How do most advisors produce client returns?

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Cody
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How do most advisors produce client returns?

Post by Cody » Thu Jul 11, 2019 8:34 am

My starting question and focus: Is it common practice for financial adviors to increase the risk profile to compete with an index portfolio?

I am not talking here about the other things that advisors might bring to the table like discussing family situations, tax advise etc.(many of which might be beneficial).

Hopefully this is a starting point for a broader discussion I wish to have - again my goal is to try to understand how financial advisors do their work.

Thanks

alex_686
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Re: How do most advisors produce thier returns?

Post by alex_686 » Thu Jul 11, 2019 8:41 am

No - if they have a shed of financial knowledge, ethics, or follow their dictates from the back office. Compliance is supposed to monitor this and squish this particular tatic hard.

They can use their superior skill to juice returns- either by stock selection or market timing- which we know us very hard to do.

NotWhoYouThink
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Re: How do most advisors produce client returns?

Post by NotWhoYouThink » Thu Jul 11, 2019 8:55 am

They "do their work" by recruiting and retaining clients. Their work is mostly sales, not finance.

They choose investments by plugging in the clients' response to questions about investment goals and risk tolerances into their companies' proprietary investment-generator program, and spitting out complicated portfolios.

They don't compare their clients' investment performance to indexes or anything else, they generate complex, colorful, incomprehensible and uninformative monthly statements. Their customers do not have at their fingertips a reference point about how a low-cost portfolio using index funds and a nominal asset allocation would have performed. If the markets do what they normally do and rise, the advisor takes credit.

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Sandtrap
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Re: How do most advisors produce client returns?

Post by Sandtrap » Thu Jul 11, 2019 8:57 am

Cody wrote:
Thu Jul 11, 2019 8:34 am
My starting question and focus: Is it common practice for financial adviors to increase the risk profile to compete with an index portfolio?

I am not talking here about the other things that advisors might bring to the table like discussing family situations, tax advise etc.(many of which might be beneficial).

Hopefully this is a starting point for a broader discussion I wish to have - again my goal is to try to understand how financial advisors do their work.

Thanks
Following up on "notwhoyouthink" prior poster comment:

How some Financial Advisors do thier work:
Some real life example stories:

1. Recently: After flying in from another state, a Financial Advisor rented a Ferrari to "check in" on a client because he knows the client if fond of sports cars, has several Porches, etc. FA took client for a drive in the Ferrari, let client drive it. Lunch together, then left. Very happy client. ( know the client).

2. Close old friend (stubborn): Financial Advisor calls from Switzerland to check on client (calls monthly) and reassure client of the tremendous portfolio gains that are coming up in the future. FA says his trip to the Swiss Resort and vacation to Europe are a result of his own personal portfolio growth and not costing him a dime. My old friend had taken out an equity loan HELOC to invest with this FA.

3. Distant neighbor: FA from Edward Jones calls every 2 weeks to reassure client that his portfolio is making tremendous gains and he is more than on track to early retirement. Client has 2 homes, trying to sell one but having problems, is paying 2 mortgages and otherwise treading water.

Just a few personal stories that might help others look carefully at who they do business with. It can be great or not so great. :oops:
j :D
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Topic Author
Cody
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Re: How do most advisors produce client returns?

Post by Cody » Thu Jul 11, 2019 9:39 am

How do most advisors actually make their money?

What specifically should one look at to determine what a client pays an advisor?

And if I say a name like Edward Jones should I automatically assume clients are being taken advantage of or are there "good" ones there?

livesoft
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Re: How do most advisors produce client returns?

Post by livesoft » Thu Jul 11, 2019 9:55 am

Here's my opinion: There are no good EJ salesreps out there. Their company prevents them from being good.

However, salesreps make their money by using the money of their clients for their own gains. I think this may be typical: Client has no idea about investing and is afraid of stocks, bonds, mutual funds, ETFs, online savings accounts, and anything to do with investing. Client thinks IRA, 401(k)s, and 403(b)s are scams. They will only put their money under the mattress or in a savings account at their bank who they don't trust anyways. Along comes Ms. EJ and at least gets them to start an IRA and an annuity. Is that better than sticking to a low-interest savings account?

BTW, all my friends over 70 that are still working say they have a financial advisor who is very good.
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NotWhoYouThink
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Re: How do most advisors produce client returns?

Post by NotWhoYouThink » Thu Jul 11, 2019 10:24 am

The title of your thread is about producing client returns, but the body of your posts is about a)what actions the advisor takes and b)how the advisor gets paid.

The returns come from the returns in the stock and bond markets. In short words, if you invested in stocks and bonds over the last 10/20/30/50 years you made money, so the mix of investments is less important that whether or not you were invested. There were and are ways to make more, but doing something, as livesoft says above, is better than doing nothing. So an advisor helps his clients by encouraging them to get and stay invested.

The work the advisor does is mostly recruiting/selling/retaining clients, which may include flattery, hand-holding, mild scolding, reassurance, whatever they need. The important skill is to know what each client craves and needs.

The fees come one or more of 3 ways -
- A percentage fee of assets under management (AUM)
- Commissions on each transaction (trading fees)
- Fees embedded in the investments (front-loads, back-loads, Expense Ratios (ER), 12b-1 fees. These are less visible to the investor than the others.

mchampse
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Re: How do most advisors produce client returns?

Post by mchampse » Thu Jul 11, 2019 10:44 am

Sandtrap wrote:
Thu Jul 11, 2019 8:57 am
Cody wrote:
Thu Jul 11, 2019 8:34 am
My starting question and focus: Is it common practice for financial adviors to increase the risk profile to compete with an index portfolio?

I am not talking here about the other things that advisors might bring to the table like discussing family situations, tax advise etc.(many of which might be beneficial).

Hopefully this is a starting point for a broader discussion I wish to have - again my goal is to try to understand how financial advisors do their work.

Thanks
Following up on "notwhoyouthink" prior poster comment:

How some Financial Advisors do thier work:
Some real life example stories:

1. Recently: After flying in from another state, a Financial Advisor rented a Ferrari to "check in" on a client because he knows the client if fond of sports cars, has several Porches, etc. FA took client for a drive in the Ferrari, let client drive it. Lunch together, then left. Very happy client. ( know the client).

2. Close old friend (stubborn): Financial Advisor calls from Switzerland to check on client (calls monthly) and reassure client of the tremendous portfolio gains that are coming up in the future. FA says his trip to the Swiss Resort and vacation to Europe are a result of his own personal portfolio growth and not costing him a dime. My old friend had taken out an equity loan HELOC to invest with this FA.

3. Distant neighbor: FA from Edward Jones calls every 2 weeks to reassure client that his portfolio is making tremendous gains and he is more than on track to early retirement. Client has 2 homes, trying to sell one but having problems, is paying 2 mortgages and otherwise treading water.

Just a few personal stories that might help others look carefully at who they do business with. It can be great or not so great. :oops:
j :D
A family member works with an advisor who manages money for high net-worth clients. He has an associate advisor and 2 assistants. Anytime anything has to get signed, he comes to their house himself to get it signed. Shouldn’t you get one of your underlings to do that and spend your time investing your clients money?

illumination
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Re: How do most advisors produce client returns?

Post by illumination » Thu Jul 11, 2019 11:41 am

The advisor is usually associated with central office that has an analyst department that makes these sorts of buy and sell list depending on what the client's risk profile is. They have the resources and time to do this and they want their financial advisors focused on finding new clients, not research or making poor decisions that lose clients.

Financial advisor are like car salesman, they know how to close deals but they aren't automotive engineers and most probably couldn't even change the oil on a new car. To me, that's the biggest misconception, that financial advisors are like skilled asset managers or have a deep background in economics. And when they meet with clients, they're also trying to use it as sales opportunity like if you have friends and family that may need a financial advisor, etc.

Not always, but usually the "list" of stocks they advise clients to buy aren't "terrible" they actually can be half decent, but the model itself is fatally flawed because

A) fees of 1-2%
B) frequent buying and selling means incurring taxes
C) They get commissions on higher fee funds that have things like sales loads
D) Many are also interested in selling products like life insurance

I've had friends and family with the highest end financial firms/planners over several decades, they all underperformed simply dropping it into the S&P500. But their clients see returns from the buying and selling that look pretty good and they know they couldn't pick stocks like that.

Glockenspiel
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Re: How do most advisors produce client returns?

Post by Glockenspiel » Thu Jul 11, 2019 3:19 pm

Cody wrote:
Thu Jul 11, 2019 8:34 am
My starting question and focus: Is it common practice for financial adviors to increase the risk profile to compete with an index portfolio?

I am not talking here about the other things that advisors might bring to the table like discussing family situations, tax advise etc.(many of which might be beneficial).

Hopefully this is a starting point for a broader discussion I wish to have - again my goal is to try to understand how financial advisors do their work.

Thanks
I think most financial advisors don't actually compete very well with an index portfolio. They will selectively filter their performance against an index fund, to make it appear like they are better. This is a sales job and most average Joes are convinced they need a FA.

MittensMoney
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Re: How do most advisors produce client returns?

Post by MittensMoney » Thu Jul 11, 2019 3:44 pm

Is it common practice for financial advisors to increase the risk profile to compete with an index portfolio
Absolutely not, nor do they need to. Here's how I'd imagine the conversation going:

Client - "Why isn't my portfolio beating the S&P 500 index?"
Advisor - "The S&P 500 index is 100% stocks. When you hired me, we sat down to discuss your risk tolerance and came to the conclusion that being in a mix of stocks & bonds fit your goals and situation."
Client - "I compared an index portfolio of 60% SPY and 40% bond index and my portfolio is still trailing."
Advisor - "When you work with me you're getting financial advice AND investment management (including tax loss harvesting and rebalancing.) There's a fee I charge which allows you to put your financial life on auto-pilot and have a go-to resource for any questions related to something in your life with a dollar sign in front of it."

Tdubs
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Re: How do most advisors produce client returns?

Post by Tdubs » Thu Jul 11, 2019 4:06 pm

Is there any "understanding" that the risk adjusted portfolio will contain at least 12 or so funds? Just complex enough that no client will figure out total ERs, fees, tilt, or be able to compare their returns to anything?

AerialWombat
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Re: How do most advisors produce client returns?

Post by AerialWombat » Thu Jul 11, 2019 4:21 pm

MittensMoney wrote:
Thu Jul 11, 2019 3:44 pm
Advisor - "When you work with me you're getting financial advice AND investment management (including tax loss harvesting and rebalancing.) There's a fee I charge which allows you to put your financial life on auto-pilot and have a go-to resource for any questions related to something in your life with a dollar sign in front of it."
I’m giving extensive consideration to opening a non-traditional financial advising shack (RIA) in 2020, largely because of the fact that the verbiage you wrote here is so common, but also absolute bunk when uttered by traditional financial advisers.
“Life doesn’t come with a warranty.” -Michael LeBoeuf

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Re: How do most advisors produce client returns?

Post by AerialWombat » Thu Jul 11, 2019 4:25 pm

Tdubs wrote:
Thu Jul 11, 2019 4:06 pm
Is there any "understanding" that the risk adjusted portfolio will contain at least 12 or so funds? Just complex enough that no client will figure out total ERs, fees, tilt, or be able to compare their returns to anything?
I could be wrong, but I think the average person is smart enough to be shown, say, a weighted ER of their complex portfolio and have it compared to a TDF and come to their own conclusion about how they’re getting screwed.
“Life doesn’t come with a warranty.” -Michael LeBoeuf

Tdubs
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Re: How do most advisors produce client returns?

Post by Tdubs » Thu Jul 11, 2019 4:28 pm

AerialWombat wrote:
Thu Jul 11, 2019 4:25 pm
Tdubs wrote:
Thu Jul 11, 2019 4:06 pm
Is there any "understanding" that the risk adjusted portfolio will contain at least 12 or so funds? Just complex enough that no client will figure out total ERs, fees, tilt, or be able to compare their returns to anything?
I could be wrong, but I think the average person is smart enough to be shown, say, a weighted ER of their complex portfolio and have it compared to a TDF and come to their own conclusion about how they’re getting screwed.
Smart enough? Sure, with a little effort. Will they do it if not done for them? I really doubt it.

AerialWombat
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Re: How do most advisors produce client returns?

Post by AerialWombat » Thu Jul 11, 2019 4:32 pm

Tdubs wrote:
Thu Jul 11, 2019 4:28 pm
AerialWombat wrote:
Thu Jul 11, 2019 4:25 pm
Tdubs wrote:
Thu Jul 11, 2019 4:06 pm
Is there any "understanding" that the risk adjusted portfolio will contain at least 12 or so funds? Just complex enough that no client will figure out total ERs, fees, tilt, or be able to compare their returns to anything?
I could be wrong, but I think the average person is smart enough to be shown, say, a weighted ER of their complex portfolio and have it compared to a TDF and come to their own conclusion about how they’re getting screwed.
Smart enough? Sure, with a little effort. Will they do it if not done for them? I really doubt it.
Correct. Which is why I’m considering doing it for them. :)

Me: “You are paying X. Would you prefer to only pay 1/10th X, and I’ll also throw in Y and Z because I’m a licensed A?”
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SuperSaver1975
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Re: How do most advisors produce client returns?

Post by SuperSaver1975 » Thu Jul 11, 2019 5:07 pm

Financial advisors can help clients be disciplined about regularly investing money, staying the course, not freaking out and selling at the bottom, and not getting greedy and buying at the top. They can help you stay in an appropriate asset allocation. They can help with tactics to avoid taxes.

I think most people should ditch their FA though.

I worked with a FA for a few months but ended up not wanting to continue. The portfolio he recommended was 16 mutual funds/ETFs from 12 different companies. The ER were too high on many of them. I used a portfolio analyzer and determined that the 3 Fund Portfolio performed better.

My temporary FA gave us helpful advice that we should get extra Long Term Disability insurance. However, he wanted us to buy the LTD insurance from his company, obviously, but I decided that from my point of view I should shop around. It turned out his company wasn't even in the top 6 or 10 for that type of insurance. He tried to sell us Whole Life Insurance, which was a terrible idea, and he was not straightforward that he would probably make $25,000 in commissions during the first 2 years of the policy he wanted to sell us.

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unclescrooge
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Re: How do most advisors produce client returns?

Post by unclescrooge » Thu Jul 11, 2019 5:12 pm

AerialWombat wrote:
Thu Jul 11, 2019 4:32 pm
Tdubs wrote:
Thu Jul 11, 2019 4:28 pm
AerialWombat wrote:
Thu Jul 11, 2019 4:25 pm
Tdubs wrote:
Thu Jul 11, 2019 4:06 pm
Is there any "understanding" that the risk adjusted portfolio will contain at least 12 or so funds? Just complex enough that no client will figure out total ERs, fees, tilt, or be able to compare their returns to anything?
I could be wrong, but I think the average person is smart enough to be shown, say, a weighted ER of their complex portfolio and have it compared to a TDF and come to their own conclusion about how they’re getting screwed.
Smart enough? Sure, with a little effort. Will they do it if not done for them? I really doubt it.
Correct. Which is why I’m considering doing it for them. :)

Me: “You are paying X. Would you prefer to only pay 1/10th X, and I’ll also throw in Y and Z because I’m a licensed A?”
How will you stay in business if you are only charging 1/10th the fee?
Assuming the average advisor charges 2%, that's only 0.2% for you.

Tdubs
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Re: How do most advisors produce client returns?

Post by Tdubs » Thu Jul 11, 2019 5:14 pm

AerialWombat wrote:
Thu Jul 11, 2019 4:32 pm
Tdubs wrote:
Thu Jul 11, 2019 4:28 pm
AerialWombat wrote:
Thu Jul 11, 2019 4:25 pm
Tdubs wrote:
Thu Jul 11, 2019 4:06 pm
Is there any "understanding" that the risk adjusted portfolio will contain at least 12 or so funds? Just complex enough that no client will figure out total ERs, fees, tilt, or be able to compare their returns to anything?
I could be wrong, but I think the average person is smart enough to be shown, say, a weighted ER of their complex portfolio and have it compared to a TDF and come to their own conclusion about how they’re getting screwed.
Smart enough? Sure, with a little effort. Will they do it if not done for them? I really doubt it.
Correct. Which is why I’m considering doing it for them. :)

Me: “You are paying X. Would you prefer to only pay 1/10th X, and I’ll also throw in Y and Z because I’m a licensed A?”
How many are paying X because they think it buys them quality funds and management where 1/10 X gets them cheap, inferior returns?

dbr
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Re: How do most advisors produce client returns?

Post by dbr » Thu Jul 11, 2019 5:18 pm

Cody wrote:
Thu Jul 11, 2019 8:34 am
My starting question and focus: Is it common practice for financial adviors to increase the risk profile to compete with an index portfolio?

I don't know. I kind of don't think so. But it is possible major investment firms such as Vanguard and Fidelity have in the past increased the stock allocations in target retirement funds to increase the return.

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Sandtrap
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Re: How do most advisors produce client returns?

Post by Sandtrap » Thu Jul 11, 2019 5:19 pm

AerialWombat wrote:
Thu Jul 11, 2019 4:25 pm
Tdubs wrote:
Thu Jul 11, 2019 4:06 pm
Is there any "understanding" that the risk adjusted portfolio will contain at least 12 or so funds? Just complex enough that no client will figure out total ERs, fees, tilt, or be able to compare their returns to anything?
I could be wrong, but I think the average person is smart enough to be shown, say, a weighted ER of their complex portfolio and have it compared to a TDF and come to their own conclusion about how they’re getting screwed.
I used to think so, too. It seems so "common sense".

But, it's amazing how well some folks can talk themselves into how much their FA is doing for them and the added costs are well worth the "tremendous returns". . . . I've spoke to quite a few seniors who have voiced this.

. . . . oh well. . . . :oops:

j
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MittensMoney
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Re: How do most advisors produce client returns?

Post by MittensMoney » Thu Jul 11, 2019 5:25 pm


But, it's amazing how well some folks can talk themselves into how much their FA is doing for them and the added costs are well worth the "tremendous returns". . . . I've spoke to quite a few seniors who have voiced this.

. . . . oh well. . . . :oops:

j
Imagine you had a million dollar portfolio in 2013 when you hired an advisor, and now you look at it today and see $500,000 in gains without ever lifting a finger or even thinking about your finances. Seems pretty straightforward to me, and telling them "you could've had $550,000" won't change the fact that they're happy with the performance.

cashmoney
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Re: How do most advisors produce client returns?

Post by cashmoney » Thu Jul 11, 2019 5:31 pm

MittensMoney wrote:
Thu Jul 11, 2019 3:44 pm
Is it common practice for financial advisors to increase the risk profile to compete with an index portfolio
Absolutely not, nor do they need to. Here's how I'd imagine the conversation going:

Client - "Why isn't my portfolio beating the S&P 500 index?"
Advisor - "The S&P 500 index is 100% stocks. When you hired me, we sat down to discuss your risk tolerance and came to the conclusion that being in a mix of stocks & bonds fit your goals and situation."
Client - "I compared an index portfolio of 60% SPY and 40% bond index and my portfolio is still trailing."
Advisor - "When you work with me you're getting financial advice AND investment management (including tax loss harvesting and rebalancing.) There's a fee I charge which allows you to put your financial life on auto-pilot and have a go-to resource for any questions related to something in your life with a dollar sign in front of it."


I had a conversation like this with my 86 year mothers RJ FA about her 70/30 portfolio that has always preformed below the index benchmarks and his reply was that what he does for his retired clients is to make sure they never run out of income.I guess this explains why he has her very high cost high yield bond funds across her ira and taxable account.He also said he thinks SP index funds are a bad idea for older investors because he prefers value investing - in high cost mutual funds with sales loads and 12b fees in addition to the 1% AUM

Tdubs
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Re: How do most advisors produce client returns?

Post by Tdubs » Thu Jul 11, 2019 5:40 pm

Sandtrap wrote:
Thu Jul 11, 2019 5:19 pm
AerialWombat wrote:
Thu Jul 11, 2019 4:25 pm
Tdubs wrote:
Thu Jul 11, 2019 4:06 pm
Is there any "understanding" that the risk adjusted portfolio will contain at least 12 or so funds? Just complex enough that no client will figure out total ERs, fees, tilt, or be able to compare their returns to anything?
I could be wrong, but I think the average person is smart enough to be shown, say, a weighted ER of their complex portfolio and have it compared to a TDF and come to their own conclusion about how they’re getting screwed.
I used to think so, too. It seems so "common sense".

But, it's amazing how well some folks can talk themselves into how much their FA is doing for them and the added costs are well worth the "tremendous returns". . . . I've spoke to quite a few seniors who have voiced this.

. . . . oh well. . . . :oops:

j
Have you had the experience of explaining to someone that an S&P 500 index fund with a 0.8% ER simply can't outperform an S&P500 with a 0.04% ER to absolutely no effect?

MittensMoney
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Re: How do most advisors produce client returns?

Post by MittensMoney » Thu Jul 11, 2019 5:40 pm

cashmoney wrote:
Thu Jul 11, 2019 5:31 pm
MittensMoney wrote:
Thu Jul 11, 2019 3:44 pm
Is it common practice for financial advisors to increase the risk profile to compete with an index portfolio
Absolutely not, nor do they need to. Here's how I'd imagine the conversation going:

Client - "Why isn't my portfolio beating the S&P 500 index?"
Advisor - "The S&P 500 index is 100% stocks. When you hired me, we sat down to discuss your risk tolerance and came to the conclusion that being in a mix of stocks & bonds fit your goals and situation."
Client - "I compared an index portfolio of 60% SPY and 40% bond index and my portfolio is still trailing."
Advisor - "When you work with me you're getting financial advice AND investment management (including tax loss harvesting and rebalancing.) There's a fee I charge which allows you to put your financial life on auto-pilot and have a go-to resource for any questions related to something in your life with a dollar sign in front of it."


I had a conversation like this with my 86 year mothers RJ FA about her 70/30 portfolio that has always preformed below the index benchmarks and his reply was that what he does for his retired clients is to make sure they never run out of income.I guess this explains why he has her very high cost high yield bond funds across her ira and taxable account.He also said he thinks SP index funds are a bad idea for older investors because he prefers value investing - in high cost mutual funds with sales loads and 12b fees in addition to the 1% AUM
It's an applicable anecdote and I agree that this 'advisor' is pretty much typical of the broker-dealer world, in essence fleecing a senior citizen who doesn't know any better - but then you start looking at RIA's, and then lower cost RIA's, and then the hourly-only planners and realize it's an entire spectrum of advisors all described by the same title and "finding value" depends on the exact circumstance of each relationship. Sadly through a lot of lobbying the broker-dealer world is effectively blurring the lines even further, check this article out: https://www.financial-planning.com/news ... a-footnote

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dratkinson
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Re: How do most advisors produce client returns?

Post by dratkinson » Thu Jul 11, 2019 5:56 pm

Question. "How do most advisors produce client returns?"

Answer.
--By not completely siphoning away all of the market's return as loads, fees, and taxes.
--And some clients wrongly believe that a (partial) return of their principle is "making money". But this is easily disproven by a declining account balance.



Neighbor (trusted their "guy"). Neighbor thought that since they had money coming in each month that FA was "making money" for them. While house sitting during neighbor's long-term absence and opening mail to call friends to pay received bills, noticed FA was churning IRA (sell one bond fund, buy two bond funds; next month sell two bond funds, buy one bond fund; $20 each transaction.) Had to explain "churning" to neighbor's friends.

Resolution.
--Neighbor moved all accounts to Fidelity, but only after >20yrs of service by trusted friendly solicitous FA.
--Hired CPA to resolve IRS tax issue caused by FA wrongly characterized rollover as complete withdrawal.



Financial products' fees.
--Recall from prior posts the importance of reviewing fees---the more fees, the worse the product.
--Surrender fees. A claimed knowledgeable former poster explained that surrender fees are closely related to the commission a salesman expects to make on a sale. So products with surrender fees are "meant to be sold, not bought."
d.r.a, not dr.a. | I'm a novice investor, you are forewarned.

skeptical
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Re: How do most advisors produce client returns?

Post by skeptical » Thu Jul 11, 2019 6:21 pm

Cody wrote:
Thu Jul 11, 2019 8:34 am
My starting question and focus: Is it common practice for financial adviors to increase the risk profile to compete with an index portfolio?
Thanks
My personal experience is that this is one way some advisors work :
- Found an advisor through a friend of a friend, and checked references. I was a complete novice, and did not ask the right questions, or do the proper research.
- Wanted a moderate/conservative portfolio, went through a song and dance of MPT and how he constructs portfolios, and how it would beat the benchmark by 1.5% after his fee 1% fee, and that I would be able to pull 5% a year inflation adjusted.
- Put in 1/5 of my money to see how it all worked - he said it was a 65/35 portfolio with "downside protection"
- Once portfolio was set up, I used analysis tools and my estimate was that it was a 85/15 portfolio. Some of the bond funds had leverage and acted more like stocks, some of the stock funds were opaque and were probably leveraged. His analysis of stock/bond rations for the funds came from a "more accurate" set of stats than M*/etc (I think Ibbotsen), but it was "paid and private". There were 20 funds.
- The benchmark used for what I calculated to be a 85/15 portfolio was a 65/35 three fund portfolio. No wonder he could beat the benchmark by so much !

This was a little over five years ago. Three months after this was set up, I found this site, read everything, and found tools to analyze the performance. Found I could replicate the performance (past) fairly accurately by using an 85/15 three fund (not counting his fee and higher taxes) - proof I was correct, fired him, sold everything (had to pay some exit loads, etc) and went with a 50/50 three fund (one stock, two bond). He thought I was nuts.

It has been five years since I exited the advisor. My 50/50 has done better than the old portfolio (counting fees), but even before taxes. Some of this is due to domestic vs INTL, but even adjusting for this, my portfolio does almost as well and is a lot less volatile, and I pay no federal taxes. Taxes on the old portfolio would have been about 1/2 or more of my current withdrawal rate.

It was a harsh learning experience, but I only went in with 1/5, paid a few 5% exit fees, plus his fee, learned a lot, and have a very boring portfolio that I "manage" myself and am happy with.

skeptical
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Re: How do most advisors produce client returns?

Post by skeptical » Thu Jul 11, 2019 6:30 pm

Cody wrote:
Thu Jul 11, 2019 8:34 am
My starting question and focus: Is it common practice for financial adviors to increase the risk profile to compete with an index portfolio?

Thanks
Also, this does not apply just to advisors - funds can do this also.

I was in between moving from Fidelity to Vanguard (my tax deferred were in Fidelity, and I was liquidating and moving an advisor designed plan to an index plan, and was trying to decide between Fidelity and Vanguard.

I needed a muni fund, and was looking at VWIUX (Vanguard National Muni), Fidelty said it had an "equivalent" FLTMX that did just as well with same duration and quality. And, it actually does, more or less, even though it has a .34 expense ration vs .09 for VWIUX.

I spent a lot of time trying to understand why, and what I believe is the difference is slightly better AAA/AA/A stats for for VWIUX, more GO bonds for VWIUX (30% vs 20%), and a few other differences.

I do not know if this was by design, but FLTMX has about the same performance as VWIUX, is marketed that way, but has .25% more fees that are made up, in my opinion, by shifting some extra risk to the buyer of the fund.

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Sandtrap
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Re: How do most advisors produce client returns?

Post by Sandtrap » Thu Jul 11, 2019 8:13 pm

Tdubs wrote:
Thu Jul 11, 2019 5:40 pm
Sandtrap wrote:
Thu Jul 11, 2019 5:19 pm
AerialWombat wrote:
Thu Jul 11, 2019 4:25 pm
Tdubs wrote:
Thu Jul 11, 2019 4:06 pm
Is there any "understanding" that the risk adjusted portfolio will contain at least 12 or so funds? Just complex enough that no client will figure out total ERs, fees, tilt, or be able to compare their returns to anything?
I could be wrong, but I think the average person is smart enough to be shown, say, a weighted ER of their complex portfolio and have it compared to a TDF and come to their own conclusion about how they’re getting screwed.
I used to think so, too. It seems so "common sense".

But, it's amazing how well some folks can talk themselves into how much their FA is doing for them and the added costs are well worth the "tremendous returns". . . . I've spoke to quite a few seniors who have voiced this.

. . . . oh well. . . . :oops:

j
Have you had the experience of explaining to someone that an S&P 500 index fund with a 0.8% ER simply can't outperform an S&P500 with a 0.04% ER to absolutely no effect?
No. Never get that far, never try anyway.

The "Deer In The Headlights" effect happens far earlier.

j :happy
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tibbitts
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Re: How do most advisors produce client returns?

Post by tibbitts » Thu Jul 11, 2019 8:28 pm

AerialWombat wrote:
Thu Jul 11, 2019 4:25 pm
Tdubs wrote:
Thu Jul 11, 2019 4:06 pm
Is there any "understanding" that the risk adjusted portfolio will contain at least 12 or so funds? Just complex enough that no client will figure out total ERs, fees, tilt, or be able to compare their returns to anything?
I could be wrong, but I think the average person is smart enough to be shown, say, a weighted ER of their complex portfolio and have it compared to a TDF and come to their own conclusion about how they’re getting screwed.
Unless the adviser supplies the information, the average person, or even above average, isn't able to calculate their return relative to a comparable benchmark given frequent changes involving a large number of investments in their portfolio.

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Re: How do most advisors produce client returns?

Post by AerialWombat » Thu Jul 11, 2019 8:34 pm

unclescrooge wrote:
Thu Jul 11, 2019 5:12 pm
AerialWombat wrote:
Thu Jul 11, 2019 4:32 pm
Correct. Which is why I’m considering doing it for them. :)

Me: “You are paying X. Would you prefer to only pay 1/10th X, and I’ll also throw in Y and Z because I’m a licensed A?”
How will you stay in business if you are only charging 1/10th the fee?
Assuming the average advisor charges 2%, that's only 0.2% for you.
This would be something fun to do in retirement for beer money. :sharebeer
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unclescrooge
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Re: How do most advisors produce client returns?

Post by unclescrooge » Thu Jul 11, 2019 10:11 pm

AerialWombat wrote:
Thu Jul 11, 2019 8:34 pm
unclescrooge wrote:
Thu Jul 11, 2019 5:12 pm
AerialWombat wrote:
Thu Jul 11, 2019 4:32 pm
Correct. Which is why I’m considering doing it for them. :)

Me: “You are paying X. Would you prefer to only pay 1/10th X, and I’ll also throw in Y and Z because I’m a licensed A?”
How will you stay in business if you are only charging 1/10th the fee?
Assuming the average advisor charges 2%, that's only 0.2% for you.
This would be something fun to do in retirement for beer money. :sharebeer
While I commend you on your desire to be helpful, I fear most clients will see a hobbyist trying to play at being a "financial advisor".

As with many things in life, perception is reality.

Unless you are doing many things for your clients to show you care (like renting Ferrari's, or filling out mundane paperwork) no one will care how much you know.

They would rather get ripped off by the friendly salesperson down the street and pay 3% fee, rather than chance their retirement on this amateur advisor. :annoyed

Unless you're seriously considering doing this for beer money ($200 per month) you'll struggle to gain any traction in this endeavor.

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Re: How do most advisors produce client returns?

Post by AerialWombat » Fri Jul 12, 2019 1:37 am

unclescrooge wrote:
Thu Jul 11, 2019 10:11 pm
AerialWombat wrote:
Thu Jul 11, 2019 8:34 pm
unclescrooge wrote:
Thu Jul 11, 2019 5:12 pm
AerialWombat wrote:
Thu Jul 11, 2019 4:32 pm
Correct. Which is why I’m considering doing it for them. :)

Me: “You are paying X. Would you prefer to only pay 1/10th X, and I’ll also throw in Y and Z because I’m a licensed A?”
How will you stay in business if you are only charging 1/10th the fee?
Assuming the average advisor charges 2%, that's only 0.2% for you.
This would be something fun to do in retirement for beer money. :sharebeer
While I commend you on your desire to be helpful, I fear most clients will see a hobbyist trying to play at being a "financial advisor".

As with many things in life, perception is reality.

Unless you are doing many things for your clients to show you care (like renting Ferrari's, or filling out mundane paperwork) no one will care how much you know.

They would rather get ripped off by the friendly salesperson down the street and pay 3% fee, rather than chance their retirement on this amateur advisor. :annoyed

Unless you're seriously considering doing this for beer money ($200 per month) you'll struggle to gain any traction in this endeavor.
While I definitely understand what you’re saying, I know without a doubt that I could pull this off if I’m serious about it. I’ve built six and seven figure professional practices before, and am quite proficient at lead generation and closing sales. I know how to use the exact sales tactics that FA’s use, and can turn them around and use them for good instead of evil. I also have a couple unique angles I could work to bring additional value to certain people.

Back to the original post, since most advisors cannot create alpha, and the ideal portfolio for most wage earners is passive indexing, the FA universe is inherently becoming a commodity. I think as indexing grows, as do robo-advisors, the only FAs to survive will be the ones that offer ancillary services that the OP said to disregard.

Within the accounting world in which I live, the practices/firms with a single service offering are dying — they are totally hosed in 5 years if they only do tax prep or only do bookkeeping, for example. FAs will eventually see the same thing occur.
“Life doesn’t come with a warranty.” -Michael LeBoeuf

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Re: How do most advisors produce client returns?

Post by Shallowpockets » Fri Jul 12, 2019 6:11 am

Aside from hiw the FAs make money for themselves or their clients, I think it boils down to the old adage, "you don't know what you don't know". This for the client. When you don't even know enough to ask the right, or any questions, then you are at the mercy of your ignorance.
This is easily rectified if one has the motivation to seek knowledge and answers easily done on the Internet. How much easier can it be in this day and age of the interent. Most people can't be bothered.

Another aspect is that most people cannot make a decision. It is easier to follow the FA down that road. He can make he decisions and even explain it to you.
This lack of ability to make a decision is clearly evident on this forum where people post for all kinds of advice regarding a decision to be made on the most trivial things. Do I really need advise from BH on what hiking socks to buy?
Seems that many BHs need an advisor in more than their finances.
Perhaps it is the flip side of you don't know what you don't know. As in, the fear of not knowing it all and maybe making a decision error thinking you did know. Paralysis there.
Your FA guy can help with that. He knows it all.

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Re: How do most advisors produce client returns?

Post by Stinky » Fri Jul 12, 2019 7:40 am

illumination wrote:
Thu Jul 11, 2019 11:41 am

Financial advisor are like car salesman, they know how to close deals but they aren't automotive engineers and most probably couldn't even change the oil on a new car. To me, that's the biggest misconception, that financial advisors are like skilled asset managers or have a deep background in economics. And when they meet with clients, they're also trying to use it as sales opportunity like if you have friends and family that may need a financial advisor, etc.
Excellent one-paragraph summary!
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Re: How do most advisors produce client returns?

Post by pyld76 » Fri Jul 12, 2019 8:15 am

I think we need to talk about what constitutes a “financial advisor.”

My definition rules out those who are only registered as broker-dealers, anyone who hasn’t passed the series 65 and registered as a RIA, and who doesn’t act by regulation or choice as an actual fiduciary. So, the salesperson as EJ or Axa or those types of places don’t count. I consider them in the same class as used car salesmen or spammers.

Within the realm of a RIA? A good RIA is going to tell you they they aren’t going to beat the market or “produce client returns.” What they should do is understand your goals and risk profile, produce a well allocated portfolio made up of tax efficiently placed index vehicles, help with budgeting and cash management, advise on tax strategy, potentially advise (not sell) insurance strategies, talk to you about estate planning, etc.

A good RIA will clearly explain this stuff above costs money and be clear upfront about how they are paid—whether that be a percentage of AUM, hourly, flat fee, etc. A good RIA will probably tell you that part of how they earn their keep is by doing the allocation bit well and keeping an investor from making behavioral mistakes out of either ignorance or emotion. So, I’d say to the OP that this is how a good advisor “produces client returns”—by generating “advisor alpha” relative to what an investor would otherwise do on their own. Vanguard thinks this, too. https://personal.vanguard.com/pdf/ISGAA.pdf

Now, the majority of folks here likely either believe they don’t need an advisor to do that kind of thing, and thus any advisory fee is a drag on returns. There may be a kernel of truth to that idea. For a lot of investors, paying a good RIA 100 basis points on their AUM or a couple of grand a year cash is undoubtedly going to leave them a larger pile at the end simply by dint of avoiding behavioral mistakes. This is real, but it will be scoffed at.

I don’t currently employ a RIA. My IPS and my estate planning is predicated upon doing so when I reach the point where I’m no longer capable of managing my own affairs (DW is similarly situated).

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Cody
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Re: How do most advisors produce client returns?

Post by Cody » Fri Jul 12, 2019 8:30 am

I'm the OP.

Funny you should mention cars repair as a metaphor for FA.

Anyway my FA would say something like "you don't how to fix your own car so you go to mechanic" - "I will keep you from driving off a financial cliff". And "you know only enough to be dangerous."

That froze me in my tracks for awhile.

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Cody
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Re: How do most advisors produce client returns?

Post by Cody » Fri Jul 12, 2019 8:32 am

A good RIA will clearly explain this stuff above costs money and be clear upfront about how they are paid—whether that be a percentage of AUM, hourly, flat fee, etc. A good RIA will probably tell you that part of how they earn their keep is by doing the allocation bit well and keeping an investor from making behavioral mistakes out of either ignorance or emotion. So, I’d say to the OP that this is how a good advisor “produces client returns”—by generating “advisor alpha” relative to what an investor would otherwise do on their own. Vanguard thinks this, too. https://personal.vanguard.com/pdf/ISGAA.pdf
++++++

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FIREchief
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Re: How do most advisors produce client returns?

Post by FIREchief » Fri Jul 12, 2019 3:35 pm

Cody wrote:
Thu Jul 11, 2019 8:34 am
My starting question and focus: Is it common practice for financial adviors to increase the risk profile to compete with an index portfolio?
If I wanted to play that game, I would find clients who do not understand what the S&P 500 index really is and who do not understand that it throws off about 2% in dividends each year. I would then invest in a diversified mix that will mimic the S&P 500 index, take the 1% AUM fee and send the client a one page graph that showed how I "beat" the S&P 500 index by 1%. Then I would just wait for the phone calls from their friends and relatives who want my "expert" management skills. You think this doesn't happen?? :P
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: How do most advisors produce client returns?

Post by 123 » Fri Jul 12, 2019 5:10 pm

Most of the time the adviser will apply a cookie cutter template to the individual's portfolio. That cookie cutter could be designed by the the adviser but, more likely, will be established by the firm the adviser works for. The cookie cuter will be selected based on the customer's risk tolerance as determined by the adviser, who might ask the customer. The actual handling of the investments will likely by done by some back-office staff or an automated software program. The job of the adviser is to get to clients, and more revenue. It's easier if the adviser uses basically the same investments for all his customer's because that makes it easier to respond to questions from customers. It makes it look like the adviser knows and cares about you, marks of a good salesperson.
The closest helping hand is at the end of your own arm.

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Re: How do most advisors produce client returns?

Post by dbr » Fri Jul 12, 2019 5:15 pm

Investors don't do something to produce client returns. If you believe the Dalbar Study they prevent bad client behavior that destroys returns. On the other hand maybe Dalbar is wrong

Here is some discussion: https://www.google.com/search?ei=_gUpXb ... Pm5p309nmo

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Cody
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Re: How do most advisors produce client returns?

Post by Cody » Sat Jul 13, 2019 8:07 am

Would you expect advisors who are held to fiduciary standards likely, on average, to return higher gains to clients?

Converely non fiduciary advisors are less likely to produce higher gains.

My thinking here would be that there have more conflicts of interest and perhpas more cookie cutter, and fees are higher and the knowledge just isn't there.

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Re: How do most advisors produce client returns?

Post by Rick Ferri » Sat Jul 13, 2019 8:17 am

Cody wrote:
Thu Jul 11, 2019 8:34 am
My starting question and focus: Is it common practice for financial adviors to increase the risk profile to compete with an index portfolio?
Of course. It's how they make enough to potentially pay themselves, and I am not being cute.

I managed money for many years using a 25% factor tilt in portfolios. The tilt did add some risk to the portfolio - there is no free lunch. I told my clients outright that the tilt would (hopefully) earn enough money to cover my advisory fee and they should expect to earn the net return of a three-fund portfolio.

Your return using an adviser is completely dependent on the extra risks they take, less the fees they charge. There is no magic to it.

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

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Re: How do most advisors produce client returns?

Post by arcticpineapplecorp. » Sat Jul 13, 2019 8:44 am

Cody wrote:
Sat Jul 13, 2019 8:07 am
Would you expect advisors who are held to fiduciary standards likely, on average, to return higher gains to clients?

Converely non fiduciary advisors are less likely to produce higher gains.

My thinking here would be that there have more conflicts of interest and perhpas more cookie cutter, and fees are higher and the knowledge just isn't there.
You might think that, but I believe it's the opposite and maybe your question is incomplete as stated.

Are you interested in "higher returns" or are you interested in "higher net returns". The net return is all that matters. The net return is the return minus fees. So it doesn't matter if the return is higher before costs. It's the costs that matter. Say the average advisor charges 1% a year (an earlier post said 2% but I think the average is closer to 1%). Then they have to beat whatever benchmark their portfolio construction (60/40, 85/15 or whatever) by 1% each year...just to match the benchmarrk.

To produce better net returns to clients they actually need to earn a return that exceeds the cost to the advisor.

If the market grows at a certain percentage, let's say 8% a year then the advisor has to earn 9% a year before the 1% advisor fee. To "beat the market" s/he'd need to earn MORE than 9% a year, right? How likely do you think that is over the long term? see this article to see how much net worth you give up by paying 1% (or more) each year (Jack Bogle used to refer to this as the "tyranny of compouning costs"):
http://web.archive.org/web/201611100649 ... f-returns/

Tom Cock and Don McDonald of vestory cite a study (marketwatch I think?) that found only 1% of all advisors are fiduciaries. A local fiduciary I know uses the number 3% of all advisors to represent the amount who are fiduciaries. Regardless of which is right, it's pretty darn low.

This article says conflicts of interest, i.e., not using fiduciaries, is costing $17 billion a year to consumers...and that's just an estimate and only regarding retirement plans. The number's likely higher considering all the nonretirement assets managed by advisors who are not fiduciaries.
The problem has become so large and widespread that the U.S. government has stepped in to try and fix the situation. In February 2015, President Obama directed the Department of Labor (DOL) to propose rules that "require retirement advisors to abide by a ‘fiduciary’ standard – putting their clients' interests before their own profits." According to the DOL, "A White House Council of Economic Advisors analysis found that these conflicts of interest result in annual losses of about 1 percentage point for affected investors — or about $17 billion per year in total."

source: https://www.marketwatch.com/story/why-y ... 2015-08-07
"May you live as long as you want and never want as long as you live" -- Irish Blessing | "Invest we must" -- Jack Bogle

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Cody
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Re: How do most advisors produce client returns?

Post by Cody » Sat Jul 13, 2019 4:50 pm

This is a wonderful and thoughtful set of posts. It is helping fill in so many voids in understanding the world in which everyday investors live.

Should I be encouraged by what I am learning?

This dragon has many heads!

FrankLUSMC
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Re: How do most advisors produce client returns?

Post by FrankLUSMC » Sat Jul 13, 2019 4:53 pm

Sandtrap wrote:
Thu Jul 11, 2019 8:57 am
Cody wrote:
Thu Jul 11, 2019 8:34 am
My starting question and focus: Is it common practice for financial adviors to increase the risk profile to compete with an index portfolio?

I am not talking here about the other things that advisors might bring to the table like discussing family situations, tax advise etc.(many of which might be beneficial).

Hopefully this is a starting point for a broader discussion I wish to have - again my goal is to try to understand how financial advisors do their work.

Thanks
Following up on "notwhoyouthink" prior poster comment:

How some Financial Advisors do thier work:
Some real life example stories:

1. Recently: After flying in from another state, a Financial Advisor rented a Ferrari to "check in" on a client because he knows the client if fond of sports cars, has several Porches, etc. FA took client for a drive in the Ferrari, let client drive it. Lunch together, then left. Very happy client. ( know the client).

2. Close old friend (stubborn): Financial Advisor calls from Switzerland to check on client (calls monthly) and reassure client of the tremendous portfolio gains that are coming up in the future. FA says his trip to the Swiss Resort and vacation to Europe are a result of his own personal portfolio growth and not costing him a dime. My old friend had taken out an equity loan HELOC to invest with this FA.

3. Distant neighbor: FA from Edward Jones calls every 2 weeks to reassure client that his portfolio is making tremendous gains and he is more than on track to early retirement. Client has 2 homes, trying to sell one but having problems, is paying 2 mortgages and otherwise treading water.

Just a few personal stories that might help others look carefully at who they do business with. It can be great or not so great. :oops:
j :D

Smoke and Mirrors!!! was going to be my answer to OP question.

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Taylor Larimore
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"How To Be A Successful Advisor"

Post by Taylor Larimore » Sat Jul 13, 2019 5:20 pm

Bogleheads:

George Sisti writes an excellent monthly newsletter called "Vectors." His latest issue contains an interesting article titled: How To Be A Successful Financial Advisor. This is the link:

http://www.oncoursefp.com/files/Vectors ... 0final.pdf

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Sandtrap
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Re: "How To Be A Successful Advisor"

Post by Sandtrap » Sat Jul 13, 2019 5:37 pm

Taylor Larimore wrote:
Sat Jul 13, 2019 5:20 pm
Bogleheads:

George Sisti writes an excellent monthly newsletter called "Vectors." His latest issue contains an interesting article titled: How To Be A Successful Financial Advisor. This is the link:

http://www.oncoursefp.com/files/Vectors ... 0final.pdf

Best wishes.
Taylor
An @@ Eye Opener @@ of an article.

Thanks for posting it.
jim :D
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Sandtrap
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Re: How do most advisors produce client returns?

Post by Sandtrap » Sat Jul 13, 2019 5:40 pm

123 wrote:
Fri Jul 12, 2019 5:10 pm
Most of the time the adviser will apply a cookie cutter template to the individual's portfolio. That cookie cutter could be designed by the the adviser but, more likely, will be established by the firm the adviser works for. The cookie cuter will be selected based on the customer's risk tolerance as determined by the adviser, who might ask the customer. The actual handling of the investments will likely by done by some back-office staff or an automated software program. The job of the adviser is to get to clients, and more revenue. It's easier if the adviser uses basically the same investments for all his customer's because that makes it easier to respond to questions from customers. It makes it look like the adviser knows and cares about you, marks of a good salesperson.
+1
This is similar to what happens with "door to door" (or drive thru window) revocable trusts. The bread and butter for many estate attorneys.
Standard Template, glossy pseudo leather bound presentation folders, etc.

j
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alex_686
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Re: How do most advisors produce client returns?

Post by alex_686 » Sat Jul 13, 2019 5:49 pm

Cody wrote:
Sat Jul 13, 2019 8:07 am
Would you expect advisors who are held to fiduciary standards likely, on average, to return higher gains to clients?

Converely non fiduciary advisors are less likely to produce higher gains.
You can't say higher returns. I think they would produce better returns. About 80% of the work that that FA does should be figuring out the clients IPS. What return they need, risk tolerance, goals, which asset classes fit those goals, how does taxes affect returns, holding the client's hand during market turbulence, etc. What if the FA suggests that they are taking on too much risk and should increase bonds to decrease risk - which obviously would decrease returns.
Cody wrote:
Sat Jul 13, 2019 8:07 am
My thinking here would be that there have more conflicts of interest and perhpas more cookie cutter, and fees are higher and the knowledge just isn't there.
Fees are actually higher in the fiduciary model. The biggest expense is the FAs time. Their time is valuable. Fiduciaries require more training and a higher knowledge base. Good FAs know that they are good and charge accordingly. The fiduciary model requires that you spend more time with your client. It requires more paperwork. It requires heavier compliance work on the back end. In short, the biggest rock you need to move to reduce fees is to reduce what you pay FAs, and the fiduciary model actually increases this.

I have done project work for 2 different brokerage firms around this issue. The conclusion at both firms was they could not serve the middle market - or any household under 1m in assets with the firm. There was just no way to serve these people profitability and maintain the standards that the fiduciary model requires. The answer in both of these cases was to shut down the middle market and focus on high net worth clients.

As you might tell, I have a slightly negative opinion about the fiduciary rule. It is a higher standard of care, but it comes with higher costs. As a fiduciary I can't chit chat with a client for an hour and drop them into a target date fund. I can't offer the Chevy option to people of modest worth, I have to offer the Cadillac version. The middle market gets shoved into self-serve land. I wish there were a space for the middle market customers, but this spaces gets smaller every year.

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