High-fee Passive Advisors Gave Me the Boot!

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Rick Ferri
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High-fee Passive Advisors Gave Me the Boot!

Post by Rick Ferri » Sun Aug 29, 2010 11:00 am

I have aLinked-in.com profile, which is a site for business connections. It seems I've been a bad boy on the site lately and have been banned from one of the index fund groups.

"Passive Investment Professional" is a group that's composed of advisors who supposedly believe in low-cost passive investing. Yet, many of these advisors charge 1% or more to construct and maintain a portfolio of index funds, ETFs, and DFA funds. So, I asked this group in a forum, why, if they believe in low-costs, would an advisor charge high fees? It was a hypocritical.

Granted, I wasn't the most courteous when asking these questions (in fact, some would say I was rude). I said it was insane for an advisor to preach about low-cost passive investing and then charge their clients excessive fees. I was direct because I wanted these advisors to feel threatened, and as such, give me an emotional response rather than their boring sales pitch about how much 'value' they added to the client relationship.

I did get some interesting answers. Such as, "I charge what the market will pay" and "I provide a unique life planning experience". I believe the first answer is the most honest, i.e. advisors charge what they think people will pay, not what's fair. The second answer, "a life planning experience" was week because how often does a person need "life" planning? I mean, how often is there something in life that occurs that needs new life planning, and why do clients have to pay for it each year whether they need it or not?

Well, to make a long story short, I was kicked off the "Passive Investment Professionals" group yesterday without any notification. I'm guessing the person who started the group and controls membership is a low-fee passive fund high-fee advisor hypocrite.

What do you think?

Rick Ferri

PS. I'd like to thank Derek Tinnin for taking my side in the discussion before I got the boot.

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Post by dbr » Sun Aug 29, 2010 11:16 am

I think if a person is in a business that competes in a market where there are alternatives, then that person should be charging what the market will bear. Any individual who goes to such a business should expect to be charged exactly that.

The sooner people who pay money out to "financial advisors" are clear in their own minds that they will be charged what the market will bear, the better. That opens the opportunity for people to seek out those vendors or other opportunities where they can put price pressure on the supplier.

I think the biggest problem we have now in terms of "unfair" costs, especially in captive arrangements such as retirement plans, is that the costs are considered by everyone to be "standard" and "fair" instead of being recognized as operating in a market that charges what it can.

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Post by hsv_climber » Sun Aug 29, 2010 11:20 am

"It is difficult to get a man to understand something when his salary depends upon his not understanding it"

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Post by Rick Ferri » Sun Aug 29, 2010 11:26 am

dbr wrote:I think if a person is in a business that competes in a market where there are alternatives, then that person should be charging what the market will bear. Any individual who goes to such a business should expect to be charged exactly that.
I don't think Jack Bogle believed that. In fact, I glad he didn't believe it!

Technology as made investment management very efficient. An advisor firm that embraces technology can manage double the number of clients with half the staff than just a decade ago. The public doesn't realize these productivity gains have occurred, and many people still expect to pay a 1% fee (or more) because they think that's the market. So, it's a question of advisor character. The advisor should pass these savings on to clients.

IMO, an advisor should charge what's fair, not what the market will bear.

Rick Ferri

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Post by GlennC » Sun Aug 29, 2010 11:30 am

1- People respond to incentives (almost all the time).

2-

http://www.bryanappleyard.com/blog/uplo ... 23.bmp&t=1

;)

3- Please keep helping investors get a fair shake.
I am one of those dirty active management people.

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Post by LynnC » Sun Aug 29, 2010 11:33 am

Such as, "I charge what the market will pay" and "I provide a unique life planning experience".

Hi Rick,

I think my favorite response to overcharging is this one: It is the industry average> I was once told that by EX broker.

Good for you for standing up!

LynnC

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Post by kenbrumy » Sun Aug 29, 2010 11:37 am

Rick Ferri wrote:IMO, an advisor should charge what's fair, not what the market will bear. Rick Ferri
It's hard for anyone to know what is "fair." I agree that 1% is horrible but there is still the magic of market forces. Unfortunately, many people don't have a clue what they're buying with their investment adviser fees. The one's that do generally don't use FAs unless they have extremely complicated situations or make periodic uses for specific situations like you would a lawyer.

I'm personally very plain vanilla financially. I have a Bogleheadish asset allocation and have a plan for going forward. I'd love to give someone a fee to really tell me what the future holds so I could only buy when the market goes up and sell before it falls. I'd like someone to tell me for sure how much I can spend to not run out of money before I die. Unfortunately, I don't believe that financial adviser exists.

No offense Rick but you cost too much for me to use you. :D

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Post by dbr » Sun Aug 29, 2010 11:41 am

Rick Ferri wrote:
dbr wrote:I think if a person is in a business that competes in a market where there are alternatives, then that person should be charging what the market will bear. Any individual who goes to such a business should expect to be charged exactly that.
I don't think Jack Bogle believed that. In fact, I glad he didn't believe it!

Technology as made investment management very efficient. An advisor firm that embraces technology can manage double the number of clients with half the staff than just a decade ago. The public doesn't realize these productivity gains have occurred, and many people still expect to pay a 1% fee (or more) because they think that's the market. So, it's a question of advisor character. The advisor should pass these savings on to clients.

IMO, an advisor should charge what's fair, not what the market will bear.

Rick Ferri
The fact that Vanguard is in business and successful and that you are in business and successful proves what the cost is that the market will bear. The fact that this forum is as busy as it is and brings in the converts it does proves the market won't entirely bear high costs. The fact that some retirement plans exist that are cost effective demonstrates the same thing. I believe those plans are mostly associated with large company benefit systems that are very sensitive to competitive benchmarking.

I believe that altruistic motives are one of the mechanisms that create alternatives in the market. Thank good fortune for that, but also thank the very system in which people try to charge what the market will bear for that.

Looked at from the right point of view, we are, of course, in agreement.

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Post by rustymutt » Sun Aug 29, 2010 11:41 am

Why it's free money Rick, are you insane? lol
They don't want you pointing out the issues with charging high adviser fees, while telling their clients how important low cost are. Your stepping on their toes and they kicked you back. I'm proud of you Rick, as would be your mother and dad. The truth will set us free! Truth, even though at times that approach to life has it's problems, is still the best advise we can give our children. The truth is always the best approach to life. Rick, you can wear that badge of honor for the rest of your life.
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Post by Jacobkg » Sun Aug 29, 2010 11:41 am

It makes me think of the inscription from the Bogleheads guide:

"Some mutual-fund managers chose to make billions. Jack Bogle chose to make a difference."

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Post by norookie » Sun Aug 29, 2010 11:59 am

:D You owe me a keyboard! After reading " I provide a unique life planning experience " I spit up my coffee all over it ! :wink: I could not find the site your referring to though after a few google inputs. Although this thread was on the first page.
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Post by Rick Ferri » Sun Aug 29, 2010 12:37 pm

norookie wrote::D You owe me a keyboard! After reading " I provide a unique life planning experience " I spit up my coffee all over it ! :wink: I could not find the site your referring to though after a few google inputs. Although this thread was on the first page.
Sorry your keyboard was ruined. This wasn't on a website. It was the response that an advisor gave for justifying whatever fee he's charging. I questioned if his life planning expertise was really needed every year by every client, and if so, why does he call it 'life' planning rather than 'calendar year' planning? I also suggested that he charge a separate one time fee for life planning and a lower fee for ongoing asset management. No response.

Actually, there may have been a response from this advisor, but the entire conversation and my membership were deleted before I could check. The message to all members on the "Passive Investment Professionals" from the moderator of that group is my way or the highway.

Rick Ferri

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Post by Cuzz35 » Sun Aug 29, 2010 12:44 pm

I went to a local advisor group in my town a few weeks ago. I'm trying to get a advisor career started so I went to these guys seeing if they would be willing to sponsor me for the series 7/66. I told them that I believe in passive low fee investing and they pretty much told me that in order to make a living I had to charge high fees.

I personally would rather charge what is fair. Needless to say they didn't offer to sponsor me after our meeting.

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Post by Dakotah » Sun Aug 29, 2010 12:48 pm

"I provide a unique life planning experience"
Hmmm. Sounds a little like a massage service advertisement...and much like during a massage, happy endings are few and far between. :wink:

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Post by RadAudit » Sun Aug 29, 2010 12:51 pm

From my MBA days, many moons ago, I was told the only time you charge what everyone else is charging (what the market will bear) is when the customer can't tell your product from your competitors' product. I believe the case in point was winter wheat. (Apologies to wheat farmers.)

But it does seem odd to me that that a "Passive Investment Professional" would charge high fees - unless there were a lot of hand holding involved. And really, if you accept the basic arguments of passive investing the planning required for stock mutual fund selection should be small.

The difference in the planners costs would seem to be setting up the paperwork for trusts, long term care insurance, etc. Maybe they could differentiate on price there by the quality / extent of the plan - but not on stock fund selection.
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Post by tms » Sun Aug 29, 2010 12:53 pm

Advisors that promote low cost passive investment strategies, but charge 1 percent for advising clients on a range of planning issues are not exactly what is wrong with the financial services industry.

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Re: High-fee Passive Advisors Gave Me the Boot!

Post by xerty24 » Sun Aug 29, 2010 12:56 pm

Rick Ferri wrote:I said it was insane for an advisor to preach about low-cost passive investing and then charge their clients excessive fees.... I did get some interesting answers. Such as, "I charge what the market will pay" ... i.e. advisors charge what they think people will pay, not what's fair.
The point of passive investing is to allow the free market to work. Apparently the free market for investment advice prices it around 1% of assets annually. You want to second guess the free market by offering your services at 1/4 the market rate? Good thing there's not WTO for your opponents to appeal to.
Rick Ferri wrote:I wasn't the most courteous when asking these questions (in fact, some would say I was rude).
Let me ask some similarly pointed questions, starting with:

Why don't you charge 1% AUM if that's what the market will bear? Many here, including myself, expect you will still do a better than average job so your business would likely still be quite competitive at a higher price. Is it because:

1. you run your business as part-business, part-charity, subsidizing the 0.75% difference in fees to your customers. If you are the only partner, I can understand this decision, but understand this would be a fiduciary breach if you had public shareholders and willing gave away over 3x their profits for "personal reasons" related to your beliefs of fairness that are clearly not commonplace. If you view this as a partly charitable work, do you think your clients' bank accounts are the most deserving charity, rather than charging them the market price and donating to your favorite causes?

2. you hope to pursue a race-to-the-bottom or "dumping" strategy, by providing your services below most providers costs (and possibly your own), hoping to gain enough market share to put the competitors out of business.

3. you don't think your services are worth more than 0.25%, either because you don't feel you add more value to your customers than that through disciplined asset management and planning, or because you don't think your time is worth such a high price/hour as implied by higher rates

With all your talk about fairness and ethics, I would hope you and your customers feel that they get a good value from playing 0.25% AUM for your services. This leads to:

How much is the value added by your services?

If it's 1% AUM in value (implying most advisors charging this rate do not add net value to their customers), why have you chosen to split the benefits 3:1 in favor of your clients? Why not charge 0.5%, for example or even 0.75%, as that would still be beneficial to both sides? I bet most of your customers can't even tell how much value you add, which is why pricing is often relatively high and emphasizes salesmanship over performance. Can you tell, and if so, what is the average benefit?

Do you worry that, by lowering the level of income advisors can expect to achieve through your hypercompetitive pricing, the best and brightest will leave the business for more lucrative pursuits and the average customer will get worse advice in the future?

I look forward to hearing your thoughts on these issues.

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Post by Beagler » Sun Aug 29, 2010 12:58 pm

Rick Ferri wrote:
dbr wrote:I think if a person is in a business that competes in a market where there are alternatives, then that person should be charging what the market will bear. Any individual who goes to such a business should expect to be charged exactly that.
I don't think Jack Bogle believed that. In fact, I glad he didn't believe it!

Technology as made investment management very efficient. An advisor firm that embraces technology can manage double the number of clients with half the staff than just a decade ago. The public doesn't realize these productivity gains have occurred, and many people still expect to pay a 1% fee (or more) because they think that's the market. So, it's a question of advisor character. The advisor should pass these savings on to clients.

IMO, an advisor should charge what's fair, not what the market will bear.

Rick Ferri
If there were more advisors like you, then the financial landscape would be a much, much better place.
“The only place where success come before work is in the dictionary.” Abraham Lincoln. This post does not provide advice for specific individual situations and should not be construed as doing so.

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LinkedIn Groups

Post by cherijoh » Sun Aug 29, 2010 1:03 pm

Hi Rick,

I also use linkedin and checked out the group you mentioned. It is described as:
This is a group for investment professionals who believe in owning the markets (DFA). The objective is for a select group of advisors to share contact information and ideas.
Obviously he was truthful about it being only for a "select group of advisors" :wink: You could always start your own group - it doesn't look like this guy has much traction with only 253 members.

C

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Disbared

Post by Taylor Larimore » Sun Aug 29, 2010 1:05 pm

Hi Rick:

Your stance against high advisor fees may irritate some, but in my book (which you co-edited :wink: ), it elevates you to a higher plateau. Mr. Bogle will be proud when he hears the news.
"I won't belong to any organization that would have me as a member." -- Groucho Marx
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Re: High-fee Passive Advisors Gave Me the Boot!

Post by Ed 2 » Sun Aug 29, 2010 1:17 pm

Rick Ferri wrote:I have aLinked-in.com profile, which is a site for business connections. It seems I've been a bad boy on the site lately and have been banned from one of the index fund groups.

"Passive Investment Professional" is a group that's composed of advisors who supposedly believe in low-cost passive investing. Yet, many of these advisors charge 1% or more to construct and maintain a portfolio of index funds, ETFs, and DFA funds. So, I asked this group in a forum, why, if they believe in low-costs, would an advisor charge high fees? It was a hypocritical.

Granted, I wasn't the most courteous when asking these questions (in fact, some would say I was rude). I said it was insane for an advisor to preach about low-cost passive investing and then charge their clients excessive fees. I was direct because I wanted these advisors to feel threatened, and as such, give me an emotional response rather than their boring sales pitch about how much 'value' they added to the client relationship.

I did get some interesting answers. Such as, "I charge what the market will pay" and "I provide a unique life planning experience". I believe the first answer is the most honest, i.e. advisors charge what they think people will pay, not what's fair. The second answer, "a life planning experience" was week because how often does a person need "life" planning? I mean, how often is there something in life that occurs that needs new life planning, and why do clients have to pay for it each year whether they need it or not?

Well, to make a long story short, I was kicked off the "Passive Investment Professionals" group yesterday without any notification. I'm guessing the person who started the group and controls membership is a low-fee passive fund high-fee advisor hypocrite.

What do you think?

Rick Ferri

PS. I'd like to thank Derek Tinnin for taking my side in the discussion before I got the boot.
Hi Rick:
I agree. A list adviser's fee in low cost investment portfolio should be much lower or depend on investment performance , results. And people will come. :wink:
"The fund industry doesn't have a lot of heroes, but he (Bogle) is one of them," Russ Kinnel

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Post by maxfax » Sun Aug 29, 2010 1:18 pm

I think the internet is a collection of 'opinion-silos'.

When your opinion differs you are labeled rude, whether you are or not. You are told to go away because 'we have our own respected experts - and they do not agree with you'. You will be banned if you don't toe the line.

That is the way the internet works. On this site as well.

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Post by Ed 2 » Sun Aug 29, 2010 1:28 pm

maxfax wrote:I think the internet is a collection of 'opinion-silos'.

When your opinion differs you are labeled rude, whether you are or not. You are told to go away because 'we have our own respected experts - and they do not agree with you'. You will be banned if you don't toe the line.

That is the way the internet works. On this site as well.
Yeah, but also there is should be a common sense. This forums unlike a social websites. Investor's community is a different crowd which need to be treated differently with a tolerance to opposite opinion otherwise it is like a boomerang will hit you back financially. :wink:
Last edited by Ed 2 on Sun Aug 29, 2010 1:31 pm, edited 1 time in total.
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Re: High-fee Passive Advisors Gave Me the Boot!

Post by sommerfeld » Sun Aug 29, 2010 1:28 pm

Rick Ferri wrote:Well, to make a long story short, I was kicked off the "Passive Investment Professionals" group yesterday without any notification. I'm guessing the person who started the group and controls membership is a low-fee passive fund high-fee advisor hypocrite.

What do you think?
Sounds like exactly what I'd expect from a guild, cartel, professional association, or union trying to limit competition and keep margins and prices high by putting up barriers to low-cost competitors.

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Re: High-fee Passive Advisors Gave Me the Boot!

Post by UrbanMedic » Sun Aug 29, 2010 1:34 pm

Rick Ferri wrote: I did get some interesting answers. Such as, "I charge what the market will pay" and "I provide a unique life planning experience". I believe the first answer is the most honest, i.e. advisors charge what they think people will pay, not what's fair. The second answer, "a life planning experience" was week because how often does a person need "life" planning? I mean, how often is there something in life that occurs that needs new life planning, and why do clients have to pay for it each year whether they need it or not?

Well, to make a long story short, I was kicked off the "Passive Investment Professionals" group yesterday without any notification. I'm guessing the person who started the group and controls membership is a low-fee passive fund high-fee advisor hypocrite.

What do you think?
I fail to see how this is the fault of the investment advisor to charge what people are willing to pay. It's not as if there is a cartel of investment advisors who meet in an former CIA prision in Malta to set prices to fix the market. Customers have options and if they don't want to shop around, that's the fault of the customer. I see people buying milk at gas stations for prices 50% higher than the grocery store, but we all understand why -- convenience.

And who decides fair? Obviously if they have customers, the client has decided the price is fair or they would take their services elsewhere. You probably won't find too many advisors charging 10% AUM. If people were willing to pay that, the price would be the prevailing one.

The internet has made it easy to find a low cost advisor. So obviously for some people cost isn't just the issue. Maybe they're satisified with a personal relationship with a local person or they want someone who sends a case of Omaha Steaks and a bottle of Crown each Christmas. Yeah they're paying for this, but that's what they want.

Think of cooking. Why bother to make a nice plating when you just mash it up with your teeth, stew it in stomach acid, mush it around in bacteria and crap it out? Because you see food before you eat it. There's a lot more than just calories and fiber.

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Re: High-fee Passive Advisors Gave Me the Boot!

Post by Rick Ferri » Sun Aug 29, 2010 1:39 pm

xerty24 wrote:The point of passive investing is to allow the free market to work. Apparently the free market for investment advice prices it around 1% of assets annually. You want to second guess the free market by offering your services at 1/4 the market rate? Good thing there's not WTO for your opponents to appeal to.
Actively managed funds have fees of 1.2% while index funds have fees of 0.2%. Active funds underperform index funds by about their extra fee. So, why doesn't everyone use index funds? The answer because people don't know the facts. It this their fault? Yes and no. Yes because most people won't take the time to educate themselves. And no because those people go to advisors who lie. When advisors hide the facts for their clients for the benefit of the advisor, that's a problem in the industry.

The SEC has been tasked to try and resolve this by making all advisors fiduciaries. IMO, advisors will lie anyway if its in their best interest to lie.
Why don't you charge 1% AUM if that's what the market will bear?Many here, including myself, expect you will still do a better than average job so your business would likely still be quite competitive at a higher price.


I would be making much more money personally if we charged higher fees. In fact, I'd be making over $1 million per year if our fees doubled to 0.5% because that extra 0.25% would be ALL profit. Our clients wouldn't be getting any more services or benefits from us than if we charged 0.5%, or 0.8%, or even 1.0% because we already provide full investment planning and management.

Technology is so good these days that an advisor can have twice the number of clients and half the staff and still provide all the service. So, to answer your question in the choices you provided, I chose #3. No advisor service is worth paying a high fee. There's nothing that an efficient advisor could possibly do that's worth 1.0% per year except perhaps to include a vacation Hawaii and season tickets to some professional sports team.
How much is the value added by your services?


We create an investment plan, set portfolio policy, implement the plan, and maintain the portfolio. We don't do tax preparation or sell insurance.

So, how much is lost over a 1% advisor? None! How much is gained by the client's? 0.75%. Now, the 1% advisors will say that you get what you pay for; but Jack Bogle says you get what you don't pay for! Jack is right.
Do you worry that, by lowering the level of income advisors can expect to achieve through your hypercompetitive pricing, the best and brightest will leave the business for more lucrative pursuits and the average customer will get worse advice in the future?
Are you inferring that the highest paid people in the business are the best, brightest, and most ethical? Where does the put Jack Bogle, Bill Bernstein and me? Are we the worst and the dumbest? I don't think you meant to infer that, but maybe we are dumb for charging what's fair rather than ringing every last cent out of our clients by charging what the market will bear. But I'm OK with my decision.

Rick Ferri
Last edited by Rick Ferri on Sun Aug 29, 2010 1:50 pm, edited 1 time in total.

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The ball game

Post by davidkw » Sun Aug 29, 2010 1:49 pm

Rick,

Does your company give clients tickets to the ball game? The high expense advisiors usually provide tickets to the ball game and circus.
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Re: The ball game

Post by Rick Ferri » Sun Aug 29, 2010 1:56 pm

davidkw wrote:Rick,

Does your company give clients tickets to the ball game? The high expense advisiors usually provide tickets to the ball game and circus.
You can have as many free tickets to local little league baseball games and local youth soccer games as you can handle! And that includes all the tap water you can drink (ice is extra). :wink:

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"toe the line' or be banned ?

Post by Taylor Larimore » Sun Aug 29, 2010 2:27 pm

maxfax wrote: You will be banned if you don't toe the line. That is the way the internet works. On this site as well.
Hi Max:

As a moderator, I know you are mistaken.

Although the Boglehead Forum's heading is "The investing advice inspired by the example of Jack Bogle," no one is or has been banned because they "don't toe the line."

All you need to do is look at the topics and replies posted every day.
"Simplicity is the master key to financial success." -- Jack Bogle

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Post by Nephron » Sun Aug 29, 2010 3:50 pm

Mr. Ferri does not know me but I called him a few years ago to be a potential client. I'm in the medical field and have gotten several calls from adivsors to use their services. Prior to reading the boglehead website and books, I felt overwhelmed about investing the right way and turned to Rick. After giving me some useful guidelines, he politely told me that I knew enough and did not need his services. I bought his asset allocation book after that conversation (and of course read the forum) and have felt much more secure about the Boglehead-way. Rick, I appreciate your integrity and your character in turning me away. You took the moral high-road instead of chasing the almighty dollar.

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Post by kenbrumy » Sun Aug 29, 2010 4:09 pm

Nephron wrote:Mr. Ferri does not know me but I called him a few years ago to be a potential client. I'm in the medical field and have gotten several calls from adivsors to use their services. Prior to reading the boglehead website and books, I felt overwhelmed about investing the right way and turned to Rick. After giving me some useful guidelines, he politely told me that I knew enough and did not need his services. I bought his asset allocation book after that conversation (and of course read the forum) and have felt much more secure about the Boglehead-way. Rick, I appreciate your integrity and your character in turning me away. You took the moral high-road instead of chasing the almighty dollar.
Rick does an excellent job of building up the knowledge base of anyone that stumbles onto Bogleheads. He's so helpful it's a wonder he has any clients left. Even worse, he doesn't promise anyone they'll beat the market or be able to retire withdrawing 6% of their portfolio every year.

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Post by Charybdis » Sun Aug 29, 2010 4:17 pm

I think the fixed fee is the fair price, which doesn't depend on the size of the portfolio. Managing $1 million and managing $5 million requires the same amount of effort.

So for example charging $2000 / client / year is the fair, not charging 0.5% / year / client / portfolio size.

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Re: High-fee Passive Advisors Gave Me the Boot!

Post by stratton » Sun Aug 29, 2010 5:51 pm

Rick Ferri wrote:Well, to make a long story short, I was kicked off the "Passive Investment Professionals" group yesterday without any notification. I'm guessing the person who started the group and controls membership is a low-fee passive fund high-fee advisor hypocrite.

What do you think?
You're a skunk at the Mad Hatter's Investment Advisors Tea Party. :-)

Paul
...and then Buffy staked Edward. The end.

Ed 2
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Re: High-fee Passive Advisors Gave Me the Boot!

Post by Ed 2 » Sun Aug 29, 2010 6:04 pm

stratton wrote:
Rick Ferri wrote:Well, to make a long story short, I was kicked off the "Passive Investment Professionals" group yesterday without any notification. I'm guessing the person who started the group and controls membership is a low-fee passive fund high-fee advisor hypocrite.

What do you think?
You're a skunk at the Mad Hatter's Investment Advisors Tea Party. :-)

Paul
Tea Party got a bad wrap. Come on !!! Do not listen too much main news media propaganda
"Don't tread on me"
:roll:
"The fund industry doesn't have a lot of heroes, but he (Bogle) is one of them," Russ Kinnel

MM07
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Re: High-fee Passive Advisors Gave Me the Boot!

Post by MM07 » Sun Aug 29, 2010 6:08 pm

I agree with you.

I had rather have an actively managed fund with 100% turnover a 3.0% management fee and a 6% sales charge than deal with one of these holier than thow advisors who do nothing but rip the people that sell this stuff, but then charge a fee that makes it the equivalent to a high fee mutual fund.

What makes me want to throw up even more are the people who do this but used to be brokers who peddled this stuff. Then they go talk to a DFA type outfit and change their business model from active to passive. They just still charge active type fees. I was looking at ric edlemans fee schedule and it is absolutely criminal that he can write a book that should have been entitled "the rightousness of ric edleman" that rips fees and then charges what he does for passive management. I would rather own an equity indexed annuity than deal with someone like him but he is not the exception.

Thanks for being one of the good guys.

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Post by nisiprius » Sun Aug 29, 2010 6:20 pm

Good for you, Rick.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Post by richard » Sun Aug 29, 2010 6:21 pm

Nephron wrote:Mr. Ferri does not know me but I called him a few years ago to be a potential client. I'm in the medical field and have gotten several calls from adivsors to use their services. Prior to reading the boglehead website and books, I felt overwhelmed about investing the right way and turned to Rick. After giving me some useful guidelines, he politely told me that I knew enough and did not need his services. I bought his asset allocation book after that conversation (and of course read the forum) and have felt much more secure about the Boglehead-way. Rick, I appreciate your integrity and your character in turning me away. You took the moral high-road instead of chasing the almighty dollar.
Impressive

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Re: High-fee Passive Advisors Gave Me the Boot!

Post by richard » Sun Aug 29, 2010 6:23 pm

Rick Ferri wrote:I would be making much more money personally if we charged higher fees. In fact, I'd be making over $1 million per year if our fees doubled to 0.5% because that extra 0.25% would be ALL profit. Our clients wouldn't be getting any more services or benefits from us than if we charged 0.5%, or 0.8%, or even 1.0% because we already provide full investment planning and management.
Would you have as many clients if you charged higher fees?

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Re: High-fee Passive Advisors Gave Me the Boot!

Post by Rick Ferri » Sun Aug 29, 2010 6:42 pm

richard wrote:
Rick Ferri wrote:I would be making much more money personally if we charged higher fees. In fact, I'd be making over $1 million per year if our fees doubled to 0.5% because that extra 0.25% would be ALL profit. Our clients wouldn't be getting any more services or benefits from us than if we charged 0.5%, or 0.8%, or even 1.0% because we already provide full investment planning and management.
Would you have as many clients if you charged higher fees?
No. But profit margins would be higher on the fewer client's we did have because we wouldn't have as much overhead from personnel, office space, insurance, and data costs. So, raising our fee from 0.25% to 0.50% would cut my overhead and at the same time increases revenue about 60%-70% (est). This combination puts a lot more money in my pocket.

WE HAVE NO intention of doing that because a 0.5% fee isn't a fair price for money management and investment advice in 2010 (even though the average so-called passive advisor charges twice that amount). :)

I'm not saying what we do is right for everyone who wants to hire an advisor. There are people who shouldn't hire us. Our fee is fair for investors who wish to delegate and have $1 million or more. But we're too expensive for people who have $300,000 or even $600,000 because our minimum is $2,000 per year household. That makes the fee to high, IMO. These folks might look at an advisor such as Derek Tinninwho also charges 0.25% and has a $1,000 minimum fee. Or, they might go toAllan Roth, who charges by the hour. Or, they could manage their own account with the help of MarketRiders.com for $99 per year.

Rick Ferri

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Post by VennData » Sun Aug 29, 2010 8:06 pm

dbr wrote:The fact that Vanguard is in business and successful...
Actually, Vanguard is a bit different.
Because the clients, through the various mutual funds, own the enterprise, Vanguard operates at cost. Each fund pays a portion of Vanguard’s expenses—for salaries, facilities, computers, operating capital, etc. But the fund expenses don’t go to provide profits to an owner of Vanguard, because the funds are the owners. The funds and their shareholders keep the money that would go to profits at a typical mutual fund sponsor
http://www.vanguardblog.com/2010.03.25/ ... owned.html

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Re: High-fee Passive Advisors Gave Me the Boot!

Post by nolo » Sun Aug 29, 2010 8:37 pm

Rick Ferri wrote:"Passive Investment Professional" is a group that's composed of advisors who supposedly believe in low-cost passive investing. Yet, many of these advisors charge 1% or more to construct and maintain a portfolio of index funds, ETFs, and DFA funds. So, I asked this group in a forum, why, if they believe in low-costs, would an advisor charge high fees? It was a hypocritical.
Rick:

Are you familiar with the practices of all the firms that charge 1%? Don't some of them do things differently than your firm-- for instance offer portfolios customized to each client rather than using the exact same funds and ETFs for all portfolios as does your firm?

from your website:

Do investments differ from Client to Client?
We have spent over a decade studying and selecting index funds and ETFs that are used in all portfolios. However, the percentage allocated to each fund may differ from client to client depending on the needs of each client. In addition, taxes may affect which investments are selected for taxable accounts. Some asset classes are not suitable for investors who are in a high tax bracket.

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Post by Adrian Nenu » Sun Aug 29, 2010 10:31 pm

Don't feel bad Rick, I got kicked off the Morningstar forums for making a nearly identical post as a certain noted Boglehead who bragged about the number of posts he wrote. Morningstar's moderator wouldn't even take my call. Talk about hypocrisy!

Adrian
anenu@tampabay.rr.com

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Post by norookie » Sun Aug 29, 2010 10:48 pm

Adrian Nenu wrote:Don't feel bad Rick, I got kicked off the Morningstar forums for making a nearly identical post as a certain noted Boglehead who bragged about the number of posts he wrote. Morningstar's moderator wouldn't even take my call. Talk about hypocrisy!

Adrian
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Posters that BRAG about their number of "posts" really annoy me. Its like "I've no life". You do understand my post right? :roll:
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Re: High-fee Passive Advisors Gave Me the Boot!

Post by rj72 » Sun Aug 29, 2010 11:30 pm

Rick Ferri wrote:
I'm not saying what we do is right for everyone who wants to hire an advisor. There are people who shouldn't hire us. Our fee is fair for investors who wish to delegate and have $1 million or more. But we're too expensive for people who have $300,000 or even $600,000 because our minimum is $2,000 per year household. That makes the fee to high, IMO. These folks might look at an advisor such as Derek Tinninwho also charges 0.25% and has a $1,000 minimum fee. Or, they might go toAllan Roth, who charges by the hour. Or, they could manage their own account with the help of MarketRiders.com for $99 per year.

Rick Ferri
2 comments:
1 - Most financial advisors are selling FUD - Fear, Uncertainty & Doubt - and try to make their work seem arcane and difficult for anyone else..
The problem is that everyone thinks they are 'above average' and they can't be 'above average' in index funds, so they hire someone who says.. "I can't promise to make above average results, but you should be able to make 10% a year." I can see why they booted you.. you (and advisors like you) are a disrupting force, and its easier to cover their eyes and go 'lalalalala' than to face it.

2. Thanks for the pointers to those other folks.. Allan's website is especially interesting.. I'm less impressed with Marketriders based on this item from their FAQ:

Code: Select all

I have taxable and non-taxable accounts. Can I manage it all with MarketRiders?
Yes, you can build one portfolio and fund it from both taxable and non-taxable accounts or you can build mirror portfolios for each account- IRA and non-IRA. Oftentimes members will build one portfolio, allocate it proportionally to each account and then rebalance from within the larger non-taxable account.
May be easier, but I've found its the hardest to get the right asset classes in the right type of account, and I would think their suggestion will lead to higher taxes over time.

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Post by natureexplorer » Sun Aug 29, 2010 11:30 pm

I believe Larry Swedroe's fees are pretty high.

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Post by letsgobobby » Sun Aug 29, 2010 11:43 pm

Rick Ferri wrote:
IMO, an advisor should charge what's fair, not what the market will bear.

Rick Ferri
Fair enough.

Define fair.

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Re: High-fee Passive Advisors Gave Me the Boot!

Post by stratton » Mon Aug 30, 2010 1:26 am

Ed 2 wrote:
stratton wrote:
Rick Ferri wrote:Well, to make a long story short, I was kicked off the "Passive Investment Professionals" group yesterday without any notification. I'm guessing the person who started the group and controls membership is a low-fee passive fund high-fee advisor hypocrite.

What do you think?
You're a skunk at the Mad Hatter's Investment Advisors Tea Party. :-)

Paul
Tea Party got a bad wrap. Come on !!! Do not listen too much main news media propaganda
"Don't tread on me"
:roll:
And here I thought people would catch the Alice in Wonderland reference when I said "Mad Hatter's...Tea Party." :?

Paul
...and then Buffy staked Edward. The end.

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Re: High-fee Passive Advisors Gave Me the Boot!

Post by james22 » Mon Aug 30, 2010 2:00 am

Rick Ferri wrote:I wasn't the most courteous when asking these questions (in fact, some would say I was rude). I said it was insane for an advisor to preach about low-cost passive investing and then charge their clients excessive fees. I was direct because I wanted these advisors to feel threatened, and as such, give me an emotional response rather than their boring sales pitch about how much 'value' they added to the client relationship.
Seems like you got the response you were looking for.
This whole episode is likely to end so badly that future children will learn about it in school and shake their heads in wonder at the rank stupidity of it all... Hussman

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Post by markhenwood » Mon Aug 30, 2010 2:15 am

People don't realize how big a 1% fee is. If you withdraw 4% of your portfolio per year the fee is a whopping 25% of your withdrawals.

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Re: High-fee Passive Advisors Gave Me the Boot!

Post by Ed 2 » Mon Aug 30, 2010 7:19 am

stratton wrote:
Ed 2 wrote:
stratton wrote:
Rick Ferri wrote:Well, to make a long story short, I was kicked off the "Passive Investment Professionals" group yesterday without any notification. I'm guessing the person who started the group and controls membership is a low-fee passive fund high-fee advisor hypocrite.

What do you think?
You're a skunk at the Mad Hatter's Investment Advisors Tea Party. :-)

Paul
Tea Party got a bad wrap. Come on !!! Do not listen too much main news media propaganda
"Don't tread on me"
:roll:
And here I thought people would catch the Alice in Wonderland reference when I said "Mad Hatter's...Tea Party." :?

Paul
I am sorry. :D
"The fund industry doesn't have a lot of heroes, but he (Bogle) is one of them," Russ Kinnel

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