What you need to know to do it on your own

[larryswedroe]

This thread was cut off yesterday so I could not respond--but here is my answer about DIY.


http://moneywatch.bnet.com/investing/bl ... /#comments


And tomorrow I will discuss the 11 things one should require of a financial advisor before even considering hiring them

Both topics are discussed in an Appendix of The Quest for Alpha

[RadAudit]

Thanks for the post. I concur with the article - there are relatively few investors who can execute the plan during conditions of moderate / great uncertainty.

I remember a number of the posts on this forum from the 2007 - early to mid 2009 time frame that discussed what they were going to / had done in response to the obvious end-of-the-financial-world-as-we-know-it conditions at that time.

Looking forward to the article on what to require from FAs.

[ResNullius]

Thanks for the post. I concur with the article - there are relatively few investors who can execute the plan during conditions of moderate / great uncertainty.

.

I find that just as many, if not more, financial advisors/brokers/whatever have even more trouble executing their own plans for their clients. I think your average investors stays the course more often and more consistently than probably 95% of so-called financial experts, which includes all the local experts throughout small/mediumville America.

[larryswedroe]

While I have no way to prove it, I suspect that directionally you are correct, but that just shows how important it is to choose the right financial advisor, one whose recommendations are based on the science not emotions or opinions. I address this in tomorrow's blog post, also from the book

I would note that the Boglehead community is NOT representative of the average investor. One simple reason is that the fact that they come here shows they meet the INTEREST requirement, while unfortunately most Americans would rather watch a reality TV show or Cramer.

[Fallible]

Thanks for the post. I concur with the article - there are relatively few investors who can execute the plan during conditions of moderate / great uncertainty.

.

I find that just as many, if not more, financial advisors/brokers/whatever have even more trouble executing their own plans for their clients. I think your average investors stays the course more often and more consistently than probably 95% of so-called financial experts, which includes all the local experts throughout small/mediumville America.

I don't know about the statistics you mention, but I do think you make a very important point about "financial advisors/brokers/whatever." The article is about investing on one's own, but much of it could also refer to advisors/brokers, too many of whom also can't meet all of Bernstein's four points, especially the last - staying the course.

[BlueEars]

Regarding getting a financial advisor: one should do it relatively soon in one's investment life. I say this because imagine taking some years to develop the expertise to invest wisely during which time you get sub par returns. You spend a lot of money finding that you are not a disciplined investor. Finally you decide to get an FA and achieve market returns. Then you retire and continue to pay the >1% of assets fee which is about 25% of your SWR (4% of total assets).

The other route is to go conservative at the start until you maybe build up the expertise to DIY. That takes discipline. But with the advise on this forum it is quite doable. Unfortunately the forum wasn't around when I started my investment life in the 1970's. But no-load funds were around and newsletters like the Telephone Switch Advisor (Dick Fabian and his 39 week moving average method), and Forbes columnists, and WSJ columnists ... makes my head spin .

So the two best routes might be:
1) Hire an FA as soon as you can afford one after doing DD search
2) Start off conservatively, learn investing from good sources

IMO paying that FA fee in retirement is unpalatable.

[RBK]

I don't know about the statistics you mention, but I do think you make a very important point about "financial advisors/brokers/whatever." The article is about investing on one's own, but much of it could also refer to advisors/brokers, too many of whom also can't meet all of Bernstein's four points, especially the last - staying the course.

This is exactly what I was thinking. If you are not capable of following the four points mentioned, okay, fine-- but if you hire an advisor they better be capable of following those four points. My limited experience with them says that many of them are not even interested in following those points.

My biggest problem with the way people use financial advisors is that most people do not even know how to measure how well their advisor is doing for them-- they just trust whatever the advisor reports. The very disinterest/ignorance that causes the person to go to an advisor prevents them from recognizing whether it has helped them or not. It's a bad position to be in, which is why my advice is always to learn more-- whether you use an advisor or not. Knowledge is power.

[larryswedroe]

Les your point is correct ONLY if you would do better on your own, and not limiting the better part to just investing, but other financial issues that become important like analyzing the need for LTCI and integrating SS into plans (like when optimal to take it) and figuring out right withdrawal strategies (not just amount but locations for tax efficiencies) and estate planning issues, etc.

Over their lifetimes investors will have dozens of chances to make mistakes, and even if you are very good you might avoid many or even most. But a good advisor will improve the odds and avoiding even a small number can easily cover the costs (including the other value adds a good advisor can bring), because even just one really bad mistake can cause a plan to fail.

[Beagler]

For many investors most of their investing is done within their 401k plans and IRS's. If they are fortunate enough to have VG TR funds in their work plans, if they simply invested in TR funds (in each) they will have serviceable (though likely not ideal) retirement asset allocations. They could do a lot worse.

[BlueEars]

Larry, I can agree with you that a high percentage of people have no taste for investment and financial planning complexities. If you have assets you need to take some action. And high net worth people who are busy might truly require a well qualified FA.

For some of us who meet some of the criteria spelled out in your article, we will benefit from DIY investing. Of course, there is no way for a young person or even a retiree to know for sure that they will succeed on their own. Some of us require total control over our own destiny -- I'm one of those odd balls. My guess is you may be too.

[larryswedroe]

Few thoughts, First there are control "freaks" I have met who even fully understand that a good advisor would add value above fees but they cannot give up control. Just met with a multimillionaire who basically said those very words to me. In fact he had agreed to hire us after visiting with us for a full day and then other meetings, signed the paper work and then simply could not get himself to act on moving the assets and he gave that explanation.

I don't fit that category because I have hired financial advisors.

IMO even those that meet most of the criteria are better off hiring an advisor, but of course you need to find the right type advisor, one who IMO meets the 11 criteria I lay out--and that can be done.

The problem as one smart person once said is that millions of people know the price of everything and the value of very little. We don't buy the cheapest cars, we don't always eat in the cheapest restaurants and we don't always use the cheapest doctors. We only use the cheapest when the product or service is a commodity. And good financial advice is not. For example I recently paid a lot more for legal services for my estate plan than I could have, but IMO the value added was many multiples of the higher cost. Now that doesn't mean that you have to pay a high fee to get good advice. But what is important to understand is that bad advice will cost you dearly, no matter how little you pay for it. (:-))

Best wishes and good luck on your investment journey. I hope that I have been helpful to you along the way.

[BlueEars]

Thanks Larry for your insights. I'm not a control freak but I'm sure they are out there.

You've had a lot more experience with FA's then I'll ever have so it's interesting to hear your thoughts there. Perhaps in your column you might profile a few FA's from the past including the success and horror stories, with names withheld of course.

[Stevewc]

Hi Larry,
Although I find your knowledge and wisdom to excel most.
How much of that actually ends up helping your real customers?
You are in the forefront online and in the news, but if your firm is hired are you really there and involved, or is someone that doesn't really know what you know leading the way?
Steve

[Rodc]

My wife does not care about investing.

She is very smart, but does not do math.

She does not have a lot of knowledge. (edit, I should have said not a lot of detailed investing knowledge)

She does have wisdom (worth more than knowledge and math skills), and she does have discipline.

She chose a plain vanilla simple low cost diversified portfolio because she does not belief experts are going to add value because if they did they would just take it out in fees (they get the money, not you), she has no need to beat the market (or her best friend) and never panics. She understands at a level most people never will that markets gyrate, ignore the noise, put your money in and go off and spend your time on the areas of your life you enjoy and can control, and in the end you adapt to how much you have anyway.

Really, you need just enough interest to gain the knowledge that low cost widely diversified investing is the correct things to do. In fact, having little interest aids discipline I suspect.

[BlueEars]

Hi Rod, you have a gem there. I think she's a keeper.

Now my wife tells me I'm doing a good job on the financial front. When I got down on myself a few years back she gave me a pep talk. We've talked about what to do if I should go into a coma or something, she should just go with a decent set of Vanguard funds that have the right AA rather then the more complex strategy I've been using.

[abuss368]

Read any of Mr. Bogle great books on investing.

[larryswedroe]

First, I am just one of seven members of our investment policy committee which sets the investment strategy for the firm. Among the other members are three of my co-authors and a PHD in math who taught the math of finance at one of the top schools in country

Second, I don't handle any clients personally so that allows me to be available to help with all clients as needed. I meet with many and they are all free to email or call or ask me to join a meeting.

Third, every month we have extensive training for the roughly 25 advisors in the firm, so they are all on the same page. And we work as a team, bringing to the table the subject matter expert, so an advisor might bring in someone for discussion on LTCI or another person on 529 plans and another for hedging single stock risk or managing stock options and I typically get involved with mortgage financing discussions having been Vice Chairman of the largest mortgage company in the country. And so on. Clients are treated as clients of the firm, not clients of a single advisor.

I hope that is helpful

[Cut-Throat]

The problem Larry is that picking a reputable FA is more difficult than "Doing it on your own".

In case you haven't noticed there are a lot of Full Service Brokers and Insurance Salesman masquerading as Financial Advisers. These people do more harm than the average bank robber.

[larryswedroe]

Here I very much disagree. One needs to follow my eleven steps which will be in my blog tomorrow and check with respected professionals you know like CPAs or attorneys. We work with 125 firms that all follow the same strategy and same approach, and we have almost $14 billion of AUM now collectively so lots of people have found good advisors. Now there are far more bad ones than good ones but there are hundreds of good ones.

Just have to know what to look for (my list helps there) and be willing to spend the time to perform proper due diligence. Just as you would on a doctor (if you are a smart patient).

[peter71]

Thanks for the post. I concur with the article - there are relatively few investors who can execute the plan during conditions of moderate / great uncertainty.

I remember a number of the posts on this forum from the 2007 - early to mid 2009 time frame that discussed what they were going to / had done in response to the obvious end-of-the-financial-world-as-we-know-it conditions at that time.

Looking forward to the article on what to require from FAs.

The above anecdotes are meaningless, and if anything I'm increasingly persuaded that retail investors underperform in BULL markets. In bear markets, like those of the past 3, 5 and 10 years, VTSMX investors (presumably including many here) have actually outperformed the fund.

http://performance.morningstar.com/fund ... -US&s=SPYZ

As discussed in the deleted thread, I also disagree strongly with most everything Larry was quoted as saying in this article:

http://custom.yahoo.com/financial-advis ... -container

As I said yesterday it's actually a slightly more moderate, if less well argued, position than Bill Bernstein's, but no time to remake all of those points tonight . . .

But all I can do is try and present some evidence . . . if after genuinely trying to understand that evidence some people still think they're too dumb or crazy to save themselves a 1% AUM fee, that's by no means for anyone else to decide.

[mlebuf]

How much math knowledge does it take to buy a balanced fund of index funds suitable for one's age and tolerance for risk? Want something more complex? How much math knowledge does it take to construct a simple, balanced portfolio of several index funds? The former takes none and the latter takes an ability to do simple percentages.

The first law of expert advice: Never ask the barber if you need a haircut.

[larryswedroe]

Just thought I would note this: While most people use the 1% fee, the weighed average fee we charge, which includes all of our services is actually bit under 50bp. And our clients save the fund expenses of fixed income funds and get the advantages of a separate account manager.

Now we do charge more for smaller accounts. But our fee for accounts under about $300k is actually less than Rick Ferri's fee because we have a $1000 minimum.

[BlueEars]

Just thought I would note this: While most people use the 1% fee, the weighed average fee we charge, which includes all of our services is actually bit under 50bp. And our clients save the fund expenses of fixed income funds and get the advantages of a separate account manager....

Larry, if I came to your firm with a $1M portfolio which would be maybe 60/40 equities/bonds then are you saying it would cost about $500/yr? Also does that include advantages you've mentioned such as (1) access to DFA funds, (2) tax planning, (3) when to take SS, (4) Monte Carlo simulations to determine a safe withdrawal rate in retirement, etc., etc?

[larryswedroe]

No, I did not say that. I said our weighted average fee is less just under 50bp. And we have small accounts that pay 1.25% with a minimum fee of just $1,000 and accounts around $50mm that pay much less than the weighted average.

(BTW-50bp on $1mm is not $500, but $5000 anyway)

I just noted that everyone seems to use that 1% figure when there are plenty advisors that charge less (many very well known) and even our weighed average fee is half of that.

Of course different advisors offer different services and so really cannot compare fees unless you do so on apples to apples basis and then you can decide if the value is there. So for example in addition to the things you listed we do the FI side with individual bonds and thus avoid the fund fee and provide the advantages of separate account management.
So on implementation side say a 50/50 portfolio to make math easy, might be 40bp for equities and 0 for bonds so only 20bp for the wtd. average for the portfolio. Then you would add our advisor fee. For an advisor that used funds you would have to add the fees on the bond fund side. So say that is 20bp, or a wtd average of 30bp for the portfolio, plus then consider the value of the advantages of separate account management on top of that.

Not trying to make any case here, just showing you have to look at things on apples to apples and value the services provided (or not if you think they have no value) and then make a judgment.

We have lost of few clients over the years to "low fee" advisors and also gained some clients who have left some "low fee" advisors because clients felt they were not getting value for the low fees. Despite the fact that probably very close to all our clients are well aware of lower cost advisors our turnover rate is pretty close to zero over 15 years (very low single digits). So it seems our clients believe they are getting more than value for the fees we charge.

Hope that answers your question

[BlueEars]

Sorry about that extra zero, my wife would say "So what's an extra zero among friends?". Should have asked is it $5k for a $1M portfolio with the other items mentioned in the above post? I'm still unclear about the answer though.

Given the other items I specified in the above post is 1% fee wrong? I'm comparing it to the DIY approach where my total portfolio ER = 0.2%.

[larryswedroe]

Thought I gave you clear answer.

As I said, our weighted average fee is slightly under 50bp. So if you look at our total revenue compared to assets you get that figure. And as I explained, we have clients who pay as high as 1.25% on small accounts, but our minimum fee is only $1,000. So compared to some low fee advisors for smaller portfolios we are actually less expensive because they might have minimums of $5k or $3k or whatever. Now they do become less expensive of course at higher asset levels. But then you have to compare the services relative to the fees and decide where you are getting more value.

We also have clients that pay us much less than 50bp because they have very large size portfolios ($40mm or more). And we also provide a service of managing separate account fixed income ONLY portfolios for higher net worth people at Vanguard-like fees but with the benefits of separate account management. So that pushes our weighted average fee down.

The bottom line is that the answer is no we would not charge 50bp for a $1mm portfolio, more like the 1% fee.

[bb]

So far the discussion has centered around can an investor do it themselves or do they need to pay an advisor a yearly fee. I assume a fee only advisor is potentially an economic solution to the problem as well.

[larryswedroe]

As one of the items in my list today on choosing a financial advisor, the fee-only is the ONLY kind I would recommend. The only one paying the advisor for the investment advice should be the client. No incentives should exist to recommend one vehicle over another. So not only fee-only but one who provides a fiduciary standard of care AND is willing to demonstrate to you that they are investing their own personal assets in the same vehicles (strategy) they are recommending to you. Now of course they may have an entirely different AA, but the vehicles should be the same. In other words, they should be prepared to show you that they eat their own cooking.

My article is here
http://moneywatch.bnet.com/investing/bl ... blog-river

[dbr]

I think bb wants to distinguish a one-time service, one-time fee from AUM.

[jhh9327]

Larry, this screening process is very valuable. Based on your expertise, if a person randomly picked an advisor from a hat of all available advisors, what do you think are the rough chances that one meeting your criteria would get picked? How about the chances of randomly picking someone who meets your criteria if you reduce the field to fee-only advisors?

[BlueEars]

I like this one from the article:

If it sounds too good to be true, it is. When money meets experience, the experience gets the money and the money gets the experience. The only free lunch in investing is diversification.

[larryswedroe]

The odds are pretty low I would say, but that is irrelevant IMO because you don't pick them randomly and it is worth the effort to find the right one.

You would not randomly pick a doctor to do heart surgery would you? Think it's worth the effort to find one you would trust your life with. Same for an advisor.

Simply meeting the test of fiduciary and fee only will increase the odds greatly.

[Rodc]

Among the other members are three of my co-authors and a PHD in math who taught the math of finance at one of the top schools in country

I have a PhD in math and over 20 years of experience on top of that.

You can understand everything you need to understand about investing with a really good 8th grade education.

After that it gets increasing likely you will fool yourself into believing you know something useful when you don't.

Now if you are investing outside a 401K (or similar), or have a complicated investing life for some reason you may run into the problem of having to really understand tax law, etc., and that is harder, but still only requires a solid 8th grade education.

For most people all they really need to know is "Vanguard has cheap funds", and "Target data retirement fund". (no I don't think they are perfect, but I do think they are fine and "good enough".)

I get nervous around advisers, fee only or whatever, who say basic good enough investing is akin to rocket science.

You can't have rocket science when you have at best one significant digit of knowledge to work with.

[richard]

You can understand everything you need to understand about investing with a really good 8th grade education.

After that it gets increasing likely you will fool yourself into believing you know something useful when you don't.

Very true.

I put a lot of effort into refining my knowledge of math and statistic, running numbers, reading academic papers, studying history, etc. before I figured out that the whole enterprise was not useful for investing. It's a lot of fun, but there's a real danger that you'll believe it's useful.

[3CT_Paddler]

The odds are pretty low I would say, but that is irrelevant IMO because you don't pick them randomly and it is worth the effort to find the right one.

You would not randomly pick a doctor to do heart surgery would you? Think it's worth the effort to find one you would trust your life with. Same for an advisor.

Simply meeting the test of fiduciary and fee only will increase the odds greatly.

But the only way you know if you picked a good doctor is if they have a great reputation among other doctors. So maybe the family practice doctor or another trusted doctor makes a recommendation for a well known heart surgeon.

But when it comes to investing, how often do you hear a financial advisor tell a potential client... don't invest with me, go with Jim over there... he is the best!

Doctors don't have any reason to deceive or not have your best interest at heart... not so with financial advisors.

[jhh9327]

The odds are pretty low I would say, but that is irrelevant IMO because you don't pick them randomly and it is worth the effort to find the right one.

You would not randomly pick a doctor to do heart surgery would you? Think it's worth the effort to find one you would trust your life with. Same for an advisor.

Simply meeting the test of fiduciary and fee only will increase the odds greatly.

How is it not relevant? You can't know if the advisor meets your criteria until you identify an advisor to ask them to. Knowing how likely or unlikely you are to find someone in the advisor field that will meet those criteria is important information. If not random from something like a phone book or google search, what else then? If I interview 10 advisors whose names I received from friends and family, will I be picking which one of the 4 who qualify I like the best or will most people be lucky to find even one that meets your criteria? It is an important part of the equation to know roughly what segment of the advisor world meets your standard. 30-40%, 5-10%, <0.5%?

[yobria]

You can understand everything you need to understand about investing with a really good 8th grade education.

After that it gets increasing likely you will fool yourself into believing you know something useful when you don't.

Now if you are investing outside a 401K (or similar), or have a complicated investing life for some reason you may run into the problem of having to really understand tax law, etc., and that is harder, but still only requires a solid 8th grade education.

For most people all they really need to know is "Vanguard has cheap funds", and "Target data retirement fund". (no I don't think they are perfect, but I do think they are fine and "good enough".)

I get nervous around advisers, fee only or whatever, who say basic good enough investing is akin to rocket science.

You can't have rocket science when you have at best one significant digit of knowledge to work with.

I couldn't agree more.

Live below your means, dump your money in a Vanguard Target retirement fund, and you'll do just fine.

Pattern hunters may also put a bit in small/value stocks, nothing wrong with that.

Nick

[peter71]

Among the other members are three of my co-authors and a PHD in math who taught the math of finance at one of the top schools in country

I have a PhD in math and over 20 years of experience on top of that.

You can understand everything you need to understand about investing with a really good 8th grade education.

After that it gets increasing likely you will fool yourself into believing you know something useful when you don't.

Now if you are investing outside a 401K (or similar), or have a complicated investing life for some reason you may run into the problem of having to really understand tax law, etc., and that is harder, but still only requires a solid 8th grade education.

For most people all they really need to know is "Vanguard has cheap funds", and "Target data retirement fund". (no I don't think they are perfect, but I do think they are fine and "good enough".)

I get nervous around advisers, fee only or whatever, who say basic good enough investing is akin to rocket science.

You can't have rocket science when you have at best one significant digit of knowledge to work with.

Hey Rod,

Agreed on all counts, though maybe because I only have a behavioral science PhD's math knowledge I'm willing to believe that math profs like Jim Simons have genuinely figured out some market-beating exotica that are simply beyond me.

As regards the passive strategies actually discussed on this board, however, my sense is that seems the perceived investment value of math knowledge is pretty much an initially increasing quadratic function of math knowledge (y=-x^2 + n?). with a vertex/global maximum at CFP-level math knowledge.

All best,
Pete

[Rodc]

Among the other members are three of my co-authors and a PHD in math who taught the math of finance at one of the top schools in country

I have a PhD in math and over 20 years of experience on top of that.

You can understand everything you need to understand about investing with a really good 8th grade education.

After that it gets increasing likely you will fool yourself into believing you know something useful when you don't.

Now if you are investing outside a 401K (or similar), or have a complicated investing life for some reason you may run into the problem of having to really understand tax law, etc., and that is harder, but still only requires a solid 8th grade education.

For most people all they really need to know is "Vanguard has cheap funds", and "Target data retirement fund". (no I don't think they are perfect, but I do think they are fine and "good enough".)

I get nervous around advisers, fee only or whatever, who say basic good enough investing is akin to rocket science.

You can't have rocket science when you have at best one significant digit of knowledge to work with.

Hey Rod,

Agreed on all counts, though maybe because I only have a behavioral science PhD's math knowledge I'm willing to believe that math profs like Jim Simons have genuinely figured out some market-beating exotica that are simply beyond me.

As regards the passive strategies actually discussed on this board, however, my sense is that seems the perceived investment value of math knowledge is pretty much an initially increasing quadratic function of math knowledge (y=-x^2 + n?). with a vertex/global maximum at CFP-level math knowledge.

All best,
Pete

Hi Peter,

I'm willing to believe somebody somewhere applied some high powered math to their gain (perhaps in fancy derivatives trading or something), but that is beyond searching for a good enough retirement portfolio which was really my topic.

I like your quadratic. It also applies to my thinking I knew something useful where x measured time from when I started.

[peter71]

Hi Rod,

Yeah, my having greater faith in Simons than you is certainly consistent with the hypothesized relationship (come to think of it, though, I don't think -x^2 + n is quite right given one really wants the entire parabola both above and to the right of the origin).

All best,
Pete

[ripper]

Thanks for the list Larry. My wife is about to finish her surgery residency and while I would be comfortable picking an allocation, integrating it into an overall estate, tax, and risk management plan seems a bit intimidating. We've started to discuss getting an advisor so I'm glad to have a little guidance!
Ripper

[larryswedroe]

As I noted one can ask the advice of other professionals in the community, lawyers and CPAs. They can be very helpful in recommending people.
And you can talk to some of the clients and ask them about their experiences, people in similar situations to yours. Ask them about the quality of the services, the personalized attention, etc. that they have received (keeping in mind no one will give you references from unhappy clients).

You should also carefully check the ADV. For example, my firm has never had even one single complaint in our 16 years. Others may not have such records. You can also read the bios of the advisors to see about their qualifications.

In our particular case over 125 other advisory firms have done due diligence on us before deciding to become strategic partners. And almost all of them are CPA firms. You can be sure they have done a great deal of due diligence on us, typically spending a full day and doing lots of reference checking.

So IMO if you follow the list I gave and the advice above then IMO you have a very good chance of finding the right type of advisor and very little chance of finding the wrong kind

[Rodc]

Peter!

Yeah, my having greater faith in Simons than you

You have more faith in Simons than you have faith in me?!