Why is 16 the magic number for FAs?

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ChinchillaWhiplash
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Why is 16 the magic number for FAs?

Post by ChinchillaWhiplash » Sun Mar 18, 2018 12:25 pm

I've noticed that a lot of posts say their financial advisers recommend or if they are using one already have 16 fund portfolios. Our FA had us set up with 16 funds in an individual 401k too. Was wondering if this was just a coincidence or is there some reasoning behind it? Our FA is a DFA guy, but had us in some other company's funds too. Some were front loaded, some had 12-b-1 fees, some with ER > 1.0%. Had a good bit of overlap in some funds. Got out and self directing in all index funds that have low ER, by the way. Just curious about this.

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Pajamas
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Re: Why is 16 the magic number for FAs?

Post by Pajamas » Sun Mar 18, 2018 12:35 pm

I'm guessing it's because that makes it certainly seem complicated enough that their clients don't want to do it themselves and think they are getting something for the fees they pay, but it's not actually so complicated as to cause too much work for the financial "advisor". Sort of the sweet spot from their viewpoint.

Also probably looks good as a 4 x 4 grid in the graphics and might even have something to do with the labels on the grid.

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Re: Why is 16 the magic number for FAs?

Post by nedsaid » Sun Mar 18, 2018 12:43 pm

If I spent a couple thousand dollars for a guy to tell me that all I needed were three index funds, I would be furious. Not mad at getting sound financial advice but mad about paying so much for something I could easily have done myself. This is just good human psychology, the advisor wants you to leave with the feeling that you got your money's worth.
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Re: Why is 16 the magic number for FAs?

Post by JoeRetire » Sun Mar 18, 2018 2:52 pm

ChinchillaWhiplash wrote:
Sun Mar 18, 2018 12:25 pm
Our FA had us set up with 16 funds in an individual 401k too. Was wondering if this was just a coincidence or is there some reasoning behind it?
16 asset classes/market sectors.
Our FA is a DFA guy, but had us in some other company's funds too. Some were front loaded, some had 12-b-1 fees, some with ER > 1.0%. Had a good bit of overlap in some funds.
That is odd.

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Re: Why is 16 the magic number for FAs?

Post by Jack FFR1846 » Sun Mar 18, 2018 3:02 pm

I just listened to Ric Edelman today and he mentioned to a caller the 16 classes. Then I went to his site for fun and did the GPS tool and it comes up with 20 classes, several of which are 1% or 2% of portfolio.

I'm sure the premise is that a fund is chosen for each class but I believe the underlying reason is to scare us into thinking that it's too complex for mere mortals to manage.
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Re: Why is 16 the magic number for FAs?

Post by Sandtrap » Sun Mar 18, 2018 3:04 pm

nedsaid wrote:
Sun Mar 18, 2018 12:43 pm
If I spent a couple thousand dollars for a guy to tell me that all I needed were three index funds, I would be furious. Not mad at getting sound financial advice but mad about paying so much for something I could easily have done myself. This is just good human psychology, the advisor wants you to leave with the feeling that you got your money's worth.
+1
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Re: Why is 16 the magic number for FAs?

Post by Rick Ferri » Sun Mar 18, 2018 3:44 pm

Here is your answer:

1. 16 funds or more makes a portfolio nice and complicated.
2. Complexity requires an adviser because you don’t want to do this alone.
3. Keeping the portfolio complex is known in the industry as “adviser job security”.

In truth, 16 funds is at least 12 funds to many. You can do it with 4 different funds, or 3, or 2, or even one balanced index fund.
Last edited by Rick Ferri on Sun Mar 18, 2018 3:47 pm, edited 1 time in total.
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Re: Why is 16 the magic number for FAs?

Post by PFInterest » Sun Mar 18, 2018 3:46 pm

Coincidence.
Of the Illuminati....

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Re: Why is 16 the magic number for FAs?

Post by john4546 » Sun Mar 18, 2018 4:05 pm

I think wealth management is a dying industry, sort of like horse buggy whip makers in the 1920's.

I think John Bogle in one of his books even recommends that young people choosing a career avoid it and do something more substantive either in business or other professional career.

Investment management is not really that hard - take 15 minutes of searching on the internet and Amazon, find this blog and the recommended books, choose a 3- fund vanguard portfolio allocation (even easier, use a target retirement date or LifeStrategy fund), then boom! - your done. The 3 fund portfolio works just as well for a million dollar portfolio as it does for a ten thousand dollar portfolio. Simple and easy to understand. Only really lazy ignoramuses or old people use a portfolio advisor these days.

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Re: Why is 16 the magic number for FAs?

Post by deltaneutral83 » Sun Mar 18, 2018 4:20 pm

john4546 wrote:
Sun Mar 18, 2018 4:05 pm
I think wealth management is a dying industry, sort of like horse buggy whip makers in the 1920's.

I think John Bogle in one of his books even recommends that young people choosing a career avoid it and do something more substantive either in business or other professional career.

Investment management is not really that hard - take 15 minutes of searching on the internet and Amazon, find this blog and the recommended books, choose a 3- fund vanguard portfolio allocation (even easier, use a target retirement date or LifeStrategy fund), then boom! - your done. The 3 fund portfolio works just as well for a million dollar portfolio as it does for a ten thousand dollar portfolio. Simple and easy to understand. Only really lazy ignoramuses or old people use a portfolio advisor these days.
It's not that simple behaviorally. Hitting "send" on an order for 5/6/7 figures or whatever you have is still a psychological hurdle. For BH it's second nature and mostly unemotional. Remember back to that first time you fired off your first order for VTI/VTSAX or whatever, it was somewhat nerve racking even knowing it's what was prudent.

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Re: Why is 16 the magic number for FAs?

Post by randomguy » Sun Mar 18, 2018 4:43 pm

deltaneutral83 wrote:
Sun Mar 18, 2018 4:20 pm
john4546 wrote:
Sun Mar 18, 2018 4:05 pm
I think wealth management is a dying industry, sort of like horse buggy whip makers in the 1920's.

I think John Bogle in one of his books even recommends that young people choosing a career avoid it and do something more substantive either in business or other professional career.

Investment management is not really that hard - take 15 minutes of searching on the internet and Amazon, find this blog and the recommended books, choose a 3- fund vanguard portfolio allocation (even easier, use a target retirement date or LifeStrategy fund), then boom! - your done. The 3 fund portfolio works just as well for a million dollar portfolio as it does for a ten thousand dollar portfolio. Simple and easy to understand. Only really lazy ignoramuses or old people use a portfolio advisor these days.
It's not that simple behaviorally. Hitting "send" on an order for 5/6/7 figures or whatever you have is still a psychological hurdle. For BH it's second nature and mostly unemotional. Remember back to that first time you fired off your first order for VTI/VTSAX or whatever, it was somewhat nerve racking even knowing it's what was prudent.
In 15 mins, I can come up with 1000 different investment plans. Deciding which one you want is a lot harder. A lot of people think it is self evident that indexing is the way to go but that is because we are a self selected group. Lots of things are easy once you know the answer. Figuring out what the right answer for you is much harder.

And I always find it amazing how many people are willing to buy .13% ER funds on this board when you can get ones with half the ER. It is amazing how lazy people are:) Personally I can't see going below about 8 funds but I like my SV,EM, and REIT tilts AND need multiple bond funds to handle taxable/tax advantaged and my desire for inflation protection. I am not too lazy to spend a couple hours to make some money:). I am also not am not up for letting people with different needs and risk tolerances dictate my portfolio. YMMV.

The real question is not why people use FA or hold 16 funds. It is how anyone can buy a front loaded fund or ones with 12-b1 fees these days.:)

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Re: Why is 16 the magic number for FAs?

Post by Rick Ferri » Sun Mar 18, 2018 4:51 pm

There is nothing wrong with hiring an adviser for advice and hiring a portfolio management company for portfolio management. And there’s no problem when this is the same firm. The problem comes in with combining fees.

An adviser should charge for the amount of time it takes him or her to research, prepare documents and render advice, like an attorney and CPA. Fees should range from $200 to $500 per hour based on the experience of the adviser.

A portfolio management company should be paid based on some formula using assets under management (AUM) and a sliding scale because the liability of managing larger acccounts is greater than small accounts. The true cost to the portfolio management company for a $1 mm account is about 0.15% per year ($1,500) not including marketing expenses. On the other hand, a $100,000 portfolio also costs about $1,500 (which makes the break-even fee 1.5%). That’s why a lot of advisers have high minimums.

The issue with advisers today is they want to charge clients 1% or so for portfolio management AND advice under an AUM model. This is often unfair to the clients and sometimes unfair to the adviser. It is unfair to the adviser who is managing a $100,000 account ($1,000 in annual fees), and it is unfair to a $1 mm client who is paying $10,000 per year for the same services.

The solution is to bifurcate the fee. One fee for advice and one fee for management. That’s fair to everyone. Clients with small accounts would pay only an hourly fee and be encouraged to DIY with balanced index funds.
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Re: Why is 16 the magic number for FAs?

Post by Katietsu » Sun Mar 18, 2018 5:09 pm

I don’t know that it is always 16 for everyone. But I suspect that there are a limited number of software programs behind all the plans. So if 10 different FA’s plug in the same information to the same software, they will get the same answer. I doubt there are many coming up with their own plan. The plan that came back to us a couple of years ago had 13 different investments recommended for the tax deferred accounts. I think it was run through Ibbotson.

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Re: Why is 16 the magic number for FAs?

Post by Rick Ferri » Sun Mar 18, 2018 5:18 pm

Most recommended portfolios derived from complex optimization models create optimium portfolio marketing for an adviser. Seriously, figuring out a sensible asset allocation for your long-term needs ain’t that hard, and there ain’t no such thing as an optimal portfolio model to follow. Optimum is only known in retrospect.
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Re: Why is 16 the magic number for FAs?

Post by rkhusky » Mon Mar 19, 2018 8:30 am

randomguy wrote:
Sun Mar 18, 2018 4:43 pm
And I always find it amazing how many people are willing to buy .13% ER funds on this board when you can get ones with half the ER.
Perhaps because 0.05% is a rather puny difference and equates to only $500/yr on a $1M portfolio. Portfolios fluctuate more than that every day. It's often not worth the hassle if it involves switching fund companies and could be costly if it involves selling from a taxable account. Further, I would want to make sure that I see a consistent historical out-performance of at least the ER difference if I were to consider switching funds.

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Re: Why is 16 the magic number for FAs?

Post by TD2626 » Mon Mar 19, 2018 10:02 am

I wonder if "exactly 16" is more common than "about 16" -- maybe one could look at posts on this board to find that out!
deltaneutral83 wrote:
Sun Mar 18, 2018 4:20 pm
john4546 wrote:
Sun Mar 18, 2018 4:05 pm
I think wealth management is a dying industry, sort of like horse buggy whip makers in the 1920's.

I think John Bogle in one of his books even recommends that young people choosing a career avoid it and do something more substantive either in business or other professional career.
It would be interesting to know if "exactly 16" is more common than "16-ish". Maybe one could study posts on this board and see!
Investment management is not really that hard - take 15 minutes of searching on the internet and Amazon, find this blog and the recommended books, choose a 3- fund vanguard portfolio allocation (even easier, use a target retirement date or LifeStrategy fund), then boom! - your done. The 3 fund portfolio works just as well for a million dollar portfolio as it does for a ten thousand dollar portfolio. Simple and easy to understand. Only really lazy ignoramuses or old people use a portfolio advisor these days.
It's not that simple behaviorally. Hitting "send" on an order for 5/6/7 figures or whatever you have is still a psychological hurdle. For BH it's second nature and mostly unemotional. Remember back to that first time you fired off your first order for VTI/VTSAX or whatever, it was somewhat nerve racking even knowing it's what was prudent.
That's a good point --- for a portfolio that's in 16 or so different places, the individual transactions are each for smaller amounts... when things are more consolidated, it can be psychologically harder. There's probably actual risk there too -- a behavioral error, such as a typographical order when making a purchase/sale, could have more of an impact.

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Re: Why is 16 the magic number for FAs?

Post by KSActuary » Mon Mar 19, 2018 3:01 pm

Never heard of 16 funds or would never put a client in more than 5 or 6 funds, depending on risk tolerance.

Sounds more like a robo-computer driven model as most FA's don't know enough to pick 16 funds.

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Re: Why is 16 the magic number for FAs?

Post by alfaspider » Mon Mar 19, 2018 3:12 pm

nedsaid wrote:
Sun Mar 18, 2018 12:43 pm
If I spent a couple thousand dollars for a guy to tell me that all I needed were three index funds, I would be furious. Not mad at getting sound financial advice but mad about paying so much for something I could easily have done myself. This is just good human psychology, the advisor wants you to leave with the feeling that you got your money's worth.
It's true that complicated portfolios and special strategies are easy to sell, but I think things do start to get complicated once you get into optimization between many different accounts. Consider different flavors of accounts, which one might plausibly have all of at once:

401k
Roth
529
Health Savings Account
Taxable Brokerage Account

Each of those accounts comes with a slightly different time horizon and tax optimization strategies, and getting the correct mix can actually be quite complicated (witness how many 529 debates we see here on BH). You'd be amazed by how few eligible people even take advantage of the backdoor Roth. I think a good FA could actually add a decent bit of value for the crowd that doesn't troll BH all the time without making feel like they were being overcharged for their work. Alas, the compensation structure of the 16-fund types makes this impossible for them to provide.

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Re: Why is 16 the magic number for FAs?

Post by EzM » Mon Mar 19, 2018 3:45 pm

No magic to 16.

The only magic I'd see is 7 to get basic asset class exposure globally instead of using core funds. Then doubling that to have a tax managed version and a non TM version. Add a bond fund or two, or some alternative asset classes and you're there.

DFA (and others) have taken steps to reduce overall # of fund holdings with their Core strategies. No reason to add more unless it is expected to have better outcomes. That's for you and/or your FA to decide.

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Re: Why is 16 the magic number for FAs?

Post by GibsonL6s » Mon Mar 19, 2018 3:58 pm

That seems low, Fidelity put a relative in 33 funds to achieve a 30/70 portfolio. They even sliced and diced the bond portion to include several meaninglessly low percentages of global bonds and other "must have" categories. When I back tested the entire mess in portfoliovisualizer it under performed an equally weighted 3 fund portfolio. I couldn't bring myself to figure out how much more the fees were and the added cost of tax return preparation.

Complexity sells

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Re: Why is 16 the magic number for FAs?

Post by dwickenh » Mon Mar 19, 2018 4:17 pm

Sandtrap wrote:
Sun Mar 18, 2018 3:04 pm
nedsaid wrote:
Sun Mar 18, 2018 12:43 pm
If I spent a couple thousand dollars for a guy to tell me that all I needed were three index funds, I would be furious. Not mad at getting sound financial advice but mad about paying so much for something I could easily have done myself. This is just good human psychology, the advisor wants you to leave with the feeling that you got your money's worth.
+1
As in golf. You pay big money. You want to play the “whole” golf course. Not just the middle of the fairway from tee to green.
🏝🏝🏝
+1 Being in the fairway is way over rated- even being in your own fairway is over rated.......
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Re: Why is 16 the magic number for FAs?

Post by Sandtrap » Mon Mar 19, 2018 4:44 pm

dwickenh wrote:
Mon Mar 19, 2018 4:17 pm
Sandtrap wrote:
Sun Mar 18, 2018 3:04 pm
nedsaid wrote:
Sun Mar 18, 2018 12:43 pm
If I spent a couple thousand dollars for a guy to tell me that all I needed were three index funds, I would be furious. Not mad at getting sound financial advice but mad about paying so much for something I could easily have done myself. This is just good human psychology, the advisor wants you to leave with the feeling that you got your money's worth.
+1
As in golf. You pay big money. You want to play the “whole” golf course. Not just the middle of the fairway from tee to green.
🏝🏝🏝
+1 Being in the fairway is way over rated- even being in your own fairway is over rated.......
:sharebeer
Resort green fees in Hawaii demand that you see every inch of the golf course, including the lakes, ponds, ravines, and lava fields. :shock:

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Re: Why is 16 the magic number for FAs?

Post by bottlecap » Mon Mar 19, 2018 5:23 pm

Whatever number they use, you can bet it's focus group tested to have the desired effect.

JT

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Re: Why is 16 the magic number for FAs?

Post by White Coat Investor » Mon Mar 19, 2018 5:28 pm

ChinchillaWhiplash wrote:
Sun Mar 18, 2018 12:25 pm
I've noticed that a lot of posts say their financial advisers recommend or if they are using one already have 16 fund portfolios. Our FA had us set up with 16 funds in an individual 401k too. Was wondering if this was just a coincidence or is there some reasoning behind it? Our FA is a DFA guy, but had us in some other company's funds too. Some were front loaded, some had 12-b-1 fees, some with ER > 1.0%. Had a good bit of overlap in some funds. Got out and self directing in all index funds that have low ER, by the way. Just curious about this.
I think 16 is silly. I see little reason to use fewer than 3 asset classes and there are very good reasons to go to 7. I think there are some limited benefits in going to 10. But 16? Come on. Who are you trying to fool?
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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Re: Why is 16 the magic number for FAs?

Post by White Coat Investor » Mon Mar 19, 2018 5:30 pm

john4546 wrote:
Sun Mar 18, 2018 4:05 pm
I think wealth management is a dying industry, sort of like horse buggy whip makers in the 1920's.

I think John Bogle in one of his books even recommends that young people choosing a career avoid it and do something more substantive either in business or other professional career.

Investment management is not really that hard - take 15 minutes of searching on the internet and Amazon, find this blog and the recommended books, choose a 3- fund vanguard portfolio allocation (even easier, use a target retirement date or LifeStrategy fund), then boom! - your done. The 3 fund portfolio works just as well for a million dollar portfolio as it does for a ten thousand dollar portfolio. Simple and easy to understand. Only really lazy ignoramuses or old people use a portfolio advisor these days.
Ha ha. You need to talk about investments with people who don't participate on this board if you think the industry is dying. There is greater need than ever. Knowledge you take for granted is actually fairly rare.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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Re: Why is 16 the magic number for FAs?

Post by celia » Mon Mar 19, 2018 5:43 pm

... because it is easy to "churn" the account without the account holder noticing all the fees that the advisor is "earning".

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Re: Why is 16 the magic number for FAs?

Post by tibbitts » Mon Mar 19, 2018 6:42 pm

randomguy wrote:
Sun Mar 18, 2018 4:43 pm
I am not too lazy to spend a couple hours to make some money:)
You really meant for the possibility of making some money. Or losing some.

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Re: Why is 16 the magic number for FAs?

Post by nedsaid » Tue Mar 20, 2018 8:39 am

alfaspider wrote:
Mon Mar 19, 2018 3:12 pm
nedsaid wrote:
Sun Mar 18, 2018 12:43 pm
If I spent a couple thousand dollars for a guy to tell me that all I needed were three index funds, I would be furious. Not mad at getting sound financial advice but mad about paying so much for something I could easily have done myself. This is just good human psychology, the advisor wants you to leave with the feeling that you got your money's worth.
It's true that complicated portfolios and special strategies are easy to sell, but I think things do start to get complicated once you get into optimization between many different accounts. Consider different flavors of accounts, which one might plausibly have all of at once:

401k
Roth
529
Health Savings Account
Taxable Brokerage Account

Each of those accounts comes with a slightly different time horizon and tax optimization strategies, and getting the correct mix can actually be quite complicated (witness how many 529 debates we see here on BH). You'd be amazed by how few eligible people even take advantage of the backdoor Roth. I think a good FA could actually add a decent bit of value for the crowd that doesn't troll BH all the time without making feel like they were being overcharged for their work. Alas, the compensation structure of the 16-fund types makes this impossible for them to provide.
Thanks for posting this.

First, much of the public is amazingly clueless about personal finance and even more clueless about investing. An advisor who does a reasonable job of diversifying a client's portfolio can do a lot to educate a client. In many cases, an advisor is like training wheels on a bike. At some point, the training wheels can come off.

Secondly, while the basics of investing are relatively simple, there are a lot of decisions on the perifery of investing that can get to be complex. One is the tax efficiency of investments and the proper placement of investments in the right accounts. Some investments are more tax efficient than others. So for example, standard advice around here is to put TIPS and REITs into tax-deferred accounts. Other issues like when to take Social Security, whether or not to annuitize a portion of the nest egg, when to retire, and so forth can get to be pretty complex. Good advice at the right time can save big money.

The problem is that much of the advice out there is not unbiased or objective. There is too much of the "stock of the month" and selling whatever the firm is promoting at the time. Often there is a conflict of interest between the advisor and the client. Not always easy to see who the good guys really are. So you wind up having to separate the wheat from the chaff, not always easy to do.
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