Why You Still Can’t Trust Your Financial Adviser

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skepticalobserver
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Why You Still Can’t Trust Your Financial Adviser

Post by skepticalobserver » Wed Jun 07, 2017 7:44 am

From Bloomberg, https://www.bloomberg.com/news/features ... s-multiply

FAs are very good at one thing: separating you from your money

Discuss

Rwsavory
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Re: Why You Still Can’t Trust Your Financial Adviser

Post by Rwsavory » Wed Jun 07, 2017 7:59 am

Coloring with such a broad brush is not entirely fair. Our FA's have done a good job for us over the long haul. We also have self-managed, low expense accounts. A lot of folks don't have the knowledge and capability to do that. And if a financial advisor encourages them to invest and keeps them from doing something monumentally stupid, it's probably worth it to them.

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Re: Why You Still Can’t Trust Your Financial Adviser

Post by David Jay » Wed Jun 07, 2017 8:26 am

Rwsavory wrote:Coloring with such a broad brush is not entirely fair. Our FA's have done a good job for us over the long haul. We also have self-managed, low expense accounts. A lot of folks don't have the knowledge and capability to do that. And if a financial advisor encourages them to invest and keeps them from doing something monumentally stupid, it's probably worth it to them.
But it's definitely worth it to the FA.
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David Jay
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Re: Why You Still Can’t Trust Your Financial Adviser

Post by David Jay » Wed Jun 07, 2017 8:31 am

From the article:
Each time, Shaffer did her own research. She took classes, pored over dense account statements, and generally did the work she was paying her adviser for. “You have to keep watching everything".
As has been said many times on BH: "When you know enough to choose a good FA, you no longer need one."
Last edited by David Jay on Wed Jun 07, 2017 8:49 am, edited 1 time in total.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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Re: Why You Still Can’t Trust Your Financial Adviser

Post by amateurnovice » Wed Jun 07, 2017 8:42 am

If you're lucky enough to fall into some cash and/or happen to have a spouse that doesn't have a clue about money and you might, ya know, die someday and leave it to them, a trustworthy FA for them to know in person is a good thing. Scout it out, find a good one with a solid reputation and a guiding light investment philosophy, and negotiate the fee. Gives some peace of mind for when the inevitable happens.

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Re: Why You Still Can’t Trust Your Financial Adviser

Post by Vanguard Fan 1367 » Wed Jun 07, 2017 8:45 am

David Jay wrote:From the article:
Each time, Shaffer did her own research. She took classes, pored over dense account statements, and generally did the work she was paying her adviser for. “You have to keep watching everything.
As has been said many times on BH: "When you know enough to choose a good FA, you no longer need one."
Great quote!! I am sorry it took me so long to run into the John Bogle philosophy, but better late than never. I certainly was lost and searching for many years.

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Re: Why You Still Can’t Trust Your Financial Adviser

Post by BogleMelon » Wed Jun 07, 2017 8:53 am

amateurnovice wrote:If you're lucky enough to fall into some cash and/or happen to have a spouse that doesn't have a clue about money and you might, ya know, die someday and leave it to them, a trustworthy FA for them to know in person is a good thing. Scout it out, find a good one with a solid reputation and a guiding light investment philosophy, and negotiate the fee. Gives some peace of mind for when the inevitable happens.
If I die, my wife knows that she has to consult my only FA that I trust. The best part that this FA doesn't charge a penny.
My FA firm is called Bogleheads.org
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Re: Why You Still Can’t Trust Your Financial Adviser

Post by neurosphere » Wed Jun 07, 2017 8:54 am

Rwsavory wrote:Coloring with such a broad brush is not entirely fair. Our FA's have done a good job for us over the long haul. We also have self-managed, low expense accounts. A lot of folks don't have the knowledge and capability to do that. And if a financial advisor encourages them to invest and keeps them from doing something monumentally stupid, it's probably worth it to them.
But if one needs help not doing something monumentally stupid, then one also does not know enough to know that they have hired a monumentally stupid advisor, or that the advisor has suggested something equally monumental.

One the other hand, there are some very good ways to minimize the chances of having a bad advisor or accepting bad advice. But it involves education and legwork (and perhaps additional costs) on the part of the client. For example, one can get a plan of action from one advisor, and then pay another advisor simply to review the plan and give an opinion. In that way, one can get some advise on whether it's reasonable. Or one can get opinions on the plan on Bogleheads for example, for free.

But you can imagine a case where one advisor suggests a bad whole life policy, and the client goes for a second opinion. And that second advisor says it's HORRIBLE advice...because he has a BETTER whole life plan he wants to sell you. And now it's been confirmed that whole life is a great thing to own. :D
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Re: Why You Still Can’t Trust Your Financial Adviser

Post by sschullo » Wed Jun 07, 2017 9:14 am

Vanguard Fan 1367 wrote:
David Jay wrote:
As has been said many times on BH: "When you know enough to choose a good FA, you no longer need one."
Great quote!!
A good FI may be helpful on the psychological side. Many people have the knowledge and skills to set up a great plan but bail when the markets get shaky. Semi knowledgeable investors have not yet experienced a decline in their portfolio because they have misjudged their risk tolerance.
Public School K-12 Educators: "Ask NOT what your annuity sales person can do for you, ask what you can do to be a Do-It-Yourselfer (DIY)."

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Re: Why You Still Can’t Trust Your Financial Adviser

Post by phisher4 » Wed Jun 07, 2017 10:01 am

If your FA could consistently beat the S&P, he wouldn't need to work for very long.

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Re: Why You Still Can’t Trust Your Financial Adviser

Post by TheTimeLord » Wed Jun 07, 2017 10:05 am

skepticalobserver wrote:From Bloomberg, https://www.bloomberg.com/news/features ... s-multiply

FAs are very good at one thing: separating you from your money

Discuss
There are lots of flat fee advisers that really have no motivation from a financial perspective to do anything but to give you solid advice.
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nedsaid
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Re: Why You Still Can’t Trust Your Financial Adviser

Post by nedsaid » Wed Jun 07, 2017 10:06 am

I believe that most investors need good financial advice. There are two fundamental questions that need to be asked in the search for that advice. Who can I trust? What is good financial advice worth?

A big problem is that no one can be knowledgeable about everything, even in the arena of investing. I have done taxes on the side for years, but I know what I know and know what I don't know. Over the years, I have sent people on to someone with more knowledge and experience. Fortunately, I am a good researcher and we have a place we can send written questions to experts.

What I am trying to say is that being a bit wrong can have negative consequences for an investment advisor's client. One area that I can think of is in the area of estate planning. Another area is tax planning. A few key details that a client doesn't tell an advisor can completely change the advice.

Even if you get a trustworthy and knowledgeable advisor, they can't know everything. Everyone has gaps in their knowledge. Even with advice, a client really should do some legwork and research on their own. It goes back to the old saying that nobody knows more about your life than you do.

As Harry Truman's famous plaque on his desk said, "The buck stops here." As a client, the ultimate responsibility for my portfolio is still mine. What I expect is good information and advice but the decisions are still mine to make.
A fool and his money are good for business.

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Re: Why You Still Can’t Trust Your Financial Adviser

Post by David Jay » Wed Jun 07, 2017 12:22 pm

sschullo wrote:
Vanguard Fan 1367 wrote:
David Jay wrote:
As has been said many times on BH: "When you know enough to choose a good FA, you no longer need one."
Great quote!!
A good FI may be helpful on the psychological side. Many people have the knowledge and skills to set up a great plan but bail when the markets get shaky. Semi knowledgeable investors have not yet experienced a decline in their portfolio because they have misjudged their risk tolerance.
Same point as above: How do you know if you have a good advisor?

I have read so many threads here on BH in recent months of individuals who have been put in horribly inappropriate "investments" by their so called "financial planner", usually working for XXX (insert name of choice here) Life Insurance Company. Index annuities inside of Roth accounts. Whole Life as a college savings plan. It goes on and on.

A Wall Street analyst of insurance companies wrote a few months ago that the fiduciary rule could cut sales of annuities by a third. A third! So implicitly, one third of all annuities sold in this country aren't in the client's best interest.

[edit] ...and that is just inside "retirement" accounts where the fiduciary rule will apply, so it is far more than 1/3
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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Re: Why You Still Can’t Trust Your Financial Adviser

Post by neurosphere » Wed Jun 07, 2017 12:51 pm

David Jay wrote: I have read so many threads here on BH in recent months of individuals who have been put in horribly inappropriate "investments" by their so called "financial planner", usually working for XXX (insert name of choice here) Life Insurance Company. Index annuities inside of Roth accounts. Whole Life as a college savings plan. It goes on and on.

A Wall Street analyst of insurance companies wrote a few months ago that the fiduciary rule could cut sales of annuities by a third. A third! So implicitly, one third of all annuities sold in this country aren't in the client's best interest.

[edit] ...and that is just inside "retirement" accounts where the fiduciary rule will apply, so it is far more than 1/3
Yeah, but I've seen several advisors pooh-pooh the advantages of 401ks and Roth IRAs in order to get more dollars into annuities or whole life. So there are ways around that. :x

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Re: Why You Still Can’t Trust Your Financial Adviser

Post by amateurnovice » Wed Jun 07, 2017 2:37 pm

BogleMelon wrote:
amateurnovice wrote:If you're lucky enough to fall into some cash and/or happen to have a spouse that doesn't have a clue about money and you might, ya know, die someday and leave it to them, a trustworthy FA for them to know in person is a good thing. Scout it out, find a good one with a solid reputation and a guiding light investment philosophy, and negotiate the fee. Gives some peace of mind for when the inevitable happens.
If I die, my wife knows that she has to consult my only FA that I trust. The best part that this FA doesn't charge a penny.
My FA firm is called Bogleheads.org
That's a great singular anecdote out of the hundreds of millions of potential investors. Gotta have the ability to ask the right questions and the ability to ignore trolls. I'm talking more about people who will pay for someone to reassure them and can leave the need to be right to someone whose qualified to do so.

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Re: Why You Still Can’t Trust Your Financial Adviser

Post by Johnnie » Wed Jun 07, 2017 4:28 pm

There is a desperate need for good advice for regular people trying to survive in a post-pension 401(k) world, and it's a total minefield. Timelord said there are lots of flat-fee advisors out there, but I'm not so sure there are, and as with all professional services you usually get what you pay for.

Barry Ritholtz did a podcast with William Sharpe recently, he of the Sharpe Ratio fame, who among other things described his big project in retirement, trying to solve problems and help people in the distribution phase, as his earlier work helped those trying to accumulate. He has a new free e-book on the subject, "Retirement Income Scenario Matrices," that doesn't appear targeted at the grass roots - but maybe in his uber-wonk's mind he thinks it is. :wink: It looks perfect for Bogleheads though (link below).

Paul Merriman is another experienced professional spending his retirement trying to make things better for the little guy. His free e-book "Get Smart or Get Screwed: How To Select The Best and Get The Most From Your Financial Advisor" is right on target for this thread!

I have immense respect for such efforts, because I see carnage everywhere I look in this arena. :(


http://ritholtz.com/2017/06/mib-bill-sh ... sing-risk/

https://web.stanford.edu/~wfsharpe/
http://web.stanford.edu/~wfsharpe/RISMAT/

http://paulmerriman.com/get-smart-get-s ... -download/

~~~~~~~~~~~

ETA, here's an excerpt from the last chapter of Sharpe's new e-book:

If there is any conclusion to be reached after reading the prior twenty chapters it is this:
comprehending the range of possible future scenarios from any retirement income strategy is
very difficult indeed, and choosing one or more such strategies, along with the associated
inputs, seems an almost impossible task. At the very least, retirees will need some help.
Enter the Financial Advisor. Ideally, he or she will have a deep background in the economics of
investment and spending approaches, sufficient analytic tools to determine the ranges of likely
outcomes from different strategies, and an ability to work with clients to find approaches that
are suitable, given their situation and preferences. Moreover, the amount charged for providing
such advice should be well below its added value. Tall orders indeed.

...A common trope holds that a good Financial Advisor is like a fine family doctor (or an internal
medicine specialist or possibly a geriatric physician). Such a doctor has deep scientific
knowledge, can assess client needs, habits and willpower, is able to provide (or have provided
by others) scientific diagnoses, and can communicate results of such analyses to the client in
simple terms so that the best treatments can be applied.
While this view may be overly optimistic about many family doctors as well as financial
advisors, it can serve as an aspiration (in the non-medical sense of the term) for both.
"I know nothing."

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Re: Why You Still Can’t Trust Your Financial Adviser

Post by lostdog » Wed Jun 07, 2017 5:53 pm

If I die it states in our IPS that my wife is to contact Vanguard Personal Advisory Services and have them take over the portfolio. I trust Vanguard.
Total World Stock and Total World Bond. The simple two fund diversified portfolio. "Simplicity is the master key to financial success."

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Re: Why You Still Can’t Trust Your Financial Adviser

Post by indexonlyplease » Wed Jun 07, 2017 6:04 pm

Bernie Madoff was a very trusted Financial Advisor. Give me your money..

But there are good FA's. Like Vanguard I believe has a good people but you must invest over $500,000 dollars to get one personal FA. They are cheap at .3%.

I don't use them but it could be good for someone that does not want to manage their finances.

Or even better save a lot of money and just put all your money in a Target Dated Fund or Life Style Fund and manage nothing for free.

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Re: Why You Still Can’t Trust Your Financial Adviser

Post by Artsdoctor » Wed Jun 07, 2017 6:18 pm

lostdog wrote:If I die it states in our IPS that my wife is to contact Vanguard Personal Advisory Services and have them take over the portfolio. I trust Vanguard.
Yes, very good planning. Although we'd all like to believe that we'll age with a perfect sharp mind, life doesn't always work out like that. Financial advisors can indeed be helpful, but my plan is to use Vanguard if I am (or my spouse is) no longer able to make those sharp decisions.

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Re: Why You Still Can’t Trust Your Financial Adviser

Post by lostdog » Wed Jun 07, 2017 6:23 pm

Artsdoctor wrote:
lostdog wrote:If I die it states in our IPS that my wife is to contact Vanguard Personal Advisory Services and have them take over the portfolio. I trust Vanguard.
Yes, very good planning. Although we'd all like to believe that we'll age with a perfect sharp mind, life doesn't always work out like that. Financial advisors can indeed be helpful, but my plan is to use Vanguard if I am (or my spouse is) no longer able to make those sharp decisions.
Artsdoctor,

Thanks you for your input on my reply. I haven't thought about the "sharp mind" perspective. I will add this to our IPS. :D
Total World Stock and Total World Bond. The simple two fund diversified portfolio. "Simplicity is the master key to financial success."

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Re: Why You Still Can’t Trust Your Financial Adviser

Post by CedarWaxWing » Wed Jun 07, 2017 6:39 pm

BogleMelon wrote:
amateurnovice wrote:If you're lucky enough to fall into some cash and/or happen to have a spouse that doesn't have a clue about money and you might, ya know, die someday and leave it to them, a trustworthy FA for them to know in person is a good thing. Scout it out, find a good one with a solid reputation and a guiding light investment philosophy, and negotiate the fee. Gives some peace of mind for when the inevitable happens.
If I die, my wife knows that she has to consult my only FA that I trust. The best part that this FA doesn't charge a penny.
My FA firm is called Bogleheads.org
1+

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Re: Why You Still Can’t Trust Your Financial Adviser

Post by Lieutenant.Columbo » Wed Jun 07, 2017 9:11 pm

BogleMelon wrote:If I die, my wife knows that she has to consult my only FA that I trust...
up until this point, what came to mind first was "what if FA dies too?', and then, somehow, Hitchcock's 1985 Final Escape came to mind...
Lt. Columbo: Well, what do you know. Here I am talking with some of the smartest people in the world, and I didn't even notice!

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Re: Why You Still Can’t Trust Your Financial Adviser

Post by afan » Thu Jun 08, 2017 5:11 am

Many people need financial advice but few need investment advice. A simple 2-4 fund portfolio is fine. But the compensation models recognize that collecting a one-time hourly fee does not go very far for the advisor. Asset under management and commission fees generate far more revenue. So that is what most clients get offered.
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Re: Why You Still Can’t Trust Your Financial Adviser

Post by sschullo » Thu Jun 08, 2017 6:54 am

David Jay wrote:
sschullo wrote:
Vanguard Fan 1367 wrote:
David Jay wrote:
As has been said many times on BH: "When you know enough to choose a good FA, you no longer need one."
Great quote!!
A good FI may be helpful on the psychological side. Many people have the knowledge and skills to set up a great plan but bail when the markets get shaky. Semi knowledgeable investors have not yet experienced a decline in their portfolio because they have misjudged their risk tolerance.
Same point as above: How do you know if you have a good advisor?

I have read so many threads here on BH in recent months of individuals who have been put in horribly inappropriate "investments" by their so called "financial planner", usually working for XXX (insert name of choice here) Life Insurance Company. Index annuities inside of Roth accounts. Whole Life as a college savings plan. It goes on and on.

A Wall Street analyst of insurance companies wrote a few months ago that the fiduciary rule could cut sales of annuities by a third. A third! So implicitly, one-third of all annuities sold in this country aren't in the client's best interest.

[edit] ...and that is just inside "retirement" accounts where the fiduciary rule will apply, so it is far more than 1/3
"Good" Question!

A "good" FA:
1. He or she is a CFA that signs the fiduciary oath upon meeting client for the first time voluntary, and a member of Garrett Planning Network, or NAPFA.
2. The adviser has the identical investing philosophy as Bogleheads, low costs, a broadly diversified portfolio with index funds, etc.
3. Charge Fee only, AUM (.50 or less), or a retainer.

I personally know 2 advisers who fit these requirements and they both like Vanguard and TIAA. One just only charges my friend by the hour when she needs him.

When I wrote "good" I was NOT EVER THINKING ABOUT Annuity agents. Don't get me started. I wrote two books because I got ripped off by two of them! They are totally the opposite of the above requirements!

Thus, your question is great and helped me clarify what "a good FA" actually does: The "good" description is a terribly vague adjective because, in this business of FA world, most anybody who works with the general public over their money, is "good," either good for themselves or perhaps good for the client.
Last edited by sschullo on Thu Jun 08, 2017 1:55 pm, edited 1 time in total.
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Re: Why You Still Can’t Trust Your Financial Adviser

Post by sschullo » Thu Jun 08, 2017 6:58 am

CedarWaxWing wrote:
BogleMelon wrote:
amateurnovice wrote:If you're lucky enough to fall into some cash and/or happen to have a spouse that doesn't have a clue about money and you might, ya know, die someday and leave it to them, a trustworthy FA for them to know in person is a good thing. Scout it out, find a good one with a solid reputation and a guiding light investment philosophy, and negotiate the fee. Gives some peace of mind for when the inevitable happens.
If I die, my wife knows that she has to consult my only FA that I trust. The best part that this FA doesn't charge a penny.
My FA firm is called Bogleheads.org
1+
You are very lucky.
Public School K-12 Educators: "Ask NOT what your annuity sales person can do for you, ask what you can do to be a Do-It-Yourselfer (DIY)."

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Re: Why You Still Can’t Trust Your Financial Adviser

Post by fishandgolf » Thu Jun 08, 2017 7:20 am

"Bernie Madoff was a very trusted Financial Advisor.......... HE MADE OFF WITH EVERYONE's MONEY

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Re: Why You Still Can’t Trust Your Financial Adviser

Post by David Jay » Thu Jun 08, 2017 8:22 am

sschullo wrote:
David Jay wrote:As has been said many times on BH: "When you know enough to choose a good FA, you no longer need one."
.
.
.
A "good" FA:
1. He or she is a CFA that signs the fiduciary oath upon meeting client for the first time voluntary, and a member of Garrett Planning Network, or NAPFA.
2. The adviser has the identical investing philosophy as Bogleheads, low costs, a broadly diversified portfolio with index funds, etc.
3. Charge Fee only, AUM (.50 or less), or some type of contract (?).
I think you are confirming my point, if someone knows BH principles they know enough to identify a good FA.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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Re: Why You Still Can’t Trust Your Financial Adviser

Post by an_asker » Thu Jun 08, 2017 8:42 am

Lieutenant.Columbo wrote:
BogleMelon wrote:If I die, my wife knows that she has to consult my only FA that I trust...
up until this point, what came to mind first was "what if FA dies too?', and then, somehow, Hitchcock's 1985 Final Escape came to mind...
... or retires and quits his firm without bothering to let clients know! :oops:

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Re: Why You Still Can’t Trust Your Financial Adviser

Post by sschullo » Thu Jun 08, 2017 8:44 am

David Jay wrote:
sschullo wrote:
David Jay wrote:As has been said many times on BH: "When you know enough to choose a good FA, you no longer need one."
.
.
.
A "good" FA:
1. He or she is a CFA that signs the fiduciary oath upon meeting client for the first time voluntary, and a member of Garrett Planning Network, or NAPFA.
2. The adviser has the identical investing philosophy as Bogleheads, low costs, a broadly diversified portfolio with index funds, etc.
3. Charge Fee only, AUM (.50 or less), or some type of contract (?).
I think you are confirming my point, if someone knows BH principles they know enough to identify a good FA.
I AM confirming your point, at least a major part. Thanks for bringing this up because I got distracted from my original point or I am confused by your comment. I thought you meant that if one can identify a good advisor, they know enough not to use one in the first place.

This "good" FA can help many clients stick with their plans. My point is that it's not enough to know BH principles and be unaware of the psychology of investing. It's easy to follow the BH principals when the markets are positive than when the markets crash. It's the qualitative part of investing that Jason Zweig wrote a book about. When a person knows their psychology by sticking with their BH principled plan during a major or minor crash, then they no longer need an adviser. Identification of a good FA is only the first part.
Public School K-12 Educators: "Ask NOT what your annuity sales person can do for you, ask what you can do to be a Do-It-Yourselfer (DIY)."

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Re: Why You Still Can’t Trust Your Financial Adviser

Post by David Jay » Thu Jun 08, 2017 12:03 pm

sschullo wrote:
David Jay wrote:
sschullo wrote:
David Jay wrote:As has been said many times on BH: "When you know enough to choose a good FA, you no longer need one."
.
.
.
A "good" FA:
1. He or she is a CFA that signs the fiduciary oath upon meeting client for the first time voluntary, and a member of Garrett Planning Network, or NAPFA.
2. The adviser has the identical investing philosophy as Bogleheads, low costs, a broadly diversified portfolio with index funds, etc.
3. Charge Fee only, AUM (.50 or less), or some type of contract (?).
I think you are confirming my point, if someone knows BH principles they know enough to identify a good FA.
I AM confirming your point, at least a major part. Thanks for bringing this up because I got distracted from my original point or I am confused by your comment. I thought you meant that if one can identify a good advisor, they know enough not to use one in the first place.

This "good" FA can help many clients stick with their plans. My point is that it's not enough to know BH principles and be unaware of the psychology of investing. It's easy to follow the BH principals when the markets are positive than when the markets crash. It's the qualitative part of investing that Jason Zweig wrote a book about. When a person knows their psychology by sticking with their BH principled plan during a major or minor crash, then they no longer need an adviser. Identification of a good FA is only the first part.
Okay, but I don't think you can really endorse BH principles without behavioral finance. In particular (from the 10 points of BH philosophy):

3 Never bear too much or too little risk
5 Never try to time the market
10 Stay the course

For risk I use Swedroe's construction of "Need, Ability and Willingness", which is dominated by behavioral issues. Points 5 and 10 are also behavioral.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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Re: Why You Still Can’t Trust Your Financial Adviser

Post by afan » Thu Jun 08, 2017 12:16 pm

sschullo wrote: 3. Charge Fee only, AUM (.50 or less), or some type of contract (?).
NOOOOOO!!!!!
Asset under management fees result in costs that are far too high. The advisor should no more charge an ongoing fee simply for breathing than your doctor charges you for being prepared to see you if needed. Or your lawyer charges you for being willing to do your will, when necessary.

The advisor should charge a simple hourly rate or a flat fee for a given service. After establishing a plan, one could go for many years without speaking to the advisor. There is no reason to pay an advisor ANYTHING to let your investments sit in VTI and BND. An AUM fee of 0.5% is huge. That would be $5,000 per year, every year, on a $1M portfolio. If the initial plan was worth, say $2,500 the price would be too high for even the first year. After that the advisor has nothing to do. Tt would be absurd to pay $50, let alone $5,000 for the advisor to do nothing.

It is simply not possible for any AUM fee to be justified.
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Re: Why You Still Can’t Trust Your Financial Adviser

Post by nedsaid » Thu Jun 08, 2017 1:47 pm

Even I as a do-it-yourself investor needs outside advice. We can be so cynical that we believe that everyone in the financial advice business is a crook. I believe this to be an extreme position but it is a "let the buyer beware world" and we have to understand that no one is 100% objective. The best we can do is to be well enough informed to separate the wheat from the chaff. In the past, I got advice from flawed sources but I still learned something in the process. Sometimes people really do want to help and it is short-sighted to just run them all off.
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Re: Why You Still Can’t Trust Your Financial Adviser

Post by sschullo » Thu Jun 08, 2017 1:47 pm

afan wrote:
sschullo wrote: 3. Charge Fee only, AUM (.50 or less), or some type of contract (?).
NOOOOOO!!!!!
Asset under management fees result in costs that are far too high. The advisor should no more charge an ongoing fee simply for breathing than your doctor charges you for being prepared to see you if needed. Or your lawyer charges you for being willing to do your will, when necessary.

The advisor should charge a simple hourly rate or a flat fee for a given service. After establishing a plan, one could go for many years without speaking to the advisor. There is no reason to pay an advisor ANYTHING to let your investments sit in VTI and BND. An AUM fee of 0.5% is huge. That would be $5,000 per year, every year, on a $1M portfolio. If the initial plan was worth, say $2,500 the price would be too high for even the first year. After that the advisor has nothing to do. Tt would be absurd to pay $50, let alone $5,000 for the advisor to do nothing.

It is simply not possible for any AUM fee to be justified.
I agree. Its about the expense, but that's not what's happening in the real world. I have several friends who believe they just don't know enough, and pay the AUM, at least they are not paying 1.0% which is about standard in the FA world even with so called fee only FA. You and I, and most BHs would never pay AUM or the hourly rate.
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Re: Why You Still Can’t Trust Your Financial Adviser

Post by sschullo » Thu Jun 08, 2017 1:52 pm

David Jay wrote:
sschullo wrote:
David Jay wrote:
sschullo wrote:
David Jay wrote:As has been said many times on BH: "When you know enough to choose a good FA, you no longer need one."
.
.
.
A "good" FA:
1. He or she is a CFA that signs the fiduciary oath upon meeting client for the first time voluntary, and a member of Garrett Planning Network, or NAPFA.
2. The adviser has the identical investing philosophy as Bogleheads, low costs, a broadly diversified portfolio with index funds, etc.
3. Charge Fee only, AUM (.50 or less), or some type of contract (?).
I think you are confirming my point, if someone knows BH principles they know enough to identify a good FA.
I AM confirming your point, at least a major part. Thanks for bringing this up because I got distracted from my original point or I am confused by your comment. I thought you meant that if one can identify a good advisor, they know enough not to use one in the first place.

This "good" FA can help many clients stick with their plans. My point is that it's not enough to know BH principles and be unaware of the psychology of investing. It's easy to follow the BH principals when the markets are positive than when the markets crash. It's the qualitative part of investing that Jason Zweig wrote a book about. When a person knows their psychology by sticking with their BH principled plan during a major or minor crash, then they no longer need an adviser. Identification of a good FA is only the first part.
Okay, but I don't think you can really endorse BH principles without behavioral finance. In particular (from the 10 points of BH philosophy):

3 Never bear too much or too little risk. This takes the longest to discover because it requires going through a market decline to experience and define your accurate risk tolerance.
5 Never try to time the market easy to learn not to do something stupid and it overlaps with Stay the Course, which is pure psychology.
10 Stay the course Psychology based and could be helped by a fee only FA

For risk I use Swedroe's construction of "Need, Ability and Willingness", which is dominated by behavioral issues. Points 5 and 10 are also behavioral.
Public School K-12 Educators: "Ask NOT what your annuity sales person can do for you, ask what you can do to be a Do-It-Yourselfer (DIY)."

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Re: Why You Still Can’t Trust Your Financial Adviser

Post by boglephreak » Thu Jun 08, 2017 2:08 pm

true story. the firm's partners and our financial advisors who handle the firm's 401k and certain of the partners' money (i believe under an AUM agreement, but am not 100% sure) got together last week for a social visit. the FAs were complaining about the fiduciary duty rule and how it will result in substantial litigation against FAs and their companies. i had to bite my tongue during the entire conversation, but boy do they whine. i find it interesting that we, as lawyers, have (probably) no qualms about being fiduciaries to our clients, and there are an insubstantial amount of claims related to lawyer's breaches of fiduciary duties (and none in our firm, ever), but FAs feel that they are incapable of holding themselves to teh same standard. i would think my partners would be a bit concerned about our FAs being so concerned that they would have to owe us fiduciary duties, but they apparently werent and the FAs were not concerned about us thinking about that.

that being said, i dont think all FAs are created equal. i dont think our FAs would be providing us different advice if they did owe fiduciary duties. the advice they have provided me has been good, albeit not a boglehead profile, and they have not attempted to steer me away from index funds. however, my mother's FA is not in the same boat and i wish he had owed a fiduciary duty since he seemed to do better in his commissions than she did with her annuities.

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Re: Why You Still Can’t Trust Your Financial Adviser

Post by Theoretical » Thu Jun 08, 2017 7:07 pm

(Lawyer too) I think the (legitimate) reasons why some are afraid of the rule is because they're dependent on a series of variables that are totally out of their control as to whether they did a good job. It's a lot different than most medicine or legal work, but usually the situations are clearer, within the industry.

For example, in a boom cycle, I'm making half the market return being invested in value or in a bear market, the market crashed and my portfolio got cut in half. Or the other side, imagine the herd-follower screaming about the lack of tech stocks in the late 1990s or why the whole folio isn't Small Value stocks and reits.

If they're afraid they'll be punished for the outcome, no matter what strategy they pick, it's hard to not understand why they'd be worried.

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Re: Why You Still Can’t Trust Your Financial Adviser

Post by johnra » Thu Jun 08, 2017 10:38 pm

It is fine for a bunch of folks who spend 10-20 hours per week on this financial web site, and who like and understand personal finance and math to sit around and proclaim that this stuff is obvious and easy. But personal finance is not obvious, not even for us, and most people don't enjoy it. In fact, even the seemingly simple minded three fund portfolio and asset allocation are actually quite sophisticated and most people don't appreciate what is behind them.

And, to be honest, it is very hard to find financial advisers who work hourly! This is a very facile belief on this web site that is in fact not true--they are few and hard to find!

I for one think personal financial (which I happen to like doing) is very complicated stuff!

If we want to advocate fiduciary responsibility we need to have education and create choices for people. There are not good choices.

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Re: Why You Still Can’t Trust Your Financial Adviser

Post by Nate79 » Thu Jun 08, 2017 10:44 pm

johnra wrote:It is fine for a bunch of folks who spend 10-20 hours per week on this financial web site, and who like and understand personal finance and math to sit around and proclaim that this stuff is obvious and easy. But personal finance is not obvious, not even for us, and most people don't enjoy it. In fact, even the seemingly simple minded three fund portfolio and asset allocation are actually quite sophisticated and most people don't appreciate what is behind them.

And, to be honest, it is very hard to find financial advisers who work hourly! This is a very facile belief on this web site that is in fact not true--they are few and hard to find!

I for one think personal financial (which I happen to like doing) is very complicated stuff!

If we want to advocate fiduciary responsibility we need to have education and create choices for people. There are not good choices.
Even the 3 fund portfolio is more complicated than needed. A single target date fund is perfectly fine. There is no excuse for thinking investing is difficult.

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Re: Why You Still Can’t Trust Your Financial Adviser

Post by Theoretical » Thu Jun 08, 2017 10:49 pm

The emotional/behavior side though is more complex no matter what the allocation.

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Re: Why You Still Can’t Trust Your Financial Adviser

Post by Alskar » Thu Jun 08, 2017 11:12 pm

David Jay wrote:As has been said many times on BH: "When you know enough to choose a good FA, you no longer need one."
I been on the BH forum for years and have never read that before, but I like it. +1
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Re: Why You Still Can’t Trust Your Financial Adviser

Post by capurkat » Fri Jun 09, 2017 12:07 am

afan wrote:
sschullo wrote: 3. Charge Fee only, AUM (.50 or less), or some type of contract (?).
NOOOOOO!!!!!
Asset under management fees result in costs that are far too high. The advisor should no more charge an ongoing fee simply for breathing than your doctor charges you for being prepared to see you if needed. Or your lawyer charges you for being willing to do your will, when necessary.

The advisor should charge a simple hourly rate or a flat fee for a given service. After establishing a plan, one could go for many years without speaking to the advisor. There is no reason to pay an advisor ANYTHING to let your investments sit in VTI and BND. An AUM fee of 0.5% is huge. That would be $5,000 per year, every year, on a $1M portfolio. If the initial plan was worth, say $2,500 the price would be too high for even the first year. After that the advisor has nothing to do. Tt would be absurd to pay $50, let alone $5,000 for the advisor to do nothing.

It is simply not possible for any AUM fee to be justified.
I see your point regarding the doctor visit and a lawyer writing your will - both seem transactional and likely don't require ongoing work. If you have a sore throat, you go see your doc and it turns out your have strep throat. Write the script. Done. Similarly with your will - it's a pretty big deal and it's something that will last a lifetime (literally) so in most cases, it's a one time event - maybe updates over a long period of time.

But I'm not sure if that's a true comparison to - as some have noted in this thread - a good financial advisor. There are over 80 individual financial topics that Certified Financial Planners are required to be proficient in to earn the CFP designation. Within those 80+ topics, each one on it's own has enough density to merit it's own designation - investments is but 1 of those 80.

It's easy to equate - or maybe better said - associate, "financial advisor" with "investments" because that's just been the perception for so many years. A good advisor isn't going to sit on his or her laurels waiting for something to happen - a good advisor is proactive and more of a coach than anything. Coaching from the psychological standpoint is probably 80% of what good advisors spend their time on.

Some people grew up with fabulous relationship with money - most did not. Some people are motivated to learn a new subject matter or have the time to do so - most do not. And everybody has their own value system - or what they perceive as value anyways.

After 4 or 5 annual visits to my doctor - prior to my 6th visit - doc notices an unusual pattern that he checks up on but digs into it a little deeper to find out there's an emergency...but it's something that can be fixed since we caught it in time...I'd gladly pay $5-$10k a year knowing that he's looking out for me and will be there when I really need him. The same can be said of a good advisor.

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Re: Why You Still Can’t Trust Your Financial Adviser

Post by neurosphere » Fri Jun 09, 2017 7:13 am

capurkat wrote:After 4 or 5 annual visits to my doctor - prior to my 6th visit - doc notices an unusual pattern that he checks up on but digs into it a little deeper to find out there's an emergency...but it's something that can be fixed since we caught it in time...I'd gladly pay $5-$10k a year knowing that he's looking out for me and will be there when I really need him. The same can be said of a good advisor.
I'm not sure 5-6 "well person" checkups a year with a doctor would be productive for one with average health issues.

Are you suggesting that people have portfolio reviews with an advisor 6 times a year? And with what payment method? AUM? Hourly?

At most, one could conceive of quarterly discussions:

"How are you? Any financial changes in your life? No? Ok, so I glanced at your portfolio, and there are no tax loss harvesting opportunities right now, it's not time to rebalance, and congrats on sticking with the plan and making regular contributions to your accounts and e-fund. I'll talk to you next quarter unless you have any question in the meantime."

That's a 15 minute process. Let's round up to an hour just to account for friction, setting up time to make a call, perhaps having the client send in a 401k statement or something.

How much should someone pay an advisor for what is, at MOST, 4 hours a year of time?
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes".

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Re: Why You Still Can’t Trust Your Financial Adviser

Post by capurkat » Fri Jun 09, 2017 8:04 am

Your response is correct and I would have to agree, meeting that many times in one year would be too much. What I was trying to illustrate were annual visits - although I didn't make that entirely clear, but none the less.

You're also correct in that the physical time spent speaking/meeting with someone during the portfolio review isn't all that time consuming - it's the 3 months leading up to a quarterly review (which I think we both agree may even be too often), it's providing data/information to support both sides of the coin for keeping status quo or diverging from a plan that's been in place, factoring in variables that would affect future outcomes and ultimately being able to digest all of that into a conversation that is both productive, transparent, & understandable.

My point was also to illustrate that good advice around your entire financial picture is more than just an investment check: it's coordinating with someone's accountant in the middle of the year to make sure they have enough time to adjust accordingly with enough time before the end of the year, coaching someone through the prospect of leaving a corporate job for entrepreneurship making sure their cash flow/debt management is under control, having an unbiased third party if a couple have different vantage points/prior experience with money.

AUM, hourly, flat fee, monthly/quarterly retainer - all viable ways to pay an advisor, all with some degree of "conflict." What matters the most is a) do you see value in the services for the cost b) are those costs crystal clear and do you understand them c) is the advisor a fiduciary 100% of the time?

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Re: Why You Still Can’t Trust Your Financial Adviser

Post by neurosphere » Fri Jun 09, 2017 8:11 am

capurkat wrote:Your response is correct and I would have to agree, meeting that many times in one year would be too much. What I was trying to illustrate were annual visits - although I didn't make that entirely clear, but none the less....
Ah, yes, I see. A series of annual visits. Sorry. Not several visits in a year.

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Re: Why You Still Can’t Trust Your Financial Adviser

Post by sschullo » Fri Jun 09, 2017 8:12 am

capurkat wrote:
Within those 80+ topics, each one on it's own has enough density to merit it's own designation - investments is but 1 of those 80.
IF people could discover the investing process alone, perhaps many of those other topics might be less intimidating. I found that to be true for me.

For examples:
Learning about the indexing strategy and Roth IRA are directly related to reducing my taxes.
Discovering how to invest and manage finances automatically clarifies (at least it did for me) who in my family can handle a lump sum in my trust and will, or giving money to certain members because they also know how to manage money. It's usually the family members who don't need the money vs. the ones that do, who cannot handle a lump sum. So I set my trust up for a monthly payout for those who cannot handle a lump sum.

I have a favor to ask Capurkat, where can I find a list of those 80 topics? Has anybody written an article or blog post about this idea?
If not, I want to explore the idea that learning the investing process alone helps people make sense of many of those other 80 topics.

thanks,
Steve
Public School K-12 Educators: "Ask NOT what your annuity sales person can do for you, ask what you can do to be a Do-It-Yourselfer (DIY)."

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Re: Why You Still Can’t Trust Your Financial Adviser

Post by David Jay » Fri Jun 09, 2017 8:19 am

Alskar wrote:
David Jay wrote:As has been said many times on BH: "When you know enough to choose a good FA, you no longer need one."
I been on the BH forum for years and have never read that before, but I like it. +1
Credit where credit is due, I think I first saw this comment from PJW

Tracing it back, here is Taylor Latimore quoting Christine Benz quoting Bill Bernstein:
viewtopic.php?t=61851#p851100

So I will credit Bernstein.
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Re: Why You Still Can’t Trust Your Financial Adviser

Post by NotWhoYouThink » Fri Jun 09, 2017 8:22 am

It's easy to equate - or maybe better said - associate, "financial advisor" with "investments" because that's just been the perception for so many years. A good advisor isn't going to sit on his or her laurels waiting for something to happen - a good advisor is proactive and more of a coach than anything. Coaching from the psychological standpoint is probably 80% of what good advisors spend their time on.
Is psychology one of the 80 items?

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Re: Why You Still Can’t Trust Your Financial Adviser

Post by Meg77 » Fri Jun 09, 2017 8:40 am

afan wrote:Many people need financial advice but few need investment advice. A simple 2-4 fund portfolio is fine. But the compensation models recognize that collecting a one-time hourly fee does not go very far for the advisor. Asset under management and commission fees generate far more revenue. So that is what most clients get offered.
This is true, and it's the reason that I have never become a financial planner despite that being my passion and a profession I'm qualified to enter (I have my Certified Financial Planner Designation, I majored in finance, and I have worked in financial services for over a decade). I have no interest in managing investments for clients or picking fund managers, but it's difficult-to-impossible to scale a business where you charge by the hour or charge a flat fee per financial plan. Attorneys have figured it out, but their business model and margins are under siege too because of software and global competition - and anyway people aren't comfortable paying hundreds of dollars an hour to a financial planner the way they are used to for a good attorney.

Many financial advisors and firms are experimenting with a retainer or hourly fee model, but the fact is that clients don't like it. Those starting out can't afford it and don't see the benefit, and those with money like their fees being hidden via AUM charges layered onto a relatively small fund expense ratio. Ask them to write you a check for your advice and they balk. People aren't accustomed to paying for financial advice that way, and even if they go comfortable with it and understood the upside, a planner would have to have hundreds of clients to make a living at rates people are willing to pay - and with that many clients it's unlikely you could serve them all well.

Once I've reached FI I'd like to become a financial planner when I no longer need a paycheck. Heck, I hang out on Bogleheads answering questions for hours for free already. The fact is though, it's hard to make money helping those who need the most help and without selling a product.
"An investment in knowledge pays the best interest." - Benjamin Franklin

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Re: Why You Still Can’t Trust Your Financial Adviser

Post by goingup » Fri Jun 09, 2017 8:44 am

I've probably seen hundreds of portfolios posted here by investors fleeing their advisors. The advisors have been with Merrill, Ed Jones, Wells Fargo, Raymond James, Ameriprise, etc. Every single portfolio was a ridiculous tangled mess. Dozens, sometimes hundreds of stocks and funds. No tax efficient placement. No discernible strategy.

Bad portfolios were just the beginning. Then we learn about whole policies and the variable annuities that have been sold to our poor refugee. Some people have related how the advisor had told them to not contribute to their 401K--that it was better just to buy a variable annuity.

Good advisors are the minority. I have no idea how the average person could find one. The best idea for most people is to contribute as much as possible to their 401K/403B in a target or blended fund. Fund a Roth too. Any funds beyond that just put into a taxable account at Vanguard. It's not hard at all. You just need a little common sense and a bit of self-discipline.

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Re: Why You Still Can’t Trust Your Financial Adviser

Post by capurkat » Fri Jun 09, 2017 9:01 am

sschullo wrote:
capurkat wrote:
Within those 80+ topics, each one on it's own has enough density to merit it's own designation - investments is but 1 of those 80.
IF people could discover the investing process alone, perhaps many of those other topics might be less intimidating. I found that to be true for me.

For examples:
Learning about the indexing strategy and Roth IRA are directly related to reducing my taxes.
Discovering how to invest and manage finances automatically clarifies (at least it did for me) who in my family can handle a lump sum in my trust and will, or giving money to certain members because they also know how to manage money. It's usually the family members who don't need the money vs. the ones that do, who cannot handle a lump sum. So I set my trust up for a monthly payout for those who cannot handle a lump sum.

I have a favor to ask Capurkat, where can I find a list of those 80 topics? Has anybody written an article or blog post about this idea?
If not, I want to explore the idea that learning the investing process alone helps people make sense of many of those other 80 topics.

thanks,
Steve
No problem and my number was wrong on the dedicated topics, it's 72 sorry about that. Periodically, this get's reviewed and updated based on feedback from all over - industry, consumers, professionals, etc.

Here is a link to the list of CFP's Principal Knowledge Topics: http://www.cfp.net/docs/default-source/ ... f?sfvrsn=9

The most in-depth and recognized blogger on all topics within Financial Planning is Micheal Kitces http://www.kitces.com So full of topics, ideas, and actionable steps for both DIY & advisers. You may already know of the resource but it's still worth sharing.

There are a few topics - quite a few actually - that are not part of these requirements but should be: non-traditional couples (LGBT), working with divorce, student loan debt, and behavioral finance (someone asked if psychology was one of the topics and I'm not sure how to link or include that here - but unfortunately, it's not and it should be).

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