On Buying Used Cars and Using a Financial Advisor

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Random Walker
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On Buying Used Cars and Using a Financial Advisor

Post by Random Walker » Thu Mar 09, 2017 2:04 pm

I was a hard headed do it yourself Boglehead 2001-early 2009. At that point I decided to go with an advisor and have been with one early 2009-present. I'm on vacation this week and have had some extra time to ponder. I remember once reading an article by a used car salesman. He wrote that the commonly accepted truth is that used car salesmen are looking to pull one over on the uninformed customer. He wrote that that commonly held belief is false. The last thing a salesman wants is for the uninformed customer to return mad after some predictable imperfection in the bought car shows up. The author then went on to write that the best customers are the knowledgeable ones who know what they are and what they are not buying. They understand the problems with the car and account for them in their decisions to buy the car at a given price.
Likewise, I think it's important for people who use an advisor to be as informed as possible up front in deciding on an advisor and to be informed and involved on an ongoing basis with the advisor thereafter. The more informed the client, the more likely he is to get from the advisor what he needs. Also, the better the advisor knows the client, the better he can make suitable recommendations for the client. I know William Bernstein once wrote that by the time an investor knows enough to choose a good advisor, he can probably manage his investments himself. I think there is a lot of truth in that, but not the whole truth. There can be very good reasons to use an advisor when one already has the required knowledge and possibly even discipline. I would go a step further. I would say that if one continues his investing education, he can maximize the benefit he derives from the advisor.

Dave

livesoft
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Re: On Buying Used Cars and Using a Financial Advisor

Post by livesoft » Thu Mar 09, 2017 2:09 pm

OK, so from your personal experience, what specifically have you gained by using an advisor? Better tax-loss harvesting? Better rebalancing in the face of behavioral issues? More vacations? Higher risk-adjusted performance?

I know I have bought a couple of used cars. I didn't have any issues with the sales reps and negotiations were done quickly with no BS-ing around. I didn't waste their time and they didn't waste my time.
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Random Walker
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Re: On Buying Used Cars and Using a Financial Advisor

Post by Random Walker » Thu Mar 09, 2017 2:46 pm

Livesoft,
Here are my best answers to your questions. Of course I can't be sure because I haven't lived the alternative history of going without advisor during the same time period. Yes better TLH although there have been very few opportunities in my time period experience 2009-present. On better rebalancing, I'll say yes as well. Although I'm in accumulation phase and until recent change in AA, all rebalancing has been done with new savings. Undoubtedly the advisor is an extra level of protection between me and my portfolio. No on more vacations :-). As far as risk adjusted returns, the time frame is too short to be meaningful, but I will say my portfolio includes sources of return that I would not have otherwise and deeper exposures to size and value than I might have on my own.
One big function of an advisor is to get the AA right in the first place. I would say that one big benefit for me has been taking advantage of Monte Carlo Simulation to adjust my AA in response to increasing clarity of my financial objectives, recent market performance, future expected returns. I think my current AA is less aggressive than I may have done on my own, and the decision to go with this AA is way more informed than I would have done on my own.

Dave

livesoft
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Re: On Buying Used Cars and Using a Financial Advisor

Post by livesoft » Thu Mar 09, 2017 2:52 pm

Thanks for those comments.

May I ask if your asset allocation was set in 2009 at the outset? Or has it changed in the past 8 years? And if it has changed, did desired equity percentage go only up? Only down? Both up and down (or down and up; or something else) with external events?
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Re: On Buying Used Cars and Using a Financial Advisor

Post by bottlecap » Thu Mar 09, 2017 3:10 pm

Random Walker wrote:There can be very good reasons to use an advisor when one already has the required knowledge and possibly even discipline. I would go a step further. I would say that if one continues his investing education, he can maximize the benefit he derives from the advisor.
There could be. What do you think thy are?

Random Walker
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Re: On Buying Used Cars and Using a Financial Advisor

Post by Random Walker » Thu Mar 09, 2017 3:25 pm

Livesoft,
I set it at 80/20 in 2009. I stuck with that until about 2015 when I cooled off to 70/30. And now in the last two years I have transitioned to 47% equities, 35% bonds, 18% low correlated alternatives (AQR Style Premia, AQR TS Momentum, alternative lending, reinsurance). Of note in 2009 I was 46 years old and am now 54. Many Bogleheads believe in cooling off the AA according to a fixed age determined glidepath. I've taken to heart what William Bernstein wrote in one of his Investing For Adults eBooks: with a modest eye towards today's relatively high valuations, adjust the AA downward as retirement comes into focus. As individual investors, there's not a lot we can control. One thing we can control is our AA response to changing valuations as we approach retirement. I don't really view this as market timing because my % equities is only going one direction over time and my investing goals are becoming more clear (and more modest) to me as I age. But I am sort of individualizing my glide path. The Monte Carlo Simulation provided by the advisor has helped these decisions greatly.

Dave

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Re: On Buying Used Cars and Using a Financial Advisor

Post by Random Walker » Thu Mar 09, 2017 3:43 pm

Bottle cap,
1. Extra level of protection from behavioral errors
2. Access to funds the individual investor may not have on his own
3. More informed asset allocation decisions with the aid of Monte Carlo
4. Relief from compulsive record keeping so more time for other activities
For example tax loss harvesting done right requires keeping track of individual lots. I know TLH is important, but I'm not compulsive enough to keep track of the individual lots. And I don't know as well as the advisor when a loss is big enough for TLH to be advantageous.
5. I'm not compulsive or knowledgeable enough to manage a municipal bond ladder either. On my own I would use a bond fund. My advisor manages a ladder of individual bonds and this saves on expense ratios and should provide TLH opportunities in the future at the individual bond level.

An advisor charges an AUM fee and the funds are going to have higher ERs than Vanguard. The increased costs are certain. The benefits are only potential. But after lots of spreadsheets, I thought the size of the potential benefits was so much bigger than the known increased costs that I went advisor route. In making the decision, one needs to know what they would do and would not do on their own. For example, would they do Vanguard mutual funds only, delve into ETFs, TLH aggressively, stick to a plan or tinker, etc. if you're interested in my decision process, I posted sometime within the last 6 months or so on my thought process regarding my decision to use an advisor. Should be easy to find that post with the search engine.

Dave

livesoft
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Re: On Buying Used Cars and Using a Financial Advisor

Post by livesoft » Thu Mar 09, 2017 3:45 pm

Random Walker wrote: I set it at 80/20 in 2009. I stuck with that until about 2015 when I cooled off to 70/30. And now in the last two years I have transitioned to 47% equities, 35% bonds, 18% low correlated alternatives (AQR Style Premia, AQR TS Momentum, alternative lending, reinsurance). Of note in 2009 I was 46 years old and am now 54.
That makes sense. I have certainly cut back on equities in the past 9 years myself. I don't see my asset allocation changing going forward as I have grown into it plus I have fewer years of "longevity" that I need to worry about.
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livesoft
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Re: On Buying Used Cars and Using a Financial Advisor

Post by livesoft » Thu Mar 09, 2017 3:52 pm

Random Walker wrote:[...]
4. Relief from compulsive record keeping so more time for other activities
For example tax loss harvesting done right requires keeping track of individual lots. I know TLH is important, but I'm not compulsive enough to keep track of the individual lots. And I don't know as well as the advisor when a loss is big enough for TLH to be advantageous.
This is one of the improved changes since 2009: Brokerages have to keep track of purchase lots for investors. All shares that have a chance of having any losses are now "covered shares" for me, so an occasional glance when the news says that markets "are the lowest in N months" is all it takes.

I'm happy to say that I never got into spreadsheets when it comes to investing, so an advisor would not save me from spreadsheet-itis since I don't use them to track my investments.

I think I am rather relaxed about my asset allocation compared to many folks, so to see that an advisor has helped one to step away from being too technical is enlightening to me.
Last edited by livesoft on Thu Mar 09, 2017 3:59 pm, edited 1 time in total.
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InvestorNewb
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Re: On Buying Used Cars and Using a Financial Advisor

Post by InvestorNewb » Thu Mar 09, 2017 3:58 pm

You must be among the very, very small percentage of people who switch from DIY to having an advisor. Care to share what they are charging you?
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BogleMelon
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Re: On Buying Used Cars and Using a Financial Advisor

Post by BogleMelon » Thu Mar 09, 2017 4:05 pm

Random Walker wrote: 2. Access to funds the individual investor may not have on his own
And do these funds invest in stocks that aren't accessible to public? or they invest in the same stocks that are anyways included in a total index fund? :wink:
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Random Walker
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Re: On Buying Used Cars and Using a Financial Advisor

Post by Random Walker » Thu Mar 09, 2017 4:08 pm

Livesoft,
Yes I had heard that the individual lot basis issue had changed since I made my original decision. It's somewhat ironic that TLH was the one issue that put me over the edge back then to go advisor route. I thought TLH alone, done right (HIFO and throughout the year) would cover or nearly cover the AUM fee on its own. Nonetheless I'm not feeling regret over my decision at this point. Investing does evolve over time, and I would say that a good advisor should help the client take advantage of that evolution when appropriate. That's an advantage I've experienced that I did not anticipate when I made the decision. The TLH thought process perhaps evolved a bit in the opposite direction. Nonetheless, on balance I'm very happy.

Dave

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Re: On Buying Used Cars and Using a Financial Advisor

Post by Random Walker » Thu Mar 09, 2017 4:17 pm

InvestorNewb,
My AUM fee started at 0.7% and has declined to 0.5% as I've accumulated assets. My average ER with Vanguard had been about 0.15% and with DFA funds it rose to about 0.4%. Since then I've sort of gone all in on small doses of the somewhat esoteric alternatives with very substantially higher ERs. Overall the total increase in portfolio expense, AUM + increased ERs compared to VG, is about 0.9-1%. As Bogle says, that 1% compounded is a big hurdle! But on balance I think it is highly likely I'm clearing that hurdle compared to what I would do on my own.

Dave

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Re: On Buying Used Cars and Using a Financial Advisor

Post by Random Walker » Thu Mar 09, 2017 4:20 pm

Boglemelon,
You know the answer to that question :-) it's an issue of overall net exposure to factors that drive returns and portfolio efficiency.

Dave

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Re: On Buying Used Cars and Using a Financial Advisor

Post by alfaspider » Thu Mar 09, 2017 4:29 pm

Nearly 1% of my portfolio every year to run some Monte Carlo simulations so I can tweak my AA and do some TLH? Thanks, but no thanks.

kelvan80
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Re: On Buying Used Cars and Using a Financial Advisor

Post by kelvan80 » Thu Mar 09, 2017 4:31 pm

Could you also share what your returns have been since your time with your advisor?

Dirghatamas
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Re: On Buying Used Cars and Using a Financial Advisor

Post by Dirghatamas » Thu Mar 09, 2017 4:58 pm

Well Random Walker
With due respect, you would have a hard time convincing anyone else with those numbers :oops:

1) TLH is trivial nowadays because all brokerages have to keep cost basis. so there is NO work involved in keeping track of tax lots for an individual investor. At present I have seven figure TLH without doing anything special just using the ever occurring bear markets. TLH is a valuable tool but why pay someone for it?

2) You are paying ~1% overhead for advisor + higher cost funds. Lets see, just to use round numbers, a 10M portfolio with an advisor will cost you an extra 100,000 dollars a year. Seriously! That is literally more than 5X my annual expenses. Would I like to increase my living expenses by 5X or pay a guy for a couple of hours of Monte Carlo simulations (which I can do myself in less time than him).

Advisors get extremely expensive as one's assets grow if they are working on AUM.

I would argue that consulting a fixed fee advisor or a fixed fee Tax accountant (much more valuable) are reasonable things. Advisors based on AUM are not.

Random Walker
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Re: On Buying Used Cars and Using a Financial Advisor

Post by Random Walker » Thu Mar 09, 2017 5:06 pm

Kelvin80,
Believe it or not, I actually don't know the specific returns. The reason I don't is that it would be meaningless to compare to something like the S&P500. One only invests looking forward, and they either buy into factor diversification or they don't. All of the advisor's funds are passive and tilted towards small, value, momentum, profitability. Most are DFA. Being passive, they sort of act as their own indexes. Comparison to anything but some sort of factor regression (which is beyond my capabilities) is sort of pointless. On top of that, as Larry Swedroe says, periods of even 10 years are only noise in the world of financial economics. I know it sounds silly that I don't know the results off the top of my head, but it's the truth :-). If you want to get a sense of how it has performed over the last 8 years, you could get a good sense looking at the results for DFA small and value funds on the DFA website or look at the data for market, small, value on Ken French's website.
If one is serious about deciding whether my 0.9-1% hurdle is likely to be overcome going the advisor route, they are probably best served looking at the longest data series available for the tilts, comparing that to a portfolio they would develop and stick with on their own, and looking into potential advisor benefits besides the funds themselves. Access to the funds can be obtained more cheaply.

Dave

livesoft
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Re: On Buying Used Cars and Using a Financial Advisor

Post by livesoft » Thu Mar 09, 2017 5:09 pm

Random Walker wrote:Kelvin80,
Believe it or not, I actually don't know the specific returns. The reason I don't is that it would be meaningless to compare to something like the S&P500. One only invests looking forward, and they either buy into factor diversification or they don't.
But I think one would want to at least compare to a simple TargetRetirement or LifeStrategy benchmark. For instance, if you found out that the Vanguard Lifestrategy moderate growth fund averaged 1% more per year than your advisor-advised setup, wouldn't you want to consider switching?

I certainly keep track of my portfolio total return and the returns of several similarly allocated benchmark funds. From that comparison, I know that my behaviors are not degrading the performance of my portfolio. Quite the contrary.

And I found this thread with videos on "Managing Expectations" viewtopic.php?t=205911
worthwhile watching, too. I don't think anybody should have their head stuck in the sand when it comes to their portfolio performance. That doesn't mean that one's portfolio always has to outperform a benchmark, but it should not consistently trail an appropriate benchmark.
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Random Walker
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Re: On Buying Used Cars and Using a Financial Advisor

Post by Random Walker » Thu Mar 09, 2017 5:31 pm

Dirghatamas,
First of all, not trying to convince anyone of anything. Although I am almost certainly guilty of confirmation bias in trying to support my decision to go the advisor route :-). You did misquote my fees. My 0.9-1% increased fees over my VG portfolio includes both the AUM fee and the higher ERs.
Most significantly, I guess my point goes back to my used car purchase example. The more informed one is as a consumer, whether the product is a used car or a financial advisor, the more likely he is to be a satisfied customer. I would contend that it is possible many Bogleheads have not fully thought out the DIY VG v. Advisor DFA route. That would make them less informed DIY VG consumers. The more informed the DIY VG consumers are about investing in general, alternative approaches, and the trade offs involved with alternative approaches, the more likely they are to stick with their plan.

Dave

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Re: On Buying Used Cars and Using a Financial Advisor

Post by Random Walker » Thu Mar 09, 2017 5:43 pm

Livesoft,
You're absolutely right. I really haven't checked because the specifics are so specific: % bonds, factor tilts, alternatives. FWIW, I do think I'd be possibly disappointed because I believe value hasn't done great until the last year or so. my overall AA would be so different, it's sort of apples to oranges comparison. We only invest looking forward. Sort of like every day we hold a stock it's like deciding to buy it again today at its given price. Looking forward, I would take my diversified portfolio at its price over a more TSMish portfolio.

Dave

dbr
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Re: On Buying Used Cars and Using a Financial Advisor

Post by dbr » Thu Mar 09, 2017 5:48 pm

[quote="Random Walker" The last thing a salesman wants is for the uninformed customer to return mad after some predictable imperfection in the bought car shows up. The author then went on to write that the best customers are the knowledgeable ones who know what they are and what they are not buying. They understand the problems with the car and account for them in their decisions to buy the car at a given price.

Dave[/quote]

I don't think used car salesmen try to get away with selling junk to people. They do try to get people to pay more than they need to for what they buy.

In this respect advisors are worse than used car salesmen because they start with getting people to pay more than they need to AND they sell them junk, though not always nor even mostly by intention.

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Re: On Buying Used Cars and Using a Financial Advisor

Post by Dirghatamas » Thu Mar 09, 2017 8:55 pm

Random Walker wrote:Dirghatamas,
First of all, not trying to convince anyone of anything. Although I am almost certainly guilty of confirmation bias in trying to support my decision to go the advisor route :-). You did misquote my fees. My 0.9-1% increased fees over my VG portfolio includes both the AUM fee and the higher ERs.
Dave
Apologies for mixing two things when I was trying to write (I meant it in my head but didn't write correctly). What I meant was

You have 3 separate extra costs that will hurt your portfolio compared to a passive Boglehead buy and hold indexer. They are 1) money paid to your advisor (0.4-0.5% AUM) 2) money paid to the investment firm whose investments you hold like DFA or whatever (another 0.4%) 3) extra taxes you pay due to portfolio turnover in taxable account which is a very high cost for active funds. I have seen numbers exceeding 1% AUM just for this in some active strategies especially if you are in the max tax bracket + state taxes. Passive total market funds tend to be some of the most tax efficient funds because of very little turn over.

I know you are not trying to influence others to go this route but still: unless you have done a bench marking of your TOTAL returns AFTER taxes vs. the appropriate mixture of passive index funds, how do you know if you are doing good or bad?

Your strategy has some very objective headwinds (3 separate costs) that need to be overcome before you come ahead long term. I am highly skeptical but my post isn't to argue with you, but for others. This is similar to the post I did about Betterment a couple of days ago where again there was a discussion that perhaps paying them (Betterment) 0.25% extra wasn't a big deal because of gains they could provide you like hand holding on asset allocation and TLH.

If the expected returns from stocks or bonds was 10%, none of this would matter. We live in a low interest, low growth world where stocks may only deliver 2-5% and bonds may deliver 0-2%. If in that environment, one starts losing 1% to costs and another up to 1% in extra taxation, it is hard to get any reasonable investing gains..that's why I would argue against even a 0.25-0.3% fees at Betterment or Vanguard advisors let alone even higher ones at individual advisors.

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Re: On Buying Used Cars and Using a Financial Advisor

Post by Random Walker » Thu Mar 09, 2017 9:19 pm

Dirghatamas,
I agree with you big time on taxes. In fact the way my thinking evolved is as follows. I first became interested in tilting to small and value. I'm about 90% taxable and 10% tax advantaged/deferred. Vanguard didn't really have any tax Managed value funds. So I started to become interested in DFA for its tax Managed value funds and subsequently learned about its core funds. So now I have a combination of core funds and tax Managed value funds to obtain my desired tilts. Taxes were a big factor in my decision to go the advisor DFA route. I know one shouldn't go advisor route for DFA access alone, but DFA access was sort of my introduction to the advisor route.
All your points are excellent, and things I considered when I made my decision. It's sort of like answering questions in law school. Doesn't matter which side of the argument you fall on. What matters is that one recognizes all the relevant issues and makes a sound argument from there.

Dave

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Re: On Buying Used Cars and Using a Financial Advisor

Post by tdhg566 » Thu Mar 09, 2017 11:39 pm

Random Walker wrote:...First of all, not trying to convince anyone of anything....
maybe convince yourself that you made the right decision? As Aslan told Lucy "you can't ask what would have happened". Who knows how things would have turned out if you had not paid the advisor fee and selected different funds, or a different allocation ratio, or done TLH differently. You're clearly a smart guy. You probably know as much as your advisor. Maybe more. But you see value paying him (or her) to do some of the grunt work. No problem there. I don't mow my lawn any more, or change my oil, or clean the outside windows. I pay someone to do that. I can do it cheaper, but I don't want to. These are just choices we make because the time we spend fiddling with our money is time we can't spend elsewhere.
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Re: On Buying Used Cars and Using a Financial Advisor

Post by tdhg566 » Fri Mar 10, 2017 12:04 am

Random Walker wrote:...It's sort of like answering questions in law school. Doesn't matter which side of the argument you fall on. What matters is that one recognizes all the relevant issues and makes a sound argument from there.
Ahhhhhhh while reading this thread I couldn't put my finger on it but the discourse sounded so familiar. Then after my previous post I saw this one. And it hit me. I could have had this discussion with my daughter (Columbia Law Review, big law, etc etc etc) on any subject where she takes a different position than me, and there are many.

So why did we enter this forest in the first place? To exchange sound arguments? To confirm that all relevant issues have been recognized?
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Re: On Buying Used Cars and Using a Financial Advisor

Post by SGM » Fri Mar 10, 2017 4:57 am

Additional 1 % yearly costs would be a large sum that would be coming directly out of my retirement withdrawals. If I look at expenses vs. dividend and interest income the expenses would be more than a third of current levels of dividends. If I look at portfolio expenses in terms of total returns the fees are maybe 20% of expected yearly total returns. I TLH myself and am certainly concerned about the effects of taxes and inflation on my portfolio. There are just too many headwinds to add on higher ERs and an AUM fee to my retirement portfolio.

I prefer muni bond funds to individual muni bonds, but that is another argument.

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Re: On Buying Used Cars and Using a Financial Advisor

Post by smitcat » Fri Mar 10, 2017 7:13 am

"livesoft,
You're absolutely right. I really haven't checked because the specifics are so specific: % bonds, factor tilts, alternatives. FWIW, I do think I'd be possibly disappointed because I believe value hasn't done great until the last year or so. my overall AA would be so different, it's sort of apples to oranges comparison. We only invest looking forward. Sort of like every day we hold a stock it's like deciding to buy it again today at its given price. Looking forward, I would take my diversified portfolio at its price over a more TSMish portfolio.

Dave"

This is a great idea - use data to quickly compare the entire portfolio returns to a set of simple standards to get a feel for how the choices affect the outcome. The only advantage of never comparing differing choices is that you will never be disappointed in the path that you are currently on. I for one and really grateful I found this website a while back as posts like these afford a great opportunity to learn by folks who have been there and done that.

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Re: On Buying Used Cars and Using a Financial Advisor

Post by bottlecap » Fri Mar 10, 2017 7:51 am

If I ever have any of your concerns, I'll just switch to some sort of target retirement type fund. I don't need anything complicated.

Perhaps when I get too old to deal with it mentally, I'll seek an "advisor" and give him very limited parameters to work with. I'm sure the advisor would just as happily charge me a AUM fee then as now.

JT

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Re: On Buying Used Cars and Using a Financial Advisor

Post by bikechuck » Fri Mar 10, 2017 9:23 am

I do not use a paid advisor though I do check in once a year or so for a discussion with Lincoln Financial who runs the retirement program where I work and with an advisor from TIAA where I have funds from a previous retirement plan. There is no charge for reviewing my situation with Lincoln or TIAA though I am sure that my employers compensated them for running our programs.

I have received better advice from my TIAA advisor than from Lincoln and I have implemented some of his suggestions with respect to my portfolio. He is a good listener, offers good suggestions and has never pushed me to do anything at any time.

The biggest area where I could use some help and have some uncertainty is coming up with a withdrawal strategy as my spousal unit and I plan to retire later this calendar year. The area where I need help is not so much how much to withdraw as which assets to deplete first, second, third etc. I want to do this in a thoughtful manner while taking advantage of Roth conversions to the extent possible.

I am a bit hampered because approx. 90% of my assets are in pre tax investments. Still I have some unique things (that I consider Bond substitutes) such as TIAA traditional and a older annuity which I have not annuitized that pays a guaranteed minimum 4.5%.

I have some old company stock from a previous employer that I would like to liquidate while taking advantage of NUA provisions. I could use some help navigating that transaction.

So I would consider a one time use of a fee based advisor if I could find the right one that could give me confidence that I am making smart decisions as I cross the chasm from the accumulation to de accumulation years.

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Re: On Buying Used Cars and Using a Financial Advisor

Post by BogleMelon » Fri Mar 10, 2017 9:32 am

Random Walker wrote:Boglemelon,
it's an issue of overall net exposure to factors that drive returns .

Dave
And you know for sure that the net returns (after deducting the extra fees) are drived higher than you would get if you were just using an index fund, correct? Otherwise you wouldn't pay that extra percentage :wink:
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Re: On Buying Used Cars and Using a Financial Advisor

Post by dbr » Fri Mar 10, 2017 9:37 am

BogleMelon wrote:
Random Walker wrote:Boglemelon,
it's an issue of overall net exposure to factors that drive returns .

Dave
And you know for sure that the net returns (after deducting the extra fees) are drived higher than you would get if you were just using an index fund, correct? Otherwise you wouldn't pay that extra percentage :wink:
This has nothing to do with funds being index funds or not. There are index funds concentrated in various asset classes that are loaded on some factor or another. It might be true such funds have higher costs than a total market fund and that does need to be allowed for. The answer in general is that it appears one can drive returns higher in a useful way by tilting to factors but it is not a proven fact that these advantages will persist or that they are large enough for you, me, or someone else to care about. But all of this is discussed at great length in books, articles, and threads on various fora.

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Re: On Buying Used Cars and Using a Financial Advisor

Post by nedsaid » Fri Mar 10, 2017 9:47 am

Random Walker wrote:InvestorNewb,
My AUM fee started at 0.7% and has declined to 0.5% as I've accumulated assets. My average ER with Vanguard had been about 0.15% and with DFA funds it rose to about 0.4%. Since then I've sort of gone all in on small doses of the somewhat esoteric alternatives with very substantially higher ERs. Overall the total increase in portfolio expense, AUM + increased ERs compared to VG, is about 0.9-1%. As Bogle says, that 1% compounded is a big hurdle! But on balance I think it is highly likely I'm clearing that hurdle compared to what I would do on my own.

Dave
Not a bad deal, 0.50% advisor fee and maybe 0.40% fund fees from DFA. I remember Rick Ferri saying that he expected the excess returns from small/value tilting to about offset his advisory fees. My guess is that you are about tracking the market.

I would like access to DFA funds, the $64,000 question is how much should an investor pay for such access. I went to a couple of Merriman presentations and was very impressed but I balked at their 1.00% a year management fee. At 0.50% fee, I would think pretty hard. Gee whiz, are there any robots out there with access to DFA?
A fool and his money are good for business.

robertmcd
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Re: On Buying Used Cars and Using a Financial Advisor

Post by robertmcd » Fri Mar 10, 2017 10:22 am

FPL capital will give you DFA and AQR access for 1k a year, you can manage all the investments yourself through their institutional platform. For large portfolios this can be a very low added expense.

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goingup
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Re: On Buying Used Cars and Using a Financial Advisor

Post by goingup » Fri Mar 10, 2017 10:23 am

Random Walker wrote:I know William Bernstein once wrote that by the time an investor knows enough to choose a good advisor, he can probably manage his investments himself. I think there is a lot of truth in that, but not the whole truth.
He's said a couple conflicting things about advisors--I don't know if his thinking is evolving or he can't decide. He has said to view them as criminals, and has also said (in Investor's Manifesto) that almost everyone can benefit from having one.

I think an advisor could be helpful if:
*Spouses disagree on portfolio management. Advisor becomes coach/referee
*Investor is behaviorally unsuited--tinkers, performance chases, flees the Market
*Successors are unwilling/unable to handle finances
*Investor becomes diminished or incapacitated

Random Walker, you don't mention any of the above. Instead you are talking about having access to size and value factors, and tax management. Yet, you have no idea what your portfolio returns are. You don't mention your TLH amounts either. I'd want to know about those things if I were paying a 1% premium.

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Re: On Buying Used Cars and Using a Financial Advisor

Post by dbr » Fri Mar 10, 2017 10:26 am

goingup wrote: I think an advisor could be helpful if:
*Spouses disagree on portfolio management. Advisor becomes coach/referee
*Investor is behaviorally unsuited--tinkers, performance chases, flees the Market
*Successors are unwilling/unable to handle finances
*Investor becomes diminished or incapacitated
These things are true. The problem is to make sure the adviser actually addresses these issues while not also doing other things that cause great damage. All along the way is the constant damage of drawing a fee from the assets.

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Re: On Buying Used Cars and Using a Financial Advisor

Post by Random Walker » Fri Mar 10, 2017 10:33 am

Boglemelon,
As you know, the answer to your question is NO! :-) it's a calculated risk. The increased costs are certain. Between AUM and increased ERs about 0.9-1%. The potential benefits are only potential. But they seem to add up pretty well: increased tilt to Factors with increased expected return, improved portfolio efficiency, TLH (for me), extra layer of protection from behavioral errors, no bond fund expense ratio, access to some institutional share classes, management of bond ladder, financial advice outside portfolio management.

Dave
Last edited by Random Walker on Fri Mar 10, 2017 10:45 am, edited 1 time in total.

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Re: On Buying Used Cars and Using a Financial Advisor

Post by larryswedroe » Fri Mar 10, 2017 10:34 am

\
There are index funds concentrated in various asset classes that are loaded on some factor or another. It might be true such funds have higher costs than a total market fund and that does need to be allowed for. The answer in general is that it appears one can drive returns higher in a useful way by tilting to factors but it is not a proven fact that these advantages will persist or that they are large enough for you, me, or someone else to care about.
My first book was published in May 1998, so it's almost 20 years now. In the book there were two big themes. First, passive investing was the winner's game. We know that has played out well.

The second big theme was that size and value would likely outperform. No guarantees of course.This of course was questioned by Bogle and Bogleheads, and continues to be. We can at least look at if that happened, which I did. The table below shows the LIVE returns from June 1998 through 2016, not some backtested strategy without transactions costs and you can see that in every case both premiums were well rewarded.

A third point is that many advisors/investors who wanted to tilt based on the evidence went with low cost wins and thus used Vanguard. We believed that the somewhat higher costs of DFA's strategies would be well worth it given the higher exposures and patient trading strategies and screens used. The table below shows that in each case the DFA funds significantly outperformed similar Vanguard funds in the same asset class and importantly in international and EM Vanguard doesn't have the size and value exposures where the differences in returns is quite large. For example, in EM the ability to use size and value added close to 3-4%, and in developed markets it was from 2-5%+.

Note that even if one paid 1% for simple access (and there was no need as firms like Rick Ferri's charged as little as 25bp) you would have been well served, even assuming no value added by an advisor, even as simple as disciplined rebalancing and efficient tax loss management. Then consider that a good advisor can add value in many ways outside of the realm of investing.

The table below

Fund Annualized Return (%)

Vanguard Total Stock Market Index (VITSX) 6.4
Vanguard Value Index (VIVAX) 6.1
DFA U.S. Large Value III (DFUVX) 7.8
Vanguard Small Cap Index (VSCIX) 8.4
DFA U.S. Small (DFSTX) 9.3
DFA U.S. Micro Cap (DFSCX) 9.7
Vanguard Small Cap Value Index (VISVX) 8.9
DFA U.S. Small Value (DFSVX) 10.1

Non-U.S. Developed Equities (MSCI EAFE Index) 3.6
DFA International Value III (DFVIX) 5.6
DFA International Small (DFISX) 8.1
DFA International Small Value (DISVX) 9.3


Vanguard Emerging Markets Stock Index (VEIEX) 7.4
DFA Emerging Markets (DFEMX) 8.1
DFA Emerging Markets Value (DFEVX) 10.8
DFA Emerging Markets Small (DEMSX) 11.1

While one can debate what is likely to happen in future there is no debate, or shouldn't be, about what has happened.
Best wishes
Larry

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Re: On Buying Used Cars and Using a Financial Advisor

Post by Random Walker » Fri Mar 10, 2017 10:43 am

Going up,
I agree, there are good reasons for going advisor route that are beyond strict portfolio management: e.g. Wife, incapacitated, heirs, etc. I've experienced those benefits as well. Some of that falls in the "stuff I don't know that I don't know" category.

With regard to Bernstein. My impression is that he has evolved from someone who believes everyone can do it themselves to most everyone would benefit from advisor. I think he has said people need to be competent in 4 categories: knowledge of investing, some math, appreciation of financial history, control of stomach's potential effect on behavior. I believe over time he's come to believe only a small portion of the population has all the categories covered.

Dave

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Re: On Buying Used Cars and Using a Financial Advisor

Post by BogleMelon » Fri Mar 10, 2017 11:24 am

larryswedroe wrote:\
The table below

Fund Annualized Return (%)

Vanguard Total Stock Market Index (VITSX) 6.4
Vanguard Value Index (VIVAX) 6.1
DFA U.S. Large Value III (DFUVX) 7.8
Vanguard Small Cap Index (VSCIX) 8.4
DFA U.S. Small (DFSTX) 9.3
DFA U.S. Micro Cap (DFSCX) 9.7
Vanguard Small Cap Value Index (VISVX) 8.9
DFA U.S. Small Value (DFSVX) 10.1

Non-U.S. Developed Equities (MSCI EAFE Index) 3.6
DFA International Value III (DFVIX) 5.6
DFA International Small (DFISX) 8.1
DFA International Small Value (DISVX) 9.3


Vanguard Emerging Markets Stock Index (VEIEX) 7.4
DFA Emerging Markets (DFEMX) 8.1
DFA Emerging Markets Value (DFEVX) 10.8
DFA Emerging Markets Small (DEMSX) 11.1

While one can debate what is likely to happen in future there is no debate, or shouldn't be, about what has happened.
Best wishes
Larry
Larry, I am very confused. So the advice to "stick to low cost index fund", and that "on the long term the higher expense ratio plus all other risk for managed funds should be enough for one to not consider", is not really supported by past performance comparisons?! :confused
I thought most of the books recommended on this forum states otherwise (I have read some of them and there were studies shows that indexing is the way to go)! I also thought that this forum is all about that! I hope it is only my second language English that caused me this confusion and that you didn't really mean "active managed could be the long term winner". Otherwise, I would have to go back to square zero in learning investing :oops:
"One of the funny things about stock market, every time one is buying another is selling, and both think they are astute" - William Feather

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goingup
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Re: On Buying Used Cars and Using a Financial Advisor

Post by goingup » Fri Mar 10, 2017 11:26 am

Random Walker wrote:Going up,
I agree, there are good reasons for going advisor route that are beyond strict portfolio management: e.g. Wife, incapacitated, heirs, etc. I've experienced those benefits as well. Some of that falls in the "stuff I don't know that I don't know" category.

With regard to Bernstein. My impression is that he has evolved from someone who believes everyone can do it themselves to most everyone would benefit from advisor. I think he has said people need to be competent in 4 categories: knowledge of investing, some math, appreciation of financial history, control of stomach's potential effect on behavior. I believe over time he's come to believe only a small portion of the population has all the categories covered.

Dave
Good summation of Bernstein's criteria in Investor's Manifesto. There was a lot of hue and cry here when he suggested that, unlike Jack Bogle, not everyone could manage their own portfolio.

Sounds like you're comfortable with your decision to use an advisor. If I could, I'd probably just use Wellington and call it a day. Like you, though, we're mostly taxable, and that just wouldn't be very efficient. :beer

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Re: On Buying Used Cars and Using a Financial Advisor

Post by larryswedroe » Fri Mar 10, 2017 12:28 pm

Boglemelon
DFA's funds are entirely consistent with the winning strategy being passive, low cost funds. And while low cost indexing is a very good strategy that will virtually guarantee you will outperform the vast majority of active funds (assuming you stay the course), there are negatives of PURE indexing that can be minimized and positives that can be maximized to enhance returns. One way is to load more heavily on known factors such as size and value.

And while no one knows the future, and didn't in 1998 when I wrote the book, clearly investors who did use DFA funds and did have higher tilts benefited from higher returns. And those who followed the "Larry" strategy of high tilt and low equity allocation (using the higher expected returns to lower beta exposure without lower expected portfolio returns) also benefited greatly, especially in 2008.

Today there are lots of other funds families that use the same academic, evidenced-based approach to designing portfolios that investors can use. And I'm perfectly willing to pay a bit more for a lot more value added.

Best wishes
Larry

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Re: On Buying Used Cars and Using a Financial Advisor

Post by JFP_SF » Fri Mar 10, 2017 8:40 pm

Random Walker wrote:Going up,
I agree, there are good reasons for going advisor route that are beyond strict portfolio management: e.g. Wife, incapacitated, heirs, etc. I've experienced those benefits as well. Some of that falls in the "stuff I don't know that I don't know" category.

With regard to Bernstein. My impression is that he has evolved from someone who believes everyone can do it themselves to most everyone would benefit from advisor. I think he has said people need to be competent in 4 categories: knowledge of investing, some math, appreciation of financial history, control of stomach's potential effect on behavior. I believe over time he's come to believe only a small portion of the population has all the categories covered.

Dave
The above points are spot on.

I use an advisor, because left to my own devices I tend to tinker too much, and I also have a very low tolerance for losses. It also takes the onus off me to discuss investing strategy with my wife (who has her own strong opinions) and kids. My compromise to reduce costs was to have the advisor manage only a portion of my portfolio, and advise us on the rest (fee free).

Random Walker
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Re: On Buying Used Cars and Using a Financial Advisor

Post by Random Walker » Sat Mar 11, 2017 12:27 am

JFP_SF,
Sounds like you're an outstanding negotiator :-)
I too would probably tinker too much left to my own devices or possibly be frozen in inaction when some action is reasonable: like taking risk off the table.

Dave

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Re: On Buying Used Cars and Using a Financial Advisor

Post by kmurp » Sat Mar 11, 2017 7:24 am

bikechuck wrote:I do not use a paid advisor though I do check in once a year or so for a discussion with Lincoln Financial who runs the retirement program where I work and with an advisor from TIAA where I have funds from a previous retirement plan. There is no charge for reviewing my situation with Lincoln or TIAA though I am sure that my employers compensated them for running our programs.

I have received better advice from my TIAA advisor than from Lincoln and I have implemented some of his suggestions with respect to my portfolio. He is a good listener, offers good suggestions and has never pushed me to do anything at any time.

The biggest area where I could use some help and have some uncertainty is coming up with a withdrawal strategy as my spousal unit and I plan to retire later this calendar year. The area where I need help is not so much how much to withdraw as which assets to deplete first, second, third etc. I want to do this in a thoughtful manner while taking advantage of Roth conversions to the extent possible.

I am a bit hampered because approx. 90% of my assets are in pre tax investments. Still I have some unique things (that I consider Bond substitutes) such as TIAA traditional and a older annuity which I have not annuitized that pays a guaranteed minimum 4.5%.

I have some old company stock from a previous employer that I would like to liquidate while taking advantage of NUA provisions. I could use some help navigating that transaction.

So I would consider a one time use of a fee based advisor if I could find the right one that could give me confidence that I am making smart decisions as I cross the chasm from the accumulation to de accumulation years.
Maybe pay for a consultation with an accountant. Might be money well spent to set up a tax friendly plan.

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Re: On Buying Used Cars and Using a Financial Advisor

Post by Random Walker » Sat Mar 11, 2017 8:21 am

In my personal experience with a very small sample size, I've been very disappointed in accountant's knowledge of investing. Perhaps any reason for a separate independent financial advisor. An advisor with a CPA can be very helpful.

Dave

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Re: On Buying Used Cars and Using a Financial Advisor

Post by tibbitts » Sat Mar 11, 2017 10:49 am

Random Walker wrote:In my personal experience with a very small sample size, I've been very disappointed in accountant's knowledge of investing. Perhaps any reason for a separate independent financial advisor. An advisor with a CPA can be very helpful.

Dave
You mean an FA being a CPA, or working with one? Honestly I think it would be pretty difficult to be an FA without being both a CPA and a JD. You'd either have to hold those designations yourself or have someone who does constantly available for every meeting or conference call. But then Bogleheads would still only pay .1% (or less) for that.

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Re: On Buying Used Cars and Using a Financial Advisor

Post by dbr » Sat Mar 11, 2017 10:55 am

tibbitts wrote:
Random Walker wrote:In my personal experience with a very small sample size, I've been very disappointed in accountant's knowledge of investing. Perhaps any reason for a separate independent financial advisor. An advisor with a CPA can be very helpful.

Dave
You mean an FA being a CPA, or working with one? Honestly I think it would be pretty difficult to be an FA without being both a CPA and a JD. You'd either have to hold those designations yourself or have someone who does constantly available for every meeting or conference call. But then Bogleheads would still only pay .1% (or less) for that.
I doubt there is an FA anywhere with both CPA and JD qualifications. But that is just the point, isn't it?

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Re: On Buying Used Cars and Using a Financial Advisor

Post by letsgobobby » Sat Mar 11, 2017 11:13 am

nedsaid wrote:
Random Walker wrote:InvestorNewb,
My AUM fee started at 0.7% and has declined to 0.5% as I've accumulated assets. My average ER with Vanguard had been about 0.15% and with DFA funds it rose to about 0.4%. Since then I've sort of gone all in on small doses of the somewhat esoteric alternatives with very substantially higher ERs. Overall the total increase in portfolio expense, AUM + increased ERs compared to VG, is about 0.9-1%. As Bogle says, that 1% compounded is a big hurdle! But on balance I think it is highly likely I'm clearing that hurdle compared to what I would do on my own.

Dave
Not a bad deal, 0.50% advisor fee and maybe 0.40% fund fees from DFA. I remember Rick Ferri saying that he expected the excess returns from small/value tilting to about offset his advisory fees. My guess is that you are about tracking the market.

I would like access to DFA funds, the $64,000 question is how much should an investor pay for such access. I went to a couple of Merriman presentations and was very impressed but I balked at their 1.00% a year management fee. At 0.50% fee, I would think pretty hard. Gee whiz, are there any robots out there with access to DFA?
I like DFA, too. I especially like not paying an advisor fee in my Utah 529.

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Re: On Buying Used Cars and Using a Financial Advisor

Post by zaboomafoozarg » Sat Mar 11, 2017 1:06 pm

nedsaid wrote:Gee whiz, are there any robots out there with access to DFA?
I wish. I'd probably pay up .25% for such a robot.

I've heard that fee-only advisors like FPL Capital and Cardiff Park can make DFA funds accessible for pretty low percentage, provided you have enough money invested. FPL Capital's website says they charge between $1k and $5k a year based on services used, and Cardiff Park is $3k to $10k.

So I could probably get my desired .25% if I had $2M invested at FPL Capital. Ah well, I guess I have (more than a) few years of saving left to pull that off :D

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