHY did your friend change? The latter question involves your friend's psychological and behavioral makeup and you couldn't answer that. The amount of quotes from him that you included suggests you and he have discussed this a lot. Why?

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Re: Why does a Boglehead move to an adviser at 1.25% AUM?

Post by dbr » Wed Mar 26, 2014 6:38 pm

Polaris wrote:
Opinions inserted.


What happens if I can no longer manage our money?

A very reasonable concern. The answer should not and cannot involve a 1.25% AUM, which is too much.

A lot of what we've talked about is shifting assets around to avoid high RMD tax rates.

This is mysterious. One would have to see the situation to understand how this might be. I would say that paying for tax advice is reasonable but that tax advice should not be under AUM. This could also be buying into a bill of goods.

His staff has access to search tools that would cost me more time and money than what I pay him.

There should be no need for search tools. This is either a con or a misunderstanding from the get go of how one should invest.

His staff has far more knowledge of tax law than I ever will.

Again tax advice is legitimate and should be paid for at a professional rate. 1.5% AUM is probably not the right fee structure for this.

He does this for a living. Very successfully. I wouldn't, for a minute, think I could out invest him.

What he does for a living is make money taxing clients at 1.5% AUM. He does indeed do this and successfully. That has nothing to do with investing for a living. I would not be so sure one could not out invest such a person.

My spouse wanted a second opinion.

That is a legitmate concern. The best way to get that opinion is to for her to educate herself on the subject and cross check the investment plan.

I find it insulting when people tell me I'm a fool for using an FA. I'm not new to investing, I've been doing quite well for 25+ years. I figured it was a good time to learn what I don't know about investing.

On the surface that is a fair comment. Thinking that hiring an FA at 1.25% AUM will accomplish that is mistaken. There could be a legitimate argument for getting a one time consultation with a $/hour planner. Also, one should never stop learning new things by all means possible, most of which are free.

Despite the prevailing opinion, I'm convinced that an expert in a field can do better than an average person doing research on the internet

I agree. The average person is apallingly ignorant about investing. However, the issue here is that the expert is an expert at getting paid rather than necessarily an expert at investing. I would not discount that the advice could be competent and appropriate. A dilemma is that investors can't afford to pay what advisers need to stay in business.

He's already provided value in helping to arrange our finances for retirement and death.

This one I would credit more than all the rest. Value found is indeed value gained. Again the question is why it takes a 1.5% tax forever to obtain such advice.


I think the value will come in the next downturn. I recognize that my flaw is knowing how to protect my nest egg and making moves to smooth the volatility.

"Making moves" is a questionable approach to managing market risk.

1.25% times several years is minor compared to the amount my portfolio lost between '07-'09.

This would seem to be a misunderstanding. The market is volatile and there is no magic bullet to eliminate that. Anyway, what happened to the market recovery after 2009? If this investor had a permanent loss from selling out in a panic in 2009, and if an adviser might solve that problem for him in the future, then indeed the cost is worth it many times over. The problem is that you don't have to pay that cost to do the right thing.

A guy that teaches asset allocation at one of the best business schools in the country could put together a portfolio that returns just as much or more while reducing volatility. Certainly, there are a lot of financial advisors that you and I could beat, but if this guy can beat my returns after fees, what I'm paying him becomes nil, correct?

Yes, if the adviser can make more money after fees than you can without the fees, then the advisor can make more money after fees than you can without the fees. The question is, can he?

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Re: Why does a Boglehead move to an adviser at 1.25% AUM?

Post by Polaris » Wed Mar 26, 2014 6:42 pm

Calm Man wrote:OP, I am missing the intent of your post. Is it whether you should do what your friend is doing? Whether you should try to convince him otherwise? Or (what I think it is) WHY did your friend change? The latter question involves your friend's psychological and behavioral makeup and you couldn't answer that. The amount of quotes from him that you included suggests you and he have discussed this a lot. Why?
Good points. The "why" is what I am curious about and I wonder what I am missing here. From our discussions on the subject, I don't see the need to pay so much money in perpetuity for financial advice but I was curious about what similar investors without a personal stake in this situation thought about his change of heart.

I do know that he knows the math and that he is going into this with his eyes wide open, so there is that. I am also not trying to change his mind and he is not trying to change mine. I do find this to be a fascinating turn of events for someone who generated a nice portfolio with Boglehead-type principles.

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Re: Why does a Boglehead move to an adviser at 1.25% AUM?

Post by patrick » Wed Mar 26, 2014 6:50 pm

Wildebeest wrote:When I read the tagline, I thought this was a joke as in "Why does the chicken cross the road ?".
Because he wants to pay the road advisor 1.25% for road timing advice?

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Re: Why does a Boglehead move to an adviser at 1.25% AUM?

Post by bs010101 » Wed Mar 26, 2014 6:52 pm

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Re: Why does a Boglehead move to an adviser at 1.25% AUM?

Post by neurosphere » Wed Mar 26, 2014 8:06 pm

The issue is not so much the hiring of an advisor, as you note, it's the hiring of an advisor with a 1.25% fee, apparently felt to be justified because the advisor can, somehow, add alpha in excess of the fee.

There are plenty of hourly advisors or low-AUM advisors who will hand-hold for much less than the 1.25% will come out to.

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Re: Why does a Boglehead move to an adviser at 1.25% AUM?

Post by Mountain Man » Wed Mar 26, 2014 8:14 pm

The answer is easy, To become a Muppet!

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Re: Why does a Boglehead move to an adviser at 1.25% AUM?

Post by Leesbro63 » Wed Mar 26, 2014 8:20 pm

Wrong thread mixup-Deleted

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Re: Why does a Boglehead move to an adviser at 1.25% AUM?

Post by bottlecap » Wed Mar 26, 2014 10:38 pm

I agree with dbr on this issue. While some of the concerns are legitimate, many of the reasons are completely bogus. The answer, unfortunately, is not this advisor.

JT

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Re: Why does a Boglehead move to an adviser at 1.25% AUM?

Post by in_reality » Wed Mar 26, 2014 11:22 pm

"The spouse wanted it"... tough to argue with. But why not a fee only consultation? ...AUM for a bear market? OK sure, pay the fee every year even though you aren't making anything ...

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Re: Why does a Boglehead move to an adviser at 1.25% AUM?

Post by LH » Thu Mar 27, 2014 12:13 am

1)tax shelter and wills and trusts sure to some extent possibly....

but the 1.25 AUM fee will be hard to overcome. Lets look at that in terms of opportunity cost:
1A) the advisors 1.25 fee comes out to:

12,500 a year, every year assuming the minimum 2 comma 1 million AA. If its 2 million, then its 25K a year, etc.

2a) combination of a CPA fee for service, and tax attorney consult yearly, and heck throw in a fee for service CFP.


I posit, no, its not worth it here. I do not see how he could fail to purchase great, likely even better more thorough advise each year, for less than the 1.25 AUM.

that leave the second part:



2) protecting against a downturn while beating indexes.

Flat out No.

If that was doable, someone out of all the active managers, would make a fund that did it.......

The "hey I can beat the indexes while giving lower volatility" fund! It includes free unicorns for long term use......




Now, I may well be wrong on 2. If I am wrong on 2, someone please just do one thing:

Name the fund that does what his advisor says he can do with asset management. We can then watch it FAIL demonstrably going forward at some point. Financial tracked reality is pretty brutal. Salesman talk doesn't change the harsh numbers.


You cant do it, you cant name the fund, and neither can his advisor pull it off, unless his advisor happens to be the next warren Buffet, versus the usual salesman who convinces his client he can do what expectationally, cannot be done when really tracked.

If he wants to do it, its fine. But line this situation up 10000 people, the vast majority will end up with lower money, with no improvement in volatility than they could accomplish themselves, especially with a team of hourly fee professionals with a yearly budget of 12.5K plus......

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Re: Why does a Boglehead move to an adviser at 1.25% AUM?

Post by pkcrafter » Thu Mar 27, 2014 12:47 am

That changed about a year ago when they decided to move their "two comma" portfolio to the care of a financial adviser who charges 1.25% AUM.

1.25% for over 1M in assets? $12,500/year? No break point? There is no way to justify this cost, but he's done it. His wife wanted it and now he's creating a rationale to justify it. Doesn't float, but it doesn't matter.

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Re: Why does a Boglehead move to an adviser at 1.25% AUM?

Post by BetaTracker » Thu Mar 27, 2014 2:03 am

Doesn't Vanguard provide free access to advisors if you have a million or more? I know Schwab is starting to offer more free advisory services for those with $500K or more with them ...
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Re: Why does a Boglehead move to an adviser at 1.25% AUM?

Post by kenner » Thu Mar 27, 2014 5:07 am

BetaTracker wrote:Doesn't Vanguard provide free access to advisors if you have a million or more?
Yes. I have talked with them many times and they provide excellent advice - in line with Boglehead principles, as you might expect fom the company that John Bogle inspired.

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Re: Why does a Boglehead move to an adviser at 1.25% AUM?

Post by Polaris » Thu Mar 27, 2014 6:39 am

BetaTracker wrote:Doesn't Vanguard provide free access to advisors if you have a million or more? I know Schwab is starting to offer more free advisory services for those with $500K or more with them ...
Absolutely, but they likely would have come up with a plan very similar to what he was already doing. I'm guessing that wasn't what he wanted to hear.

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Re: Why does a Boglehead move to an adviser at 1.25% AUM?

Post by Jack FFR1846 » Thu Mar 27, 2014 7:07 am

For the "wife" argument.....I know that if I told my wife "it only costs us $18,750 on our $1.5MM portfolio, she would have a heart attack. Or more likely, scream so loud that I would have one.

I've learned that people do stupid things and some of these people dig in their heels. I was talking with someone yesterday who had their money with Edward Jones and was crowing how EJ had jumped their $4500 investment last year into $5100. I noted to them that this was only 13% in a year where most portfolios jumped 25%. He's looking into index funds at Vanguard now and using the Fidelity online tools to do research on the funds.
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Re: Why does a Boglehead move to an adviser at 1.25% AUM?

Post by Random Musings » Thu Mar 27, 2014 7:51 am

Instead of 1.25%, could have utilized a tax/estate specialist on an hourly basis to provide guidance and continued with DIY investing, or utilize a passive investment advisor at a far lower AUM.

For the first year at 1.25%, with $1MM portfolio, breakeven would have been 0.50% AUM advisor and 19 hours of tax/estate consulting @ $400 per hour. Then, the cost structure goes down to AUM.

RM
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Re: Why does a Boglehead move to an adviser at 1.25% AUM?

Post by hiddensee » Thu Mar 27, 2014 8:40 am

Polaris wrote:I should say that I think that some of the above concerns are perfectly valid to be asking and that seeking help from a pro is completely appropriate.
The tax thing maybe, but why not retain a lawyer or accountant on a fixed fee? If he's in the "two comma club" he's paying at least $12,500/year for this tax advice.

The others may be valid concerns but the validity of the FA as a solution depends on the ability of the advisor to actually, "put together a portfolio that returns just as much or more while reducing volatility". What guarantee does your friend have of this? If he fails to do so, or under- rather than over-performs the stock market at the next downturn, does he have to provide your friend with compensation? If not, this is a gamble, not an investment decision.

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Re: Why does a Boglehead move to an adviser at 1.25% AUM?

Post by Polaris » Thu Mar 27, 2014 10:11 am

hiddensee wrote:The tax thing maybe, but why not retain a lawyer or accountant on a fixed fee? If he's in the "two comma club" he's paying at least $12,500/year for this tax advice.

The others may be valid concerns but the validity of the FA as a solution depends on the ability of the advisor to actually, "put together a portfolio that returns just as much or more while reducing volatility". What guarantee does your friend have of this? If he fails to do so, or under- rather than over-performs the stock market at the next downturn, does he have to provide your friend with compensation? If not, this is a gamble, not an investment decision.
I'm not sure it's even legal for an adviser to provide any performance guarantees. Perhaps they might have to do something like use some sort of a portfolio insurance product?

manwithnoname
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Re: Why does a Boglehead move to an adviser at 1.25% AUM?

Post by manwithnoname » Thu Mar 27, 2014 10:25 am

Taylor Larimore wrote:Polaris:

There are many good reasons for using a financial adviser. You have listed several in your opening post.

There are also good reasons for not using a financial adviser--especially one charging high fees (1.25% of assets = ~20% of average returns).

Consider the simple Three Fund Portfolio.
"Does this portfolio seem overly simplistic, even amateurish? Get over it. Over the next few decades, the overwhelming majority of all professional investors will not be able to beat it." -- William Bernstein
Best wishes.
Taylor
A rational basis to retain a financial advisor currently is to provide guidance to retiree and their spouses if/when they need advisory assistance. I know many retirees who manage their own investments who have retained a financial advisor to provide investment guidance as they get older. They worry that they may not be able to make investment decisions as they age and or their surviving spouse will be unable to manage the investments, estate, etc and want the spouse to have someone who is available immediately without have to search alone. Spending money on an advisor who can provide tax and estate planning advice is worth the cost. It better to pay a fee to an advisor so that the spouse feels that he/she will not be alone after the investor dies then to leave the spouse without a financial advisor. I have discussed this issue with many investors who manage their own affairs who have concluded that retaining a financial advisor is worth the cost for the services provided. There is more to advising an investor than finding the simplest, most amateurish investment portfolio. Its not a question of investment returns but providing support. But there are investors who believe that only metrics count when determining what course to follow.

Too many investors make the mistake of assuming that the cheapest form of advice (0 fee) is the always the best but in many cases it's the worst when the investor or surviving spouse cannot manage their own financial affairs. I have an advisor who provides me with excellent advice for a reasonable fee and who can advise my spouse if I am not able to do so. This advice is priceless and will increase, not decrease my net worth. Its up to the investor to decide that the fee is reasonable for the services provided.

Hiring an advisor is like hiring any other service provider to provide a service that you cannot or do not want to do yourself.

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Re: Why does a Boglehead move to an adviser at 1.25% AUM?

Post by 555 » Thu Mar 27, 2014 10:30 am

Early onset dementia.

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Re: Why does a Boglehead move to an adviser at 1.25% AUM?

Post by Random Musings » Thu Mar 27, 2014 10:34 am

manwithnoname wrote: A rational basis to retain a financial advisor currently is to provide guidance to retiree and their spouses if/when they need advisory assistance. I know many retirees who manage their own investments who have retained a financial advisor to provide investment guidance as they get older. They worry that they may not be able to make investment decisions as they age and or their surviving spouse will be unable to manage the investments, estate, etc and want the spouse to have someone who is available immediately without have to search alone. Spending money on an advisor who can provide tax and estate planning advice is worth the cost. It better to pay a fee to an advisor so that the spouse feels that he/she will not be alone after the investor dies then to leave the spouse without a financial advisor. I have discussed this issue with many investors who manage their own affairs who have concluded that retaining a financial advisor is worth the cost for the services provided. There is more to advising an investor than finding the simplest, most amateurish investment portfolio. Its not a question of investment returns but providing support. But there are investors who believe that only metrics count when determining what course to follow.

Too many investors make the mistake of assuming that the cheapest form of advice (0 fee) is the always the best but in many cases it's the worst when the investor or surviving spouse cannot manage their own financial affairs. I have an advisor who provides me with excellent advice for a reasonable fee and who can advise my spouse if I am not able to do so. This advice is priceless and will increase, not decrease my net worth. Its up to the investor to decide that the fee is reasonable for the services provided.

Hiring an advisor is like hiring any other service provider to provide a service that you cannot or do not want to do yourself.
What do you consider a reasonable fee? IMHO, in today's more competitive market, 125 basis points doesn't cut the mustard. Still have to perform due diligence to find an informed, ethical advisor.

RM
I figure the odds be fifty-fifty I just might have something to say. FZ

hiddensee
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Re: Why does a Boglehead move to an adviser at 1.25% AUM?

Post by hiddensee » Thu Mar 27, 2014 10:36 am

Polaris wrote:
hiddensee wrote:The tax thing maybe, but why not retain a lawyer or accountant on a fixed fee? If he's in the "two comma club" he's paying at least $12,500/year for this tax advice.

The others may be valid concerns but the validity of the FA as a solution depends on the ability of the advisor to actually, "put together a portfolio that returns just as much or more while reducing volatility". What guarantee does your friend have of this? If he fails to do so, or under- rather than over-performs the stock market at the next downturn, does he have to provide your friend with compensation? If not, this is a gamble, not an investment decision.
I'm not sure it's even legal for an adviser to provide any performance guarantees. Perhaps they might have to do something like use some sort of a portfolio insurance product?
The advisor can simply agree to pay out a certain % of the money deposited with him, like a loan, and then a bonus linked to the stock market. For that matter, if this man can reliably outperform the market, why can't he issue a bond that pays baseline market returns and pocket the difference? Warren Buffett did something very close to this to get a lot of his seed capital.

Of course no advisor would do that today, because even those who can outperform the market don't know that they can. So why should you or I think some specific manager can?

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Re: Why does a Boglehead move to an adviser at 1.25% AUM?

Post by nedsaid » Thu Mar 27, 2014 11:27 am

My reaction to the original post is that the same thoughts that your friend has have run through my head as well.

I have mostly managed my own investments for 30 years. So far so good. But it has taken a lot of research and a lot of time. I have also sought out the advice of an independent broker who I have worked with for 16-17 years. A portion of my investments are with him. I also have had my portfolio reviewed by others. My favorite mutual fund company, my insurance company, a financial advisor, an advisor with Merriman, and others have "checked under the hood." Every time I have had this done, I have learned something.

I have wondered about having someone else manage my investments for me. 1.25% with fund expenses on top of that is too much. The Merriman folks wanted 1% plus the fees for the DFA funds. The "all in" expense ratio would have been about 1 1/3%. Doing it myself, my expense ratio is below 0.58%. My "all in" expenses including the trading costs within my active mutual funds would still be under 1%. I own stocks that I rarely trade and a portion of my mutual funds are indexed. So that reduces the trading costs of my portfolio.

People hire financial advisors to protect against themselves to be perfectly honest. So far I have done only the dumb things and not the really, really, really, really stupid things. I have avoided the worst of the behavioral errors. I have done most things right. A part of me wonders if I can keep that going with age. (I believe that I can).

One of the things that gives me pause is that advisors are human too. They make errors too. I can pay someone 1.25% to make errors or I can make errors myself for free. Hopefully a paid advisor would make fewer errors than a do it yourself investor. Even Dan Solin admitted to a bit of panic in the last downturn. So nothing is foolproof.
A fool and his money are good for business.

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Re: Why does a Boglehead move to an adviser at 1.25% AUM?

Post by barnaclebob » Thu Mar 27, 2014 11:34 am

Many of the things mentioned in the OP are worth paying for...by the hour not by %AUM.

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Re: Why does a Boglehead move to an adviser at 1.25% AUM?

Post by IlliniDave » Thu Mar 27, 2014 12:14 pm

Polaris wrote: So fellow Bogleheads, if you were about 50 and still working because you wanted to and not because you had to, could you see yourself abandoning the investment philosophy you very successfully employed for 25 years in favor of an academic financial guru that charges 1.25% AUM? How does one get there from here? It just seems so counter-intuitive to everything I hold dear!

Thoughts?
Knowing what I know now, there's no chance at all I'd do it. With that many commas, too easy to turn it over to Vanguard to manage at much lower cost.
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Re: Why does a Boglehead move to an adviser at 1.25% AUM?

Post by EnjoyIt » Thu Mar 27, 2014 12:27 pm

If you have a real concern for your friend, send him a message stating:

"Here are some facts I looked into for you. After today I will never bring up this topic again"

And then lay out some of the things described in this thread. After that he can make whatever decision he wants to and leave it at that.

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Polaris
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Re: Why does a Boglehead move to an adviser at 1.25% AUM?

Post by Polaris » Thu Mar 27, 2014 1:11 pm

Beckmaster wrote:If you have a real concern for your friend, send him a message stating:

"Here are some facts I looked into for you. After today I will never bring up this topic again"

And then lay out some of the things described in this thread. After that he can make whatever decision he wants to and leave it at that.
That ship has already sailed. Pretty much all of the thoughts expressed here support my position. To be honest, I was hoping that I was missing something.

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Re: Why does a Boglehead move to an adviser at 1.25% AUM?

Post by Jay69 » Thu Mar 27, 2014 2:54 pm

I have seen this subject come up from time to time and I keep coming back to the following in my simple little mind.

For many of us working people who save a lifetime and have most everything in taxed advantaged accounts tossing it all into a Vanguard Fixed AA fund of 60/40 or 40/60 when we get to the point you don't want to mess with it may not be a bad thing.

Even though I have a good few good working years left I see my future as tossing everything into a single fund in our tax advantaged accounts, annuitize what's in taxable/portion of the taxed advantaged funds if needed maybe keep a pile of I-bonds early in retirement. I would hope this approach would keep me from doing to many stupid mistakes when I start loosing my cognitive abilities.

The flip side is giving it all to an advisor but you still need to talk with them. Your advisor retires when you are 85 then you are stuck looking for a new one unless you like the new advisor who took over. Again will I or my spouse be in good memory standing in our latter years to select a new decent advisor? Will we even care? I think that's the last thing I would want to be doing!

Chances are I will expire before my spouse, my spouse won't want to mess with it, don't want my kids to worry about, want it as simple as possible for my spouse and kids to manage and can spend more time reading a good book while I can. The trick is to get it all in place before I start loosing my cognitive abilities :annoyed

We are blessed with decent kids that we feel will advocate well for us no matter what happens, a very nice place to be in.

my .02
"Out of clutter, find simplicity” Albert Einstein

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Re: Why does a Boglehead move to an adviser at 1.25% AUM?

Post by dl7848 » Thu Mar 27, 2014 2:59 pm

Polaris wrote:I have an acquaintance on another forum that I have come to respect very much as a fellow investor over the past few years. Until about a year ago, this person was a vocal proponent of low investment costs, simple and well diversified portfolios, tax efficiency, and staying the course. That changed about a year ago when they decided to move their "two comma" portfolio to the care of a financial adviser who charges 1.25% AUM. :o
Has your friend tried talking with someone at his/her brokerage? With high assets, some brokerages offer free, sit-down consultations which address some of things your friend mentioned. I went through one of these consultations and it was very thorough. It was good for taking a high-level look at things and long-range planning. It was not about individual security selection, however, and for a Boglehead, that shouldn't be an issue. I'd advise the friend to get everything he can free, then narrow down the areas where additional help is needed and go from there. But expecting an advisor to help in mitigating market volatility is not realistic. Your friend would be better served taking a course in investor psychology.

manwithnoname
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Re: Why does a Boglehead move to an adviser at 1.25% AUM?

Post by manwithnoname » Thu Mar 27, 2014 3:26 pm

Random Musings wrote:
manwithnoname wrote: A rational basis to retain a financial advisor currently is to provide guidance to retiree and their spouses if/when they need advisory assistance. I know many retirees who manage their own investments who have retained a financial advisor to provide investment guidance as they get older. They worry that they may not be able to make investment decisions as they age and or their surviving spouse will be unable to manage the investments, estate, etc and want the spouse to have someone who is available immediately without have to search alone. Spending money on an advisor who can provide tax and estate planning advice is worth the cost. It better to pay a fee to an advisor so that the spouse feels that he/she will not be alone after the investor dies then to leave the spouse without a financial advisor. I have discussed this issue with many investors who manage their own affairs who have concluded that retaining a financial advisor is worth the cost for the services provided. There is more to advising an investor than finding the simplest, most amateurish investment portfolio. Its not a question of investment returns but providing support. But there are investors who believe that only metrics count when determining what course to follow.

Too many investors make the mistake of assuming that the cheapest form of advice (0 fee) is the always the best but in many cases it's the worst when the investor or surviving spouse cannot manage their own financial affairs. I have an advisor who provides me with excellent advice for a reasonable fee and who can advise my spouse if I am not able to do so. This advice is priceless and will increase, not decrease my net worth. Its up to the investor to decide that the fee is reasonable for the services provided.

Hiring an advisor is like hiring any other service provider to provide a service that you cannot or do not want to do yourself.
What do you consider a reasonable fee? IMHO, in today's more competitive market, 125 basis points doesn't cut the mustard. Still have to perform due diligence to find an informed, ethical advisor.

RM
Whatever fee is reasonable for the services provided.

Its up to the investor to decide whether the fee is reasonable. One financial advisor was supposed to charge .25%. But I don't know what services were provided for the advice.

125BP could be reasonable depending on the service provided. I don't make quantitative decisions on a reasonable fee. There are tax advisors who charge $300 an hour and those who charge $1200 a hour. It up to the client to decide who is best suited to provide advice.
Last edited by manwithnoname on Thu Mar 27, 2014 3:27 pm, edited 1 time in total.

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Milano
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Re: Why does a Boglehead move to an adviser at 1.25% AUM?

Post by Milano » Thu Mar 27, 2014 3:27 pm

555 wrote:Early onset dementia.
Yes, like J. Nesham (sp?) in California in 2012 who went to jail for selling an elderly person a variable annuity, the court reached the verdict based on the fact that the client was on early stages of dementia.

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Re: Why does a Boglehead move to an adviser at 1.25% AUM?

Post by livesoft » Thu Mar 27, 2014 3:33 pm

555 wrote:Early onset dementia.
Maybe it is just an affair with the administrative assistant in the adviser's office?
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Re: Why does a Boglehead move to an adviser at 1.25% AUM?

Post by Leif » Thu Mar 27, 2014 4:10 pm

Looks like this thread has run its course.

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