Impressive Results from Financial Planner -- Time to Surrender?

[Postmon]

Many years ago I helped a friend with his finances and set him up with a 3-Fund portfolio (42 US/18 Int'l/40 FI). He recently told me that a financial planner got to him about 5 years ago and he agreed to move a portion of his assets over to him. The planner put him in a portfolio that's approximately 60/40 and includes over 15 funds/etfs. I was suspicious so I backtested it in Portfolio Visualizer from 2015 - 2020. To my surprise it's been doing significantly better than our beloved 2 and 3 funders. Now he's considering moving the rest of his assets over the planner and he wants my advice. I'm not sure what to say given these results. In fact, I'm starting to 2nd guess my own 3-funder! Thoughts?

Most of the equity is split among these sector funds:

iShares US Home Construction ETF
SPDR S&P Biotech ETF
VanEck Vectors Semiconductor ETF
iShares Gold Trust
Consumer Discret Sel Sect SPDR ETF
Vanguard Health Care ETF
Vanguard Information Technology ETF

Other portfolios on charts:
Stock/Bond 60/40: Vanguard Total Stock Mkt / Vanguard Total Bond Market Index
Boglehead Three Fund: 42% Vanguard Total Stock Mkt, 18% Vanguard Total Intl Stock Index Inv, 40% Vanguard Total Bond Market Index

[Jack FFR1846]

Are the numbers net fees?

Have you looked at Callan's periodic table? If this planner has beaten the market in this past cycle, I'd expect him to crash and burn in the near future.

[cogito]

You likely will not be able to convince your friend, and you may not want to either. What are his fees? Just based on that chart, he might be underperforming a 60/40 if he's paying 1-2% AUM + expensive etf fees.

[NotWhoYouThink]

So a riskier (more concentrated) portfolio gave higher returns? Not that surprising. Also no way to know whether these funds, or whatever his advisor puts him in, will do better or worse than TSM over the next 5 years.

You say you backtested. Does that mean that you know that the advisor put him in these funds 5 years ago and kept him there? Or did the advisor put him in these funds because the advisor backtested like you did and recently put him in funds that did well over the last 5 years, after having him invested previously in funds that did well over an earlier 5 year period?

[Impatience]

A five year backtest is absolutely meaningless. It’s like looking out the window and guessing tomorrow’s weather.

[rascott]

Those sector funds are all lowish fees. So that's not really the concern. But how is the FP getting paid? Is it fee based, by the hour? Or is he raking an AUM fee?

[Postmon]

It's an AUM fee of 1.5%. Besides the CAGR, what struck me was that the Stdev wasn't much greater than the others and the Sharpe and Sortino ratios were quite higher.

Good points about how long they've been in these funds -- I just got a snapshot so I'll have to ask. I definitely understand past performance is not a predicter but it's tough to convince someone who's not a DIY'er and trusts the planner.

[megabad]

Uh, is this an IRA? Gosh I hope so. Otherwise, no way to exit without a big bill to Uncle Sam. I assume FA will want to pick new lucky winners moving forward?

[runninginvestor]

You should really be looking at the account balances and specific returns. The planner could have been fiddling with the portfolio the last 5 years causing the portfolio return to be above or below what was put in portfolio visualizer. Then of course take out any fees like others have mentioned.

[mhalley]

It's not that bogleheads belive that no one can beat the market. Its that we can't pick who will do it in the future, and if they are doing it now, when will they stop doing it, and when they stop doing it will it be a spectacular crash that negates the previous outperformance.
So my advice would be, you hit the jackpot with the fa, but you have no idea if he will be able to continue to outperform. If due diligence shows the outperformance really exists, Enjoy the outperformance, but keep the rest of your money in the 3 fund.
PS,
You gave him advice many years ago, which according to his fa portfolio outperformance was "wrong". Why does he want your advice again? And if you gave him advice, why would he follow it, since he didn't follow it the first time?

[aristotelian]

How much is the AUM fee? That could take a serious chunk out of that CAGR. Then ask yourself whether you believe the upside outperformance is worth the downside risk plus guaranteed known cost in the future.

[nedsaid]

I would be wary of backtests. They are useful but their predictive power is rather limited. The past is not necessarily the future.

[MittensMoney]

Just because a portfolio is 60/40 doesn't mean it's Risk is equivalent to a Boglehead 60/40 portfolio. You're seeing higher returns because the assets are concentrated in sectors that did well. Fund managers at major firms worldwide make sector bets, concentrate risk, and then tout great returns across 1, 3, 5, or 10 year periods -- but which of them have consistently beaten the S&P 500 across decades of management? The answer is none.

[nick evets]

Did you charge your friend to set up his 3-fund portfolio?

If not the portfolio he received for 'free' returned less than the money he invested by paying a professional. A good lesson for all, I'd say. Are you still friends? How do you explain your choice of International?

Just as financial advisors always have a reason for under performing and over performing, so do bogleheads. IME you have to find your own path, but without being a licensed professional I'd sure never put anyone else on it.

[muffins14]

Could you share the exact composition of this portfolio you used in the backtest?

I'll add this thread to my list of those to return to in 5 years and make snarky comments about past performance != future success

[rockstar]

I don't like paying someone some percentage of my assets to manage my money.

However, given how big the haystack is with the three fund portfolio, I'm not surprised someone beat it.

[Rowan Oak]

Many years ago I helped a friend with his finances and set him up with a 3-Fund portfolio (42 US/18 Int'l/40 FI). He recently told me that a financial planner got to him about 5 years ago and he agreed to move a portion of his assets over to him. The planner put him in a portfolio that's approximately 60/40 and includes over 15 funds/etfs. I was suspicious so I backtested it in Portfolio Visualizer from 2015 - 2020. To my surprise it's been doing significantly better than our beloved 2 and 3 funders. Now he's considering moving the rest of his assets over the planner and he wants my advice. I'm not sure what to say given these results. In fact, I'm starting to 2nd guess my own 3-funder! Thoughts?

Most of the equity is split among these sector funds:

iShares US Home Construction ETF
SPDR S&P Biotech ETF
VanEck Vectors Semiconductor ETF
iShares Gold Trust
Consumer Discret Sel Sect SPDR ETF
Vanguard Health Care ETF
Vanguard Information Technology ETF

It is almost certain that this "financial planner" hasn't had your friend invested in these same 15 funds/ETFs from 2015-2020. 

Also, probably paying a high AUM fee. 

I would ask your friend to dig deeper into his performance over the last 5 years. Many AUM financial advisors don't make this easy.

[Brianmcg321]

He got him hook line and sinker.

Ask your friend again in five years.

[HomerJ]

Many years ago I helped a friend with his finances and set him up with a 3-Fund portfolio (42 US/18 Int'l/40 FI). He recently told me that a financial planner got to him about 5 years ago and he agreed to move a portion of his assets over to him. The planner put him in a portfolio that's approximately 60/40 and includes over 15 funds/etfs. I was suspicious so I backtested it in Portfolio Visualizer from 2015 - 2020. To my surprise it's been doing significantly better than our beloved 2 and 3 funders. Now he's considering moving the rest of his assets over the planner and he wants my advice. I'm not sure what to say given these results. In fact, I'm starting to 2nd guess my own 3-funder! Thoughts?

Most of the equity is split among these sector funds:

iShares US Home Construction ETF
SPDR S&P Biotech ETF
VanEck Vectors Semiconductor ETF
iShares Gold Trust
Consumer Discret Sel Sect SPDR ETF
Vanguard Health Care ETF
Vanguard Information Technology ETF

It is almost certain that this "financial planner" hasn't had your friend invested in these same 15 funds/ETFs from 2015-2020. 

This.

It's what he is in NOW, but very few financial planners would have picked 15 specific sector funds in 2015, and then never changed it again.

The reason they are getting paid to is to move money around and pick the next winners.

Your friend's advisor probably just picked some of those funds recently for the EXACT same reason that you like them... They've done well recently and back-tested well.

[neverpanic]

Five years while the bulls are running strong is an extremely small sample size. A prior poster already said it's "meaningless" and that's the truth. You've done everything right, except 2nd-guessing a philosophy and strategy that has been working for YOU.

You can tell your friend you're happy his portfolio has done well over the past 5 years, but that you're leaving yours alone and you can even tell him why without trying to convince him of anything.

[tibbitts]

Many years ago I helped a friend with his finances and set him up with a 3-Fund portfolio (42 US/18 Int'l/40 FI). He recently told me that a financial planner got to him about 5 years ago and he agreed to move a portion of his assets over to him. The planner put him in a portfolio that's approximately 60/40 and includes over 15 funds/etfs. I was suspicious so I backtested it in Portfolio Visualizer from 2015 - 2020. To my surprise it's been doing significantly better than our beloved 2 and 3 funders. Now he's considering moving the rest of his assets over the planner and he wants my advice. I'm not sure what to say given these results. In fact, I'm starting to 2nd guess my own 3-funder! Thoughts?

It would help if you would verify that these are the same ETFs that the planner invested in for the entire period, and there were no other changes to the portfolio along the way (other than maybe adding to positions from new money, etc.)

[averagedude]

Don't confuse between the best strategy with the best outcome.

[000]

Your backtest does not include the AUM fee.

[Trader Joe]

Many years ago I helped a friend with his finances and set him up with a 3-Fund portfolio (42 US/18 Int'l/40 FI). He recently told me that a financial planner got to him about 5 years ago and he agreed to move a portion of his assets over to him. The planner put him in a portfolio that's approximately 60/40 and includes over 15 funds/etfs. I was suspicious so I backtested it in Portfolio Visualizer from 2015 - 2020. To my surprise it's been doing significantly better than our beloved 2 and 3 funders. Now he's considering moving the rest of his assets over the planner and he wants my advice. I'm not sure what to say given these results. In fact, I'm starting to 2nd guess my own 3-funder! Thoughts?

Most of the equity is split among these sector funds:

iShares US Home Construction ETF
SPDR S&P Biotech ETF
VanEck Vectors Semiconductor ETF
iShares Gold Trust
Consumer Discret Sel Sect SPDR ETF
Vanguard Health Care ETF
Vanguard Information Technology ETF

Other portfolios on charts:
Stock/Bond 60/40: Vanguard Total Stock Mkt / Vanguard Total Bond Market Index
Boglehead Three Fund: 42% Vanguard Total Stock Mkt, 18% Vanguard Total Intl Stock Index Inv, 40% Vanguard Total Bond Market Index

It sounds like you really want to transfer your investments to this financial planner.

Keep us updated on your performance.

[firebirdparts]

Sounds like you don't believe in reversion to the mean. I don't blame you. Some of that stuff, I see as cyclical, and no amount of performance would make me expect it to do it again. Some possibly not.

I always thought computers, IT services, semicoductors and whatnot would be a good long term sector. Unfortunately, I began my career about 1990, and thus in 10 year was hit by about a 90% loss which got my attention. But that's okay overall. These are big important businesses. Healthcare on the other hand consumes such an embarrassing fraction of the USA GDP that I don't see how they can get any more. That's just me.

[JBTX]

The difference is performance is mainly:

- no international
- more growth oriented than blend.

You could go 60% US Growth index and 40% bonds and probably beat his portfolio back tested. Is that the way you want to invest going forward?

[nzahir]

Now backtest QQQ only

[kimura king]

how bout no

https://www.youtube.com/watch?v=y0QbXfvbjFk

[mokaThought]

He took more risk, and the risk happened to pay off over five years. Okie dokie. By that standard, let's all go 100% TSLA.

Don't lose a friendship over this.

[JustinR]

If he asks for your opinion, I would continue advising him to do the three-fund portfolio, and leave it at that.

[Harry Livermore]

It is almost certain that this "financial planner" hasn't had your friend invested in these same 15 funds/ETFs from 2015-2020. 

Rowan beat me to it. I've been privy to family members' AUM "planner" monthly statements. A common thread is not only complexity (15 funds/ ETFs!) but also churn (selling this ETF and buying this similar ETF, selling some of this fund and buying a little of that fund and some of that other fund, etc.) Sometimes up to 50 trades per MONTH.
I think they do that for the sake of optics ("Wow, look at how he's trading around the market. He must be smart!") and also to discourage unwinding of the portfolio or moving.
Cheers

[redmaw]

As others have said, your back test doesn't show the fa's actual performance, its a hypothetical based on the current portfolio... which was selected based on backtest data. If you want to do this right, get the date and amount of $ invested with the FA, and go figure out what that would have been worth now in a DIY portfolio. Compare ending balances. To start the achieved CAGR will lag the backtest by the fee, so that 10% becomes 8.5%, barely better than the 60/40... then if they held a loser for a while, and sold it for something that had been doing better recently, it goes down from there. I would bet there is no actual out performance here.

[Coltrane75]

As another poster has said, I wouldn't suggest giving your friend advice anymore. Caveat is that I don't know your relationship so that's your call. Do you want to be potentially held responsible, not legally but in a personal way, for his perceived investment problems?

I've given BH advice to someone close to me; and he got upset because of International underperformance over a short period of time. I quickly stopped giving him advice because he doesn't have a common understanding of the BH philosophy.

Maybe point him to the BH way if he wants to learn more; otherwise let him figure it out.

[rkhusky]

Ask your friend the questions brought up in this post:
Has he been in those funds the whole time?
Does the performance comparison include the advisor fees?

And note that US growth has done well recently, while international has lagged the US. Did the advisor get him into US growth before or after it started to out-perform? Will the advisor get him out of US growth before it starts to under-perform?

[wickywack]

When I was grading my previous financial advisor, I used external rate of return (xirr in Google sheets). Over a 10 year period, I had my dated deposits and my final (at the time) balance. That is sufficient to compute an external rate of return, and far simpler than looking at the actual funds. I had both a taxable and an IRA, and AUM fees were deducted from the accounts, so xirr accounted for that.

For comparison / back testing, I created a similar portfolio - same dated deposits - but all invested in a Vanguard Target Retirement Fund (VFORX, which I happened to be using in my 401k) instead. I used a total return calculator (buyupside.com, but there may be better) to compute the corresponding "final" balance if I has done that instead.

In my case, the advisor did quite well - most of my deposits were shortly *after* the 08/09 crash - but VFORX would have done even better. The advisor's portfolio returned 11.8% a year and the hypothetical VFORX one 13.5%. The margin was roughly the AUM fee of 1.3% + the difference in expense ratios.

The one thing missing from my analysis was tax cost, but I would expect that to favor a 3 or 4 fund portfolio approach.

[WarAdmiral]

OP,

You have taken a very short term view of 5 years. 2-3 funders require ideally 20+ years to work their magic.

There are cases where a particular fund has outperformed 2-3 funders over 20 years (Magellan) and then crashed and burned. You will never know ahead of time which fund could that be and by the time you realize, reversion to mean would be about due.

Stay the course!