Your Investment Adviser’s Dirty Secret

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
EvelynTroy
Posts: 456
Joined: Sat Jun 07, 2008 8:35 am

Re: Your Investment Adviser’s Dirty Secret

Post by EvelynTroy »

nedsaid wrote: Sun Apr 05, 2020 4:38 pm What I will say is that there are people in the business that are better than others and I would not hesitate to recommend Ferri, Roth, or Bernstein to others. But nothing is perfect. Even Vanguard has incentives to grow its business. No one is 100% free of conflicts of interest.

As for myself, I have invested with imperfect advisors with imperfect financial products and yet somehow I have managed to survive all of that. If you have an advisor, take the opportunity to learn as much as you can, at some point you might want to take over and run the portfolio for yourself. I know that I learned a lot from the people that I worked with over the years.
Well said Nedsaid. To be straight-forward Mr. Ferri is obviously in the advisor business - nothing wrong with that, but he certainly has his interests at heart as he posts here on Bogleheads. No, he is not free of conflicts of interest. Just in this thread someone asking about his services. Just saying.

I recently posted on the topic of advisors and my experience with Buckingham Asset Management (Larry Swedroe's firm) - I am forever greatful for their guidance, what they taught me, and the service that went far beyond managing my portfolio.

viewtopic.php?f=10&t=305839&p=5063825#p5063825

You can scroll up a bit for the first post I made on the topic.

And yes as I age, and the inevitable cognitive decline approaches, or I become incapacitated I have instructed my trust services company to turn my portfolio over to Buckingham. Who knows might be sooner than later. Working with a good fee-only advisor is a very individual thing.

Stay safe - Evelyn
User avatar
nedsaid
Posts: 13808
Joined: Fri Nov 23, 2012 12:33 pm

Re: Your Investment Adviser’s Dirty Secret

Post by nedsaid »

EvelynTroy wrote: Sat Apr 11, 2020 6:03 am
nedsaid wrote: Sun Apr 05, 2020 4:38 pm What I will say is that there are people in the business that are better than others and I would not hesitate to recommend Ferri, Roth, or Bernstein to others. But nothing is perfect. Even Vanguard has incentives to grow its business. No one is 100% free of conflicts of interest.

As for myself, I have invested with imperfect advisors with imperfect financial products and yet somehow I have managed to survive all of that. If you have an advisor, take the opportunity to learn as much as you can, at some point you might want to take over and run the portfolio for yourself. I know that I learned a lot from the people that I worked with over the years.
Well said Nedsaid. To be straight-forward Mr. Ferri is obviously in the advisor business - nothing wrong with that, but he certainly has his interests at heart as he posts here on Bogleheads. No, he is not free of conflicts of interest. Just in this thread someone asking about his services. Just saying.

I recently posted on the topic of advisors and my experience with Buckingham Asset Management (Larry Swedroe's firm) - I am forever greatful for their guidance, what they taught me, and the service that went far beyond managing my portfolio.

viewtopic.php?f=10&t=305839&p=5063825#p5063825

You can scroll up a bit for the first post I made on the topic.

And yes as I age, and the inevitable cognitive decline approaches, or I become incapacitated I have instructed my trust services company to turn my portfolio over to Buckingham. Who knows might be sooner than later. Working with a good fee-only advisor is a very individual thing.

Stay safe - Evelyn
Rick is one of the good guys in the business, want to make that clear. I am glad you had a great experience with Buckingham. Larry is out of favor here right now but if Value makes a comeback so will his standing here.
A fool and his money are good for business.
User avatar
tipswatcher
Posts: 358
Joined: Tue Jun 21, 2011 5:17 pm
Contact:

Re: Your Investment Adviser’s Dirty Secret

Post by tipswatcher »

Once we retired, my wife and I realized we needed financial advice, including tax advice and an income plan. We looked for a "fee-only" adviser, thinking that was the way to go. The name is a *bit* misleading. The couple advisers we talked to wanted to put all our assets "under management" and the fees could have been up to $30,000 a year. NO THANK YOU! And yes, they suggested complex formulas for our assets -- small cap value, large cap growth, emerging markets, international bond funds, etc., etc., etc. And if those advisers are good and honest, then all that complexity probably mimics Total Stock Market, Total International Stock Market and Total Bond Market, maybe in funds with a bit higher fees. The complexity is simply an AUM sales tool, a way to keep the customer impressed that something is being done.

So, thanks to intervention from Bogleheads, we found an hourly-fee adviser. We worked for several months on an overall plan, which we then put into effect. Then we fired our adviser, which is exactly the way it should work. Total one-time cost was about $7,000, and we probably saved half that in one year by cutting fund fees and optimizing taxes.

One main success was simplifying our assets, which were spread across five investment firms and probably 20 funds. Now everything is at Fidelity and Vanguard, in a few core funds, much simpler to track. And sure, we will probably revisit our plan in a few years, just a check in. I feel very good about where we are.

If you find a good hourly fee adviser, and can handle the do-it-yourself part, this works very well.
TIPS: Perfect investment for imperfect times?
User avatar
birdog
Posts: 758
Joined: Fri Apr 07, 2017 1:35 pm

Re: Your Investment Adviser’s Dirty Secret

Post by birdog »

Rick,

I especially liked the simplicity of the article. Thank you for sharing it.

I heard you on the ChooseFI podcast a week or so ago and found it interesting that you flew in the Marine Corps. I trained alongside a handful of Marine pilots when I went through Naval Flight School in Corpus Christi, TX in the late 90's.

Your article recommends BND. My portfolio is VTI and BIV (with a touch of VTEB in taxable). Would you recommend I switch from BIV to BND (in IRA) or am I OK to stand pat? I understand the difference between the two and might have been swayed by the slight historical performance difference when I selected these ETFs three years ago.

Thank you Devil Dog.
User avatar
convert949
Posts: 401
Joined: Thu May 07, 2009 8:33 am
Location: Fort Myers, FL

Re: Your Investment Adviser’s Dirty Secret

Post by convert949 »

lostdog wrote: Sun Apr 05, 2020 10:20 am Excellent article.

Thank you.
+1...

As they say... "I represent that remark"! Having been a Boglehead and managing my own for more than 10 years, I offer 3 observations:

1. Rick is right. Complexity sells and therefore attempts to convince the average Joe that he can't do it on his own and/or that the advisor can offer superior returns to what one could achieve without their help.

2. My "Come to Jack" moment came in 2008 when I realized that "I" had to take on more risk in order to get the same result due to fees. He didn't... Being somewhat risk averse, (60 and retired), that became my value judgement. Less risk, same returns.

3. Relative to the emotional value of a good advisor, I have found that there is a flip side to that. I have a friend that is not sleeping well, not because his advisor did a poor job (my opinion is that he is a good egg), but that someone else's assurances that everything will be OK does not compare to a good plan that you formulated on your own (with help from the Bogleheads) that accurately reflects your desire, ability and need to take risk.

Bottom line... I am sleeping just fine.
illumination
Posts: 859
Joined: Tue Apr 02, 2019 6:13 pm

Re: Your Investment Adviser’s Dirty Secret

Post by illumination »

Are "fee-only" financial advisors legally obligated to not sell other products? Or is this all on the honor system?

I know there's good ones that do the right thing, and I have no problem paying for professional services, but I've wondered if this is a way to get their foot in the door and sell things like life insurance or annuities in addition to providing "fee only" financial advice.

My in laws for example have a tax preparer that is "fee only" and now he also does "wealth management" and sells things like life insurance, etc.
retiredjg
Posts: 41861
Joined: Thu Jan 10, 2008 12:56 pm

Re: Your Investment Adviser’s Dirty Secret

Post by retiredjg »

illumination wrote: Sat Apr 11, 2020 1:21 pm Are "fee-only" financial advisors legally obligated to not sell other products? Or is this all on the honor system?

I know there's good ones that do the right thing, and I have no problem paying for professional services, but I've wondered if this is a way to get their foot in the door and sell things like life insurance or annuities in addition to providing "fee only" financial advice.

My in laws for example have a tax preparer that is "fee only" and now he also does "wealth management" and sells things like life insurance, etc.
I don't know what the official answer is to your question. I'm not even sure there is one.

I do think there is a lot of confusion over what "fee only" is supposed to mean. There is some notion that "fee only" is a better thing than some other model (commissions I guess) but that's a misunderstanding.

For example, "fee only" includes people who charge an AUM fee for providing wealth management services. So this is not a matter of some being good guys on an honor system and some not being good guys. And it is not a matter of whether they are allowed to sell products in addition to managing your money.

The simple fact is if they sell products, there is a conflict of interest in selling you their management services as well. The only way to avoid this is separate the advice service from the management service.

It is for this reason that thefinancebuff coined the term "advice only" when referring to advisors who only provide advice. These are people who help you set up a plan but you must implement it yourself. In this way, there can be no conflict of interest concerning the advice.

I feel like I've pretty much botched this answer. Maybe someone else can do a better job of it. :happy. I guess my main point is that "fee only" doesn't mean what you think it means.
illumination
Posts: 859
Joined: Tue Apr 02, 2019 6:13 pm

Re: Your Investment Adviser’s Dirty Secret

Post by illumination »

retiredjg wrote: Sat Apr 11, 2020 1:38 pm
illumination wrote: Sat Apr 11, 2020 1:21 pm Are "fee-only" financial advisors legally obligated to not sell other products? Or is this all on the honor system?

I know there's good ones that do the right thing, and I have no problem paying for professional services, but I've wondered if this is a way to get their foot in the door and sell things like life insurance or annuities in addition to providing "fee only" financial advice.

My in laws for example have a tax preparer that is "fee only" and now he also does "wealth management" and sells things like life insurance, etc.

I feel like I've pretty much botched this answer. Maybe someone else can do a better job of it. :happy. I guess my main point is that "fee only" doesn't mean what you think it means.
If someone is charging their financial planning based on AUM yet positioning themselves as "fee only" advisors, that's definitely moving the goal posts. I guess most commerce could technically be classified as "fee only".

I would just love to know the stats on how many of these firms that position themselves this way are really just a way to get a retiree in there with their guard down and thinking it's only going to cost them a few hundred to look things over and suddenly they're being pitched all sorts of products they get a nice commission on all the while the client is thinking there is no financial incentive for them to do this and it really is in their best interest.

Do these firms view themselves as having a "switch" where they are BOTH "fee only" and can also purse other revenue streams from their clients?
User avatar
birdog
Posts: 758
Joined: Fri Apr 07, 2017 1:35 pm

Re: Your Investment Adviser’s Dirty Secret

Post by birdog »

illumination wrote: Sat Apr 11, 2020 2:17 pm If someone is charging their financial planning based on AUM yet positioning themselves as "fee only" advisors, that's definitely moving the goal posts. I guess most commerce could technically be classified as "fee only".

I would just love to know the stats on how many of these firms that position themselves this way are really just a way to get a retiree in there with their guard down and thinking it's only going to cost them a few hundred to look things over and suddenly they're being pitched all sorts of products they get a nice commission on all the while the client is thinking there is no financial incentive for them to do this and it really is in their best interest.

Do these firms view themselves as having a "switch" where they are BOTH "fee only" and can also purse other revenue streams from their clients?
My understanding is that fee-only don't charge AUM fees. I had a financial advisor that charged 1% AUM and he said he was "fee-based". Perhaps my understanding is not correct but I thought the difference was fee-based vs fee-only.
retiredjg
Posts: 41861
Joined: Thu Jan 10, 2008 12:56 pm

Re: Your Investment Adviser’s Dirty Secret

Post by retiredjg »

Maybe this would be a good time for Rick to step in and define these terms for us a little better.

One reason I like the concept of the term "advice only"...it only seems to mean one thing. Fee-only and fee-based can mean a lot of different things including charging AUM fees for management of your money. Or so it seems to me.
SxSW
Posts: 105
Joined: Sat Mar 23, 2019 9:25 am

Re: Your Investment Adviser’s Dirty Secret

Post by SxSW »

lgs88 wrote: Sun Apr 05, 2020 11:52 am I maintain that an AUM investment adviser can earn his/her fees by coaching clients to avoid behavioral errors in times of market turbulence. They’d be more honest to market themselves as financial-markets-therapists than stock-pickers...
Many advisors, regardless of what they are charging, have spent the last 6 weeks taking back-to-back calls from clients that go like this:

Client: The market's dropping, sell everything!

Advisor: In the long run, that will do more damage than good, and I'll explain why...

Client: I don't care about the long run! Sell everything!

Advisor: But . . .

Client: You're fired!
SxSW
Posts: 105
Joined: Sat Mar 23, 2019 9:25 am

Re: Your Investment Adviser’s Dirty Secret

Post by SxSW »

illumination wrote: Sat Apr 11, 2020 1:21 pm Are "fee-only" financial advisors legally obligated to not sell other products? Or is this all on the honor system?

I know there's good ones that do the right thing, and I have no problem paying for professional services, but I've wondered if this is a way to get their foot in the door and sell things like life insurance or annuities in addition to providing "fee only" financial advice.

My in laws for example have a tax preparer that is "fee only" and now he also does "wealth management" and sells things like life insurance, etc.

Insurance and annuities require additional licensing beyond investment advice licenses.
afan
Posts: 5203
Joined: Sun Jul 25, 2010 4:01 pm

Re: Your Investment Adviser’s Dirty Secret

Post by afan »

Fee only really does not mean anything.
Hourly fee only means that the adviser simply charges for their time, with no other costs.
Flat fee means they charge a rate, usually annual, that covers whatever services they provide.

Some advisers claim to be fee only with respect to the asset management part of the job, but also sell commissioned products. This is at best misleading, but they still claim to be "fee only".

One poster gave a great description of all the help provided by an AUM adviser. This person seemed happy with the service. However, I did not see anything in there that would require an AUM structure. Hourly fee only would have worked just fine.

IF I ever et to the point that I need someone to manage a three fund portfolio for me and I don't have a relative who will do it for free, I would look for a flat fee manager. From some shopping I did a while ago, I found several that would do a good job and the fees would be a fraction of any AUM deals I know about. Much cheaper than Vanguard PAS.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
lgs88
Posts: 467
Joined: Tue Jun 07, 2016 7:48 am

Re: Your Investment Adviser’s Dirty Secret

Post by lgs88 »

SxSW wrote: Sat Apr 11, 2020 3:21 pm
lgs88 wrote: Sun Apr 05, 2020 11:52 am I maintain that an AUM investment adviser can earn his/her fees by coaching clients to avoid behavioral errors in times of market turbulence. They’d be more honest to market themselves as financial-markets-therapists than stock-pickers...
Many advisors, regardless of what they are charging, have spent the last 6 weeks taking back-to-back calls from clients that go like this:

Client: The market's dropping, sell everything!

Advisor: In the long run, that will do more damage than good, and I'll explain why...

Client: I don't care about the long run! Sell everything!

Advisor: But . . .

Client: You're fired!
Ah! "One is most punished for one's virtues." --Nietszche
merely an interested amateur
User avatar
tipswatcher
Posts: 358
Joined: Tue Jun 21, 2011 5:17 pm
Contact:

Re: Your Investment Adviser’s Dirty Secret

Post by tipswatcher »

Here's an example of where AUM advice can hit a "grey area":

I was listening to the Ric Edelman podcast last week and a caller who was near retirement asked about paying off her mortgage, or refinancing it for a short number of years, or taking a cash-out 30-year mortgage as the refinance. She said her brother, who is a Ric Edelman fan, said she should take the 30-year cash-out mortgage, because rates are so low.

Ric did say, "There's no wrong answer." And he admitted he didn't know her exact circumstances (he did know she was very near retirement and didn't want a mortgage in retirement), but he said he thought the best option was the 30-year mortgage, refinanced to give her cash to live on in retirement.

OK, I disagree with that advice, others might agree with it. But if you are an AUM adviser, it is in your interest to advise against removing assets to pay off a mortgage. And it is in your interest to advise refinancing into a 30-year mortgage, to take out cash to place in "assets under management," resulting in a percentage fee for the AUM adviser.

I think Edelman runs an honest company, and probably provides a good service. But AUM management results in conflicts. It's just the way it works, right?
TIPS: Perfect investment for imperfect times?
JBTX
Posts: 6942
Joined: Wed Jul 26, 2017 12:46 pm

Re: Your Investment Adviser’s Dirty Secret

Post by JBTX »

Wings5 wrote: Sun Apr 05, 2020 6:58 pm Glad to read that, Rick. Very well-said and to the point. Hopefully more than a few folks find it up there in Collin County!
Collin County?
SxSW
Posts: 105
Joined: Sat Mar 23, 2019 9:25 am

Re: Your Investment Adviser’s Dirty Secret

Post by SxSW »

tipswatcher wrote: Sat Apr 11, 2020 10:06 pm AUM management results in conflicts. It's just the way it works, right?

Hourly advice, as well as "at-cost" services can result in conflicts as well. Even 'free' can be conflicted -- Free advice and free food can be used as a loss leader to get clients in the door to buy paid services. Financial firms ultimately want your paid business, and that's their overriding motivation. This is true of Vanguard as well as every other financial firm.
Random Walker
Posts: 4611
Joined: Fri Feb 23, 2007 8:21 pm

Re: Your Investment Adviser’s Dirty Secret

Post by Random Walker »

tipswatcher wrote: Sat Apr 11, 2020 10:06 pm Here's an example of where AUM advice can hit a "grey area":

I was listening to the Ric Edelman podcast last week and a caller who was near retirement asked about paying off her mortgage, or refinancing it for a short number of years, or taking a cash-out 30-year mortgage as the refinance. She said her brother, who is a Ric Edelman fan, said she should take the 30-year cash-out mortgage, because rates are so low.

Ric did say, "There's no wrong answer." And he admitted he didn't know her exact circumstances (he did know she was very near retirement and didn't want a mortgage in retirement), but he said he thought the best option was the 30-year mortgage, refinanced to give her cash to live on in retirement.

OK, I disagree with that advice, others might agree with it. But if you are an AUM adviser, it is in your interest to advise against removing assets to pay off a mortgage. And it is in your interest to advise refinancing into a 30-year mortgage, to take out cash to place in "assets under management," resulting in a percentage fee for the AUM adviser.

I think Edelman runs an honest company, and probably provides a good service. But AUM management results in conflicts. It's just the way it works, right?
Sounds like a good question to use when interviewing advisors. Don’t know anyone who has regretted paying off the mortgage.

Dave
March2009
Posts: 68
Joined: Sat Mar 21, 2020 7:04 pm

Re: Your Investment Adviser’s Dirty Secret

Post by March2009 »

Solid article. Most bogleheads probably don't need an advisor. I cannot imagine giving any of my assets to someone to manage. However I think most people need advisors. They are clueless on investing and want to remain clueless plus they are impulsive. A good advisor is worth the fee to those type of people (even if it is as high as 1%).
In bear markets, stocks return to their rightful owners. - J.P. Morgan
Wings5
Posts: 169
Joined: Sun Nov 16, 2014 5:17 pm

Re: Your Investment Adviser’s Dirty Secret

Post by Wings5 »

JBTX wrote: Sat Apr 11, 2020 10:24 pm
Wings5 wrote: Sun Apr 05, 2020 6:58 pm Glad to read that, Rick. Very well-said and to the point. Hopefully more than a few folks find it up there in Collin County!
Collin County?
The linked magazine is Living Well: Collin County edition.
User avatar
Sandi_k
Posts: 1464
Joined: Sat May 16, 2015 11:55 am
Location: SF Bay Area

Re: Your Investment Adviser’s Dirty Secret

Post by Sandi_k »

retiredjg wrote: Sat Apr 11, 2020 2:28 pm Maybe this would be a good time for Rick to step in and define these terms for us a little better.

One reason I like the concept of the term "advice only"...it only seems to mean one thing. Fee-only and fee-based can mean a lot of different things including charging AUM fees for management of your money. Or so it seems to me.
You are correct. My brother works for a wealth management firm, and they are using "fee only" in their marketing materials. With a 1%+ AUM model.

I think asking whether they are FIDUCIARY ONLY in EVERY circumstance is the key question.
muddlehead
Posts: 271
Joined: Mon Sep 22, 2008 2:03 pm

Re: Your Investment Adviser’s Dirty Secret

Post by muddlehead »

Hi Rick. Is there anyone on this site who doesn't know this? Not getting the "secret" part?
User avatar
tipswatcher
Posts: 358
Joined: Tue Jun 21, 2011 5:17 pm
Contact:

Re: Your Investment Adviser’s Dirty Secret

Post by tipswatcher »

On this topic, I found an interesting article on AdvisorPerspectives.com, a site directed to financial advisers, not their consumers.

What To Do When Your AUM Fees Plummet
by Sara Grillo, 4/7/20
https://www.advisorperspectives.com/art ... es-plummet

The premise is (when the article was written) that your assets under management have fallen 30%, so now what do you do to get your earnings back up to previous levels? It discusses several ways to gouge (suddenly move to a flat yearly fee) or nickel and dime your clients (extra consultation fees, fee-admission webinars, etc.). Or, obviously, recruit new clients. I think the author is a credible financial adviser, because she writes :
Look at it from the client’s point of view. How happy am I, really, if I’m paying you the same fee you got paid last year while my portfolio is down 35%? If it were me, I’d want to see you squirm a little bit, too.

Moreover, while I love reading articles about how the profession is moving to being planning-based, I don’t see it as reality in the foreseeable future. Look, AUM fees are not going away anytime soon because there is just too much money involved for that to happen. Point blank, period.
Fascinating, huh?
TIPS: Perfect investment for imperfect times?
Wanderingwheelz
Posts: 476
Joined: Mon Mar 04, 2019 9:52 am

Re: Your Investment Adviser’s Dirty Secret

Post by Wanderingwheelz »

Nate79 wrote: Sun Apr 05, 2020 2:04 pm I agree that fixed fee or per hour fee for an advisor is much better than AUM. I have said multiple times shame on Vanguard for ripping off clients with their AUM model PAS system.
I agree that paying a percentage isn’t the right way to go, which Rick made very clear in his advertisement.

I feel like it was missing one very big piece of information though, and that’s what Rick charges for his time and knowledge.
User avatar
tipswatcher
Posts: 358
Joined: Tue Jun 21, 2011 5:17 pm
Contact:

Re: Your Investment Adviser’s Dirty Secret

Post by tipswatcher »

I feel like it was missing one very big piece of information though, and that’s what Rick charges for his time and knowledge.
Rick's website lays this out very clearly:
People find the Portfolio 2nd Opinion to be a good value because their questions are answered for a one-time $750 fee. My hourly fee after that is $450 per hour, and you only pay for the time used.
https://rickferri.com/investors/
TIPS: Perfect investment for imperfect times?
retiredjg
Posts: 41861
Joined: Thu Jan 10, 2008 12:56 pm

Re: Your Investment Adviser’s Dirty Secret

Post by retiredjg »

Wanderingwheelz wrote: Sun Apr 19, 2020 8:56 am I feel like it was missing one very big piece of information though, and that’s what Rick charges for his time and knowledge.
You can find that information on his website. Right out there in the open for all to see. :happy
Wanderingwheelz
Posts: 476
Joined: Mon Mar 04, 2019 9:52 am

Re: Your Investment Adviser’s Dirty Secret

Post by Wanderingwheelz »

retiredjg wrote: Sun Apr 19, 2020 9:13 am
Wanderingwheelz wrote: Sun Apr 19, 2020 8:56 am I feel like it was missing one very big piece of information though, and that’s what Rick charges for his time and knowledge.
You can find that information on his website. Right out there in the open for all to see. :happy
That’s the same with the AUM based fee-advisors too- their fees are right in their website. That didn’t stop Rick from explaining in detail how they’re compensated in his advertisement, though.
hale2
Posts: 254
Joined: Sat Feb 15, 2014 5:54 pm

Re: Your Investment Adviser’s Dirty Secret

Post by hale2 »

Wanderingwheelz wrote: Mon Apr 20, 2020 7:11 am
retiredjg wrote: Sun Apr 19, 2020 9:13 am
Wanderingwheelz wrote: Sun Apr 19, 2020 8:56 am I feel like it was missing one very big piece of information though, and that’s what Rick charges for his time and knowledge.
You can find that information on his website. Right out there in the open for all to see. :happy
That’s the same with the AUM based fee-advisors too- their fees are right in their website. That didn’t stop Rick from explaining in detail how they’re compensated in his advertisement, though.
And don't forget, Rick's previous business, Portfolio Solutions, charged an AUM fee. Nothing wrong with that, and the fees were much lower than competitors, but he still made his money this way.
Post Reply