Scott Burns blows the whistle on ETFs (and Vanguard too?)

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Lbill
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Scott Burns blows the whistle on ETFs (and Vanguard too?)

Post by Lbill »

Scott Burns quotes Rick Ferri in this critical article about ETFs - pointing out that Vanguard is one of the largest purveyors.
Basically, ETFs are a new distribution channel for financial service firms. And the first firms to market not only dominate it, they are causing money to flow out of traditional mutual fund firms and into the new funds.

One recent indication is the loss of assets from the American Funds group, about $82 billion in 2011. A stalwart of the traditional mutual fund industry, the American Funds group manages mutual funds at very low cost but distributes them through the brokerage industry. American Funds was the largest of all the mutual fund firms as recently as 2007.

But last year both the American Funds group and Fidelity lost assets, about $126 billion combined. During the same period Vanguard gained $44 billion.

Significantly, American Funds has no ETFs. Fidelity has just one. Vanguard has jumped in feet first. It has 64 ETFs that clone most of their index mutual funds.
http://assetbuilder.com/blogs/scott_bur ... thing.aspx
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yobria
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Re: Scott Burns blows the whistle on ETFs (and Vanguard too?

Post by yobria »

Thanks for the link. A lot of lousy traditional mutual funds out there too. No reason to put a negative spin on ETFs in general.

Nick (All ETF portfolio and loving it)
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Re: Scott Burns blows the whistle on ETFs (and Vanguard too?

Post by Pennstateclj1 »

Lbill wrote:Scott Burns quotes Rick Ferri in this critical article about ETFs - pointing out that Vanguard is one of the largest purveyors.
Basically, ETFs are a new distribution channel for financial service firms. And the first firms to market not only dominate it, they are causing money to flow out of traditional mutual fund firms and into the new funds.

One recent indication is the loss of assets from the American Funds group, about $82 billion in 2011. A stalwart of the traditional mutual fund industry, the American Funds group manages mutual funds at very low cost but distributes them through the brokerage industry. American Funds was the largest of all the mutual fund firms as recently as 2007.

But last year both the American Funds group and Fidelity lost assets, about $126 billion combined. During the same period Vanguard gained $44 billion.

Significantly, American Funds has no ETFs. Fidelity has just one. Vanguard has jumped in feet first. It has 64 ETFs that clone most of their index mutual funds.
http://assetbuilder.com/blogs/scott_bur ... thing.aspx
When I started my first ROTH at age 18, I went into the local bank and their "investment advisor" set me up with American Funds. What they fail to mention is that American Funds offer front end load funds (5.75% class A) with high back end expense ratios. He took financial advantage of a trusting 18 year old kid. I doubt the entire reason people moved from AF to Vanguard is cost because most people don't know/care. But if you look at American Funds returns and then load adjusted returns it's about a 5% difference on average. Regardless of the reason, it's probably a good dynamic shift but of course people abuse the intraday buying/selling capability. The cost of ETFs are a pittance comparatively.
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Re: Scott Burns blows the whistle on ETFs (and Vanguard too?

Post by dbonnett »

If I am not mistaken, having a ETF share class of a fund, helps with the tax effieciency of the mutual fund of the fund class by off loading capital gains.
This is from Gus Sauter if I'm not mistaken.
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Re: Scott Burns blows the whistle on ETFs (and Vanguard too?

Post by asset_chaos »

That's not quite correct. The criticism comes from the ETF industry that Vanguard's ETFs may give unexpected capital gains distributions to ETF investors due to being linked to the mutual fund. Sauter and Vanguard have published data debunking this idea. (There's a recent paper at Vanguard you can search for; I don't have a link handy.) Vanguard's paper shows that the major broad market index ETFs have had substantially the same tax efficiency, which is not unexpected. This particular criticism from the rest of the ETF industry was always rather spurious and is similar to the old criticism during the late 90s that S&P500 index funds had huge accrued capital gains that could be suddenly distributed during a market downturn. Vanguard (and subsequent market history) debunked that canard as well.
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Re: Scott Burns blows the whistle on ETFs (and Vanguard too?

Post by asset_chaos »

Sorry dbonnett, I misread your post. You're quite right that the ETF shares help make the mutual fund more tax efficient.
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Re: Scott Burns blows the whistle on ETFs (and Vanguard too?

Post by ThePrune »

Scott Burns wrote:Basically, ETFs are a new distribution channel for financial service firms. And the first firms to market not only dominate it, they are causing money to flow out of traditional mutual fund firms and into the new funds.

One recent indication is the loss of assets from the American Funds group, about $82 billion in 2011. A stalwart of the traditional mutual fund industry, the American Funds group manages mutual funds at very low cost but distributes them through the brokerage industry. American Funds was the largest of all the mutual fund firms as recently as 2007.

But last year both the American Funds group and Fidelity lost assets, about $126 billion combined. During the same period Vanguard gained $44 billion.
Until recently my wife had her school 403(b) in American Funds. But with Vanguard Group now being added as an approved custodian, we've transferred those investments into Vanguard index mutual funds, not the ETFs.

This was purely a cost saving measure, having nothing to do with ETFs. The expense ratios for the American Funds are all greater than 0.55%, whereas (as WE know) Admiral shares of Vanguard mutual funds are only 0.10%. And 0.25% of the American Funds expense ratio was 12b-1 fees, effectively commissions getting funneled back to the broker who years ago helped her school district set up American Funds (actually Capital Bank and Trust) as a 403(b) custodian. That seemingly small 0.25% was $1,000 per year out of her assets! After I pointed out the absolute dollar amount of those 12b-1 fees, she had a fit! Transfer time had come!
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Re: Scott Burns blows the whistle on ETFs (and Vanguard too?

Post by beyou »

ETFs are making low cost investing reachable for everyone.

And active managers take a hit during tough times, hard to beat the market, even harder
to keep customers happy when the market is down, and you are down even more.

Vanguard should be given another award for turning the ETF frenzy into another low cost investing avenue.
Many ETF providers are treating this as another get rich quick scheme, with high ER ETFs coming to market.
Shame on them.
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Re: Scott Burns blows the whistle on ETFs (and Vanguard too?

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Re: Scott Burns blows the whistle on ETFs (and Vanguard too?

Post by Boglenaut »

I prefer Vanguard Admiral shares over ETF's, but I don't understand why it is bad that American Funds is losing market share. If they go to zero share for having overpriced mutual funds, so what?

PS - Fidelity has filed to release a broad range of ETF's.
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Re: Scott Burns blows the whistle on ETFs (and Vanguard too?

Post by Rick Ferri »

My issue is not with ETFs and never has been. I use several ETFs in client's portfolios. Mostly Vanguard ETFs.

My issue is with an ETF industry that is creating and selling actively managed products that they say are better at "indexing" than index funds. The essence of Indexing has been polluted by the proliferation of these high-cost "index tracking" active management ETFs that are sold as a "better beta," "intelligent beta" and "smart indexes". They say indexing as Bogleheads know it is as outdated as a black and white TV with a rabbit ear antena.

ETF evolution has become ETF pollution.

Rick Ferri

See this article on Beta Diarrhea
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Re: Scott Burns blows the whistle on ETFs (and Vanguard too?

Post by mlebuf »

Scott Burns writes:
Just remember this: Wall Street makes money on complexity. Everyone else makes money on simplicity. If it isn’t simple and cheap, don’t buy it.
Those words are worth carving in stone.
Best wishes, | Michael | | Invest your time actively and your money passively.
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Re: Scott Burns blows the whistle on ETFs (and Vanguard too?

Post by Rick Ferri »

I completely agree, Mike. Any index fund or ETF that charges more than 0.25 percent is probably not worth buying, and any advisor who charges more than 0.25% for index fund asset allocation, implementation and ongoing management is probably not worth hiring! (I couldn't resist adding that bit about advisors, sorry - but it's true! :shock: )

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Re: Scott Burns blows the whistle on ETFs (and Vanguard too?

Post by cldrunner »

Rick Ferri wrote:I completely agree, Mike. Any index fund or ETF that charges more than 0.25 percent is probably not worth buying, and any advisor who charges more than 0.25% for index fund asset allocation, implementation and ongoing management is probably not worth hiring! (I couldn't resist adding that bit about advisors, sorry - but it's true! :shock: )

Rick Ferri

Hi Rick,

Why does an investor who has a $4,000,000 portfolio pay $10,000 to manage those assets while a portfolio of $1,000,000 only costs $2,500. If the technology allows the advisor to make the exact same trades with the exact number of keystrokes on the same number of funds and the same time commitement---Why the additional costs? Seems to me that the investor with $4,000,000 receives the same advice and same service while getting charged $7,500 more per year for no additional benefit. This is like going to get a oil change on your car and the technician says " The value of your vehicle is $40,000 compared to the car in the bay next to you that has a $10,000 value ----your going to have to pay 4 times as much because your car has a higher value although we use the same filter and oil and it takes the same amount of time."
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Re: Scott Burns blows the whistle on ETFs (and Vanguard too?

Post by staythecourse »

cldrunner wrote:
Rick Ferri wrote:I completely agree, Mike. Any index fund or ETF that charges more than 0.25 percent is probably not worth buying, and any advisor who charges more than 0.25% for index fund asset allocation, implementation and ongoing management is probably not worth hiring! (I couldn't resist adding that bit about advisors, sorry - but it's true! :shock: )

Rick Ferri

Hi Rick,

Why does an investor who has a $4,000,000 portfolio pay $10,000 to manage those assets while a portfolio of $1,000,000 only costs $2,500. If the technology allows the advisor to make the exact same trades with the exact number of keystrokes on the same number of funds and the same time commitement---Why the additional costs? Seems to me that the investor with $4,000,000 receives the same advice and same service while getting charged $7,500 more per year for no additional benefit. This is like going to get a oil change on your car and the technician says " The value of your vehicle is $40,000 compared to the car in the bay next to you that has a $10,000 value ----your going to have to pay 4 times as much because your car has a higher value although we use the same filter and oil and it takes the same amount of time."
Interesting point. I would like to hear the rebuttal.

Good luck.
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Re: Scott Burns blows the whistle on ETFs (and Vanguard too?

Post by wwross »

I am backing up staythecourse question. This is the most fundamental issue I have been dealing with as a presumed Boglehead. I have a multiple 7 figure AA and have it invested in a diversified set of slice and diced ETFs with a moderate risk tolerance. I made the investments after a lot of research and analysis based on Bogleheads approaches. But in reaching a certain age, (late 50s), I anticipate that I will soon like to ask for and pay for financial advice. However, I can't understand why at even a .25% rate, I would be paying multiple times the amount a person with much fewer assets would pay--all for the same service. For an experienced advisor, with computer driven algorithms, using a fundamental index driven, portfolio theory how is the fee-as-a-percent of assets be justified?

I understand the idea of paying a reasonable amount, say $1,000 for a once a year review and the right to call once or twice during the year for advice. I would hope this would compensate the advisor. But anything much more, and I "staythecourse" and do it myself. I pay a tax person a few hundred dollars a year for her work and she is satisfied. Its too bad. It appears that because of this industry's fee structure, there is a fairly signficant market failure and a lot of financial advice income left on the table.

This appears to be the next revolution for the industry on the part of individual investors. We have moved beyond expensive broker fees, market timing, managed mutual funds, individual stock investing, commission-based financial advice, whole life policies, etc. Now its time to challenge fees based on asset size.

Otherwise its just a dirty-little secret amongst our Boglehead community and Boglehead expert contributors.

In the meantime, I will look for these one-time and hourly fee advisors.
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Re: Scott Burns blows the whistle on ETFs (and Vanguard too?

Post by cldrunner »

wwross wrote:I am backing up staythecourse question. This is the most fundamental issue I have been dealing with as a presumed Boglehead. I have a multiple 7 figure AA and have it invested in a diversified set of slice and diced ETFs with a moderate risk tolerance. I made the investments after a lot of research and analysis based on Bogleheads approaches. But in reaching a certain age, (late 50s), I anticipate that I will soon like to ask for and pay for financial advice. However, I can't understand why at even a .25% rate, I would be paying multiple times the amount a person with much fewer assets would pay--all for the same service. For an experienced advisor, with computer driven algorithms, using a fundamental index driven, portfolio theory how is the fee-as-a-percent of assets be justified?

I understand the idea of paying a reasonable amount, say $1,000 for a once a year review and the right to call once or twice during the year for advice. I would hope this would compensate the advisor. But anything much more, and I "staythecourse" and do it myself. I pay a tax person a few hundred dollars a year for her work and she is satisfied. Its too bad. It appears that because of this industry's fee structure, there is a fairly signficant market failure and a lot of financial advice income left on the table.

This appears to be the next revolution for the industry on the part of individual investors. We have moved beyond expensive broker fees, market timing, managed mutual funds, individual stock investing, commission-based financial advice, whole life policies, etc. Now its time to challenge fees based on asset size.

Otherwise its just a dirty-little secret amongst our Boglehead community and Boglehead expert contributors.

In the meantime, I will look for these one-time and hourly fee advisors.
I can not agree with you more. This is why I asked the question.


The below is from Rick's Blog
Your Advisor’s Fee Matters
January 23, 2012

"Advisors are all for low fees — as long they aren’t their own.

Investors know what’s good for them. Over time, money flows to value. Vanguard’s $2 trillion in assets proves it. Advisors who adopt fair-fee policies will see increased traffic in the future and those who continue to practice gluttony will lose assets. The truth about fees shall be known, and fair-fee advisors shall prevail.

*A total relationship value below $1 million is subject to a $625 minimum quarterly fee in lieu of the .25% annual management fee."



I suspect from the disclaimer about a $625 minimum quarterly fee that $2500 a year is about the fee that a large advisor can profitably manage an account. Mr. Ferri, please do not take this as pointing a finger at you. You have done a great job bringing advisor fees to the forefront and I think that is a wonderful thing. I just think that advisors do not want to address this issue or educate client's that they in fact may be paying more in fees than the client who comes through the door an hour later for the exact same service.

I understand this fee to be a investment management fee only. This fee pays for technology,staff, and other costs not associated with advice that would be considered financial planning. Until investors start walking in the door and saying "I'm bring $4,000,000 to your advisory firm and I only will pay the same fee for the work you do on a $1,000,000 account" I suspect advisors will continue to take the extra GRAVY(fee) from the client that does not know better or does not demand that their fee be capped.
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Re: Scott Burns blows the whistle on ETFs (and Vanguard too?

Post by Rick Ferri »

Our cost to carry a client is about $2,500 per year. About half our clients are at this rate. This means yours truly, the owner, makes no money from about half the clients we carry. My profit margin comes from clients who have more than $1 million with us. Thus, my goal is to get the clients who are paying the minimum fee to be worth over $1 million so that I get paid, and to get larger clients even bigger so I get paid more.

Someone told me long ago that the best thing I can do for a clients is to be around long enough for them to benefit from what I do. This requires that I am able to earn a decent living as an investment advisor. None of our clients have an issue with this, and there is no reason for anyone who is not a client to have an issue with it.

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Re: Scott Burns blows the whistle on ETFs (and Vanguard too?

Post by afan »

I've asked the same question and this seems to be the answer for why AUM is more popular than hourly fee. It is too hard to make money under the hourly model. Once a portfolio is set up there is little to do. With decent technology monitoring the investments takes far less than an hour per year. Quite a high hourly rate, even for the minimum fee. I assume a lot of time is spent getting new clients and holding on to existing ones. With AUM there is still money coming in while doing this. With hourly, no revenue.

Tough situation. Clients would be better off with hourly, but can advisors afford it?
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Re: Scott Burns blows the whistle on ETFs (and Vanguard too?

Post by HardKnocker »

John Bogle on ETFs: "Ma, what have they done to my song?"
“Gold gets dug out of the ground, then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility.”--Warren Buffett
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Re: Scott Burns blows the whistle on ETFs (and Vanguard too?

Post by Rick Ferri »

afan wrote:I've asked the same question and this seems to be the answer for why AUM is more popular than hourly fee. It is too hard to make money under the hourly model. Once a portfolio is set up there is little to do. With decent technology monitoring the investments takes far less than an hour per year. Quite a high hourly rate, even for the minimum fee. I assume a lot of time is spent getting new clients and holding on to existing ones. With AUM there is still money coming in while doing this. With hourly, no revenue.
Your statement leads me to believe that you've never been in the business. The hourly model is not portfolio management. It is not discretionary, meaning the advisor does not control the account. They do no trading. The hourly advisor suggests a strategy, they do not impliment or maintain the portfolio. The client does that if they decide to. It is take it or leave it advice.

Diiscretionary money management is an AUM fee. All mutual funds charge this way, including Vanguard. The same is true for investment managers like me. We all create, implement and maintain portfolios on an ongoing basis. Hourly fees can not work for discretionary management because costs for research, compliance, insurance, etc. cannot be allocated fairly across portfolios.

Little to do, you say? Not quite. All accounts are monitored and reconciled daily. Rebalancing takes place when needed. Cash is managed as it comes in and goes out. Reports are created and sent. Client questions and requests must be answered in a timely manner. And don't take for granted all the research that goes behind every portfolio. Lest I forget, there are volumes of government regulations that must be followed for every client and every account. This alone chews up more of the fee than you can imagine, and the cost of government compliance goes up every year.

.

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Re: Scott Burns blows the whistle on ETFs (and Vanguard too?

Post by ariceptist »

Rick,
I love what you write and do but not a fan of your policy of obligating higher account holders to subsidize the smaller account holders. Although your firms gives a break on accounts of over ? $20 M, it seems grossly unfair to folks having say, ? only $ 2 M.
rgds,
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Re: Scott Burns blows the whistle on ETFs (and Vanguard too?

Post by wwross »

Rick -- Your explanation of your business model is very enlightening and makes me understand better where you and the AUM fee model comes from. Your forthrightness about your breakeven point is very refreshing and probably helps the rest of us amateurs understand the challenges of the industry.

But I have funds that I am willing to spend for advice. Is there an amount that such AUM advisors would be willing to charge for a one-time review and recommendation? For example, given that $2,500 is the breakeven point for year round services, I would think that a one time service, involving an hour or two could be offered for something less and at a profit. One could even have a junior associate do the work--following the firm's investing and allocation principles.

Who knows? I might even become convinced to sign up more permanently.

I have the money and am willing to spend some. A couple of years ago I called up a Ric Edelman advisor and offered, I think $750-800 for them to review my portfolio and give me some one-time advice on ETF selections. They would have none of it and tried to talk me into the full service which apparently involved many other aspects of my financial situation, which I was not seeking.

I would think that in a world where one is trying to expand business and gain potential customers, a bit more flexibility on the products and services offered would fill some needs for all involved. What am I missing?
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Re: Scott Burns blows the whistle on ETFs (and Vanguard too?

Post by PreserveCapital »

I'll bet some of the folks also think that when they buy a can of Coca Cola the price is determined by the cost of brown carbonated sugar water, too. :D

A couple of years ago I called up a Ric Edelman advisor and offered, I think $750-800 for them to review my portfolio and give me some one-time advice on ETF selections.
OK would you please mow my law for $5.00?

No? Why not? That's what I think your time is worth....
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Re: Scott Burns blows the whistle on ETFs (and Vanguard too?

Post by PreserveCapital »

ariceptist wrote:Rick,
I love what you write and do but not a fan of your policy of obligating higher account holders to subsidize the smaller account holders. Although your firms gives a break on accounts of over ? $20 M, it seems grossly unfair to folks having say, ? only $ 2 M.
rgds,
ariceptist@gmail.com
No one is obligated to do anything. A service is being offered and presumably people with in excess of $1 megadollars to invest are sophisticated enough to conduct their own cost-benefit analysis.
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Re: Scott Burns blows the whistle on ETFs (and Vanguard too?

Post by Rick Ferri »

wwross,

I'd like to be able to offer an "as needed" self-directed service someday. It would be helpful to many people. We don't have the resources currently. Vanguard does have a one time service like the type you described. I don't know the cost or quality.

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Re: Scott Burns blows the whistle on ETFs (and Vanguard too?

Post by Kevin M »

wwross: At your asset level, you are flagship if with Vanguard, and can get consulting you desire for free. I have never tried it, as have not felt the need, but since it would be free for you (again, if assets are at Vanguard), why not try it?

Here is a page that shows the fees charged at different account levels: https://personal.vanguard.com/us/whatwe ... s/flagship

Look at rows for "Ask a CFP Professional" and "Financial Plan"

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)
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Re: Scott Burns blows the whistle on ETFs (and Vanguard too?

Post by wwross »

Kevin M - Thanks very much.
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Re: Scott Burns blows the whistle on ETFs (and Vanguard too?

Post by afan »

Rick,

No, I am not in the business. But as has been discussed on this board by a number of people, quite eloquently I think by Finance Buff, rebalancing takes place infrequently with reasonable bands. Typically less than once per year. So one might check the asset allocation daily, but one would not often do anything other than say "no need to rebalance". You are right, I was assuming one would NOT give the advisor trading discretion. But even if they had that, a boglehead would want very small number of stock index funds, and index or active bond funds. Not much trading to do.

The account management, reporting, cash management, etc. big companies like Vanguard will do nearly for free.

Look I have nothing against honest AUM, and 0.25% is quite good by those standards. But once established, and assuming assets are held with a reasonable custodian, there really is not much to do. Review daily for allocation?- fine but rarely rebalance. Custom design a portfolio? fine, but from the same small set of index funds. Accounts monitored, reconciled daily, cash managed?- fine but Vanguard will do that almost free.

It would be different if the advisor were picking stocks, timing the market, etc. But those make no sense, and to your credit you don't do that nonsense.

Most people who need some advice probably need an initial set up, then, perhaps, a half hour or hour per year of review, if that. Very hard to make money on that model, but it may not be necessary to do anything else.

I have tried the Vanguard service. It is generic, plain jane, and nothing fancy. In other words perfect for bogleheads. And free.
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Re: Scott Burns blows the whistle on ETFs (and Vanguard too?

Post by Rick Ferri »

There are advisors who provide the investment "advice" your seeking. I've mentioned the advisors at Vanguard. Another is Allan Roth. For an hourly fee, Allan will review your portfolio and recommend investment options. This advice for a fee model is distinctly different business than ongoing discresionary portfolio management, which is what we do.

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Re: Scott Burns blows the whistle on ETFs (and Vanguard too?

Post by HardKnocker »

A good businessman charges as much as he can get his customers to pay. A great businessman charges even more and they still pay it. :greedy

It's up to the customer to walk away.
“Gold gets dug out of the ground, then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility.”--Warren Buffett
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Re: Scott Burns blows the whistle on ETFs (and Vanguard too?

Post by jeffyscott »

Pennstateclj1 wrote:When I started my first ROTH at age 18, I went into the local bank and their "investment advisor" set me up with American Funds. What they fail to mention is that American Funds offer front end load funds (5.75% class A) with high back end expense ratios. He took financial advantage of a trusting 18 year old kid.
You were not taken advantage of, IMO. You apparently went in not knowing what you were doing and your money went to one of the better options for someone with few dollars that wants to pay someone else to tell them what to do with their money. While you paid a commission, American funds at least have reasonable expenses, after that one time charge and are generally decent, conservatively run funds.
The two greatest enemies of the equity fund investor are expenses and emotions. ― John C. Bogle
dad2000
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Re: Scott Burns blows the whistle on ETFs (and Vanguard too?

Post by dad2000 »

Not that he needs it, but I want to defend Rick against the AUM fee attacks.

For 15 years, I've managed a business that derives all it's income from the Alternative Investment industry (aka hedge funds). Even though I've invested like a Boglehead for as long as I can remember, I've only recently become familiar with the Bogleheads.

Rick, like many of my clients, is an RIA. If you think that all he has to do is occasionally update your plan and rebalance, you're mistaken. I suggest you go look at a Form ADV (on sec.gov) and how long it might take you to complete it. Then look at all the recordkeeping requirements. Then think about the costs of an SEC audit or investor lawsuit. And the administrative and technical costs of maintaining all this stuff.

Does any of this stuff sound fun or cheap? I'd much rather rebalance my portfolio.

Hedgies get 2% AUM plus 20% of performance. He charges 0.25%/0% and gives out free (and IMHO, better) advice.
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altruistguy
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Re: Scott Burns blows the whistle on ETFs (and Vanguard too?

Post by altruistguy »

Hello Folks,

Dad2000 has it right.

Criticizing Rick is just silly -- he is one of the lowest-cost competent investment managers in the world. To criticize one of the lowest cost -- and most ethical -- of such providers -- for being too expensive and/or unethical just seems wrong. Rick has long been advocating for the investment management industry to lessen their fees to something more reasonable (i.e., like his extremely low fees). Rick is clearly one of the "good guys". If anything, his pricing practices are clearly worthy of emulation, not castigation.

One more comment about the goodness of the AUM compensation model.
a) Folks, potential liability (of the adviser) goes up linearly with AUM. Further, a client's propensity to sue goes up exponentially with (their) AUM.
b) Work to manage the portfolio goes up too -- not linearly, but it does go up. It is just a fact that there are (sometimes quite complex) issues which may tend to apply to $20M portfolios that are completely irrelevant to $200k portfolios. Tax issues, estate-planning issues, many more. Big portfolios just tend to have complexities that small investors can't even imagine.

Eric E. Haas
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matjen
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Re: Scott Burns blows the whistle on ETFs (and Vanguard too?

Post by matjen »

Must agree with altruist and dad2000. Rick deserves to make a living and pushing him down to .00000005% in fees does more harm than good it seems to me because his service will suffer or he will be gone. Rick is one of the good guys. Anyone with significant assets is free to work with him or any other manager to craft a fee structure that suits both parties.
A man is rich in proportion to the number of things he can afford to let alone.
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Re: Scott Burns blows the whistle on ETFs (and Vanguard too?

Post by afan »

I hope my comments are not interpreted as attacks on AUM in general or on Rick personally. Certainly not my intent.

My questions concern whether the services provided are worth the cost to the investor. Or alternatively, how might each investor determine what these services are worth to her/him? If your friendly Fidelity, Schwab, or Vanguard will handle the record keeping, sweep cash, generate tax forms, and process transactions at near zero cost, then, as an individual investor, you have to look for value added to justify an AUM fee on top. Setting up a portfolio is certainly worth something. It is very hard to decide how much this is worth, particularly when you are placed in a passive portfolio using the same small set of funds or ETF's as for other clients. And I fully agree this is the best way to set up client portfolios.

Rebalancing when needed is worth something, but as discussions on this board have shown, it is difficult to say how much, and in any case, it need be done rarely.

So if many things need be done only rarely (rebalancing) or are essentially free (record keeping, cash movement) then one needs to identify the services, beyond these, that AUM managers deliver.

If someone does have a need for extensive financial planning, beyond investment management, then this could be worth it. However, these other sorts of financial planning services tend to be episodic. One does estate planning (and needs an ACTEC attorney in addition to a financial planner) infrequently. This does not require constant monitoring. Even some highly illiquid assets (private business, for example) may require planning to diversify the entire portfolio, but does not require constant adjustments to maintain that diversification. If so, then this business is a scary high-wire act that is constantly changing its risk exposure. Better off getting rid of it.

At 0.25% of assets per year, and invested in low cost index funds, such clients are far better off than going through brokers and being stuck in load funds. They are better off than they would be doing it themselves and investing in the large universe of high-fee funds. The fee is certainly lower than most AUM managers. If you are going to have someone manage your investments for you, this is a pretty good price. But for a boglehead, what do you get that you cannot do for yourself, with very little time or effort?

I believe in markets. I believe that businesses exist because people want what they sell. I may not want to buy into a hedge fund, but obviously some people do. I may not see the value, to me, of an AUM manager, but some people do. For now, I have given up on understanding the appeal of hedge funds, but I am trying to get an idea of the appeal of AUM. It seems to me to be a very expensive way to go. Perhaps a good deal for the first year, when there might be a lot of planning going on. After that, the services received, above those available anyway from Vanguard or its competitors, would be worth, at most, several hundred dollars per year.

The 0.25% fee is low by AUM standards. If you go with Vanguard asset management Rick's fees would still be lower than Vanguard for a $10M portfolio. Of course with Vanguard you could forego the management service entirely, get a free one time financial plan, a free annual update, and free consultations with a planner a couple of times a year. Since that is likely all one would need, the extra $25,000 would buy what, exactly? Now if you have a$10M portfolio, you can afford the $25,000, but it is still a lot of money.

So take these comments as intended. They are not "attacks", they are questions.
Let me frame it this way -

"What is the least expensive way to get needed asset management and financial planning advice?"

"What incremental (useful) services does one receive for paying higher prices?"
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
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Rick Ferri
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Re: Scott Burns blows the whistle on ETFs (and Vanguard too?

Post by Rick Ferri »

I didn't think this unusual topic would have so much interest.

Here is the skinny. I originally priced portfolio management services at 0.25% because I calculated that at this rate we could deliver a quality product and I could still make my mortgage payment and feed my family. Now that Portfolio Solutions has about $1.1 billion under management, I am feeding 14 families (# of people who work at PS), and I'm still not personally earning as much as I did when I was a stockbroker in the the 1990s with 1/20th the assets under management. I'm getting there though! Maybe this is the year.

Rick Ferri

PS for "afan", our typical client has $1.2 million under management, not $10 million. Only a handful of clients out of 600 are at that level.
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.
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Leif
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Re: Scott Burns blows the whistle on ETFs (and Vanguard too?

Post by Leif »

Rick Ferri wrote:Vanguard does have a one time service like the type you described. I don't know the cost or quality.

Rick Ferri
I've had this service. The cost was free. The product was not worth more than the cost. Better advice is available here at Bogleheads.
cldrunner
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Re: Scott Burns blows the whistle on ETFs (and Vanguard too?

Post by cldrunner »

Rick Ferri wrote:I completely agree, Mike. Any index fund or ETF that charges more than 0.25 percent is probably not worth buying, and any advisor who charges more than 0.25% for index fund asset allocation, implementation and ongoing management is probably not worth hiring! (I couldn't resist adding that bit about advisors, sorry - but it's true! :shock: )

Rick Ferri
So if the cost to carry a client is $2500 for a firm like yours --why bash investment advisors who take on a $250,000 client and charges 1%, or a $500,000 account and charges .50%. Seems like you are all making the same amount on each client.
Here is the skinny. I originally priced portfolio management services at 0.25% because I calculated that at this rate we could deliver a quality product and I could still make my mortgage payment and feed my family. Now that Portfolio Solutions has about $1.1 billion under management, I am feeding 14 families (# of people who work at PS), and I'm still not personally earning as much as I did when I was a stockbroker in the the 1990s with 1/20th the assets under management. I'm getting there though! Maybe this is the year.
Congrats on going over 1 billion in assets. Even though your only earning about the same as 1990, I'm sure you could probably sell your firm for 5-10+ million tomorrow. You should be able to feed your family.....
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Rick Ferri
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Re: Scott Burns blows the whistle on ETFs (and Vanguard too?

Post by Rick Ferri »

cldrunner wrote:So if the cost to carry a client is $2500 for a firm like yours --why bash investment advisors who take on a $250,000 client and charges 1%, or a $500,000 account and charges .50%. Seems like you are all making the same amount on each client.
We generally don't accept clients who have less than $500,000 in household investment assets so that their fee is reasonable. I don't have a good answer for investors who have less than $500,000 except as I stated above, i.e. talk with a Vanguard planner or a highly qualified hourly planner shuch as Allan Roth, or you can always choose to keep things simple with a low-cost balanced fund from Vanguard.

Rick Ferri
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.
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