Why do people have financial/wealth/portfolio managers?

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Soon2BXProgrammer
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Re: Why do people have financial/wealth/portfolio managers?

Post by Soon2BXProgrammer »

MrCheapo wrote: Thu Oct 07, 2021 4:01 pm Hi,

So I see a few post every day asking about financial/wealth/portfolio managers, that is, people who make investments decisions for you. And it seems whenever I go to parties (not that often now) that people are very happy with their money managers.

I must be missing something but in this age of ultra-cheap index funds why would you use a money manager? My understanding is that no manager could out-perform a good balanced index portfolio. Further, no one will look after your money better than you will. Even if you are ultra-busy, not too-bright etc. why not use a 3 fund portfolio.

Please enlighten me why you use a money manager rather than handling your money yourself? I'm genuinely curious and eager to learn why.
People don't understand that after costs and adjusting for risk, a 3 fund portfolio will statistically outperform.
Earned 34 (and counting) credit hours of financial planning related education from a regionally accredited university, but I am not your advisor.
ThankYouJack
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Re: Why do people have financial/wealth/portfolio managers?

Post by ThankYouJack »

arcticpineapplecorp. wrote: Fri Oct 08, 2021 9:06 am
ThankYouJack wrote: Thu Oct 07, 2021 4:17 pm It's probably better than them investing in the 3 fund and panic selling during the next bear market.
i think this is a fallacy, though people continue to believe that if they are in actively managed funds or have an advisor they will be able to sidestep bear markets. Evidence shows otherwise.

even if active managers or advisors get out it's usually after the market's already declined. Perhaps they don't have the entire losses of the market because they got out while the worst was yet to happen, but then the problem becomes that the advisor/active manager can not know when the worst will be, then the market goes up and then the advisor gets in and misses some of those gains. Missing gains is more important than experiencing temporary losses but try convincing people of that who are fear based.

also there's evidence (was discussed a few weeks ago on bogleheads) that stock pickers may do fine on the buy side, but their mistakes on the sell side is why they do so much worse than the market (i.e., they sell too soon leaving money on the table or too late after the stocks decline).

If the only choices are: 1. do it yourself or 2. hire an advisor, then if the advisor will help them stay the course whereas the individual would not, then the advisor probably will help them do better than they'd do for themself (even after fees). Behavioral errors are a big problem with investing. Investor know thyself.

That doesn't mean you have to pay more than is necessary. When you decide you need an advisor you can choose: 1. high priced wealth management or 2. Vanguard PAS. The latter will do better overtime because of the lower fees. Returns come and go but fees are forever.

Finally, having an advisor doesn't prevent you from firing an advisor or ordering them to sell everything in a panic. The advisor's job is to talk you off the ledge. Their ability to do that will vary upon their expertise in psychology, behavioral finance and ability to influence.
You make some good points and I think we both agree with the psychology aspect. But is Vanguard PAS going to do the same or better job as a personal advisor to talk someone off the ledge? I would say it depends on the investor and advisor.

So I think for a lot of (most? all?) investors the psychology aspect plays a role and not just the fees. I don't think it's an exact science and one size fits all.
milktoast
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Re: Why do people have financial/wealth/portfolio managers?

Post by milktoast »

I went through two managers and now handle it myself. My spouse and I were first on either side of our family to move beyond the work 401k level of investing. We didn't know what we were doing.

That first advisor was expensive but they told us we needed life insurance beyond the free stuff from our work, they explained what a 529 was and what it was for, they told us about umbrella insurance, they explained why the stock market with a mix of bonds was better than having all of our savings in a savings account, etc. Their AUM fee of 1.5% was crazy high. But those 7 years were how we learned. And they said no the first time I freaked out about a market move. It was worth the fee. The active management under performed the market, but it was probably worth that as well.

Moved to PAS after several years of under performance and realized that the portfolio they set up was so simple I could do it myself. And they would not adjust the plan for things they couldn't see (my old advisor took 401k and company stock into consideration). So I dumped them and started DIY.

Could I have started at DIY? Maybe if I had found this forum first. But no probably not. Because my spouse was raised poor and the concept of taking risk with our savings is something that needed to be handled by a professional until they became comfortable with the concept.
backpacker61
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Re: Why do people have financial/wealth/portfolio managers?

Post by backpacker61 »

Here is a white paper describing the value that advisors can add from Vanguard; an expert on ... indexing.

https://advisors.vanguard.com/iwe/pdf/ISGQVAA.pdf
“Now shall I walk or shall I ride? | 'Ride,' Pleasure said; | 'Walk,' Joy replied.” | | ― W.H. Davies
tibbitts
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Re: Why do people have financial/wealth/portfolio managers?

Post by tibbitts »

burritoLover wrote: Fri Oct 08, 2021 10:16 am
tibbitts wrote: Fri Oct 08, 2021 10:07 am
burritoLover wrote: Fri Oct 08, 2021 9:56 am Nope - there's no skill involved in setting up a DIY investment portfolio once you understand the benefits of low-cost broadly diversified index funds. You could literally open an account at Vanguard or Fidelty or wherever, choose a low-cost target date fund or balanced fund and set up auto-invest - all in less than a day and then do absolutely NOTHING from that point forward except maybe some contribution increases once a year as your salary increases. Or you could do a 3-fund portfolio which you could rebalance once a year - not really that complicated.

I could read about patching the stucco on my house - pretty much guaranteed my first attempt doing this will look like crap. I do my own oil changes, but there's no set and forget it process for DIY oil changes - I will be getting my hands dirty and taking up my time to do all future oil changes. In fact, I've spent way more time doing oil changes on all our cars this year than managing my portfolio.
But you only know that it isn't more complicated because you spent countless hours researching the issue and finally concluded that "wow, there isn't anything more to this investing thing." Well until you started looking at loading factors, slicing and dicing, the ins and out of commodities, tax efficiency...
You can make anything more complicated than it needs to be. That includes oil changes - you could spend countless hours investigating which oil is best , the best change interval, sending off used oil to get an oil analysis, figuring out which oil filters have the best protection, and so on. Those that were willing to have someone else do their investing for them are not likely to do a deep dive into this stuff if they attempt DIY.
But those that have someone else already managing their investments for them are unlikely to research to the point of knowing that they can or want to d-i-y. They won't automatically know without doing extensive research that with just a little effort they can produce good results. Bogleheads will say "just read a book", but what they really mean is "just read one of the correct books", and nobody will know which books are correct without research.

Many people who have their oil changed by a professional feel that it's just part of having their car checked over by someone who, while they might not do a lab-based oil analysis, will feel/smell/taste(?)/whatever the oil and know if something is off. And they assume that the pro will have done all the research to know what is the best oil, filter, etc. for their car. They assume the pro will have done the deep dive for them, just as with investing.
heyyou
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Re: Why do people have financial/wealth/portfolio managers?

Post by heyyou »

Opening the hornets' nest:
My flat rate CFP advisor invests in index funds, only trades when I ask for money or after I agree to a rebalancing suggestion, makes my withdrawals in the most tax efficient way, and has confirmed my decision to use the RMD portfolio spending method. The flat rate cost is less than VG's advisor percentage rate, since my rate has not increased since I opened the account, and I have the same advisor since the beginning, not just someone with similar qualifications who answers the phone or my message at a giant low cost brokerage. I was very happy with the tax advice when maxing my annual Roth conversions during my early-retirement-to-age-70 period. My wife was unfamiliar with mutual funds when we married late, but was thriftier than I was, so the advisor would have been a buffer if I had died early. My future will include some mental loss, as did both my parents in their old ages, so having the trusted advisor contributes to current SWAN. Bottom line, I believe my low cost, enduring flat rate advisor, has been a good investment for my situation.

Others could do whatever suits them for their own situations, while being aware that not everyone is the same as they are.
tibbitts
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Re: Why do people have financial/wealth/portfolio managers?

Post by tibbitts »

heyyou wrote: Fri Oct 08, 2021 12:00 pm Opening the hornets' nest:
My flat rate CFP advisor invests in index funds, only trades when I ask for money or after I agree to a rebalancing suggestion, makes my withdrawals in the most tax efficient way, and has confirmed my decision to use the RMD portfolio spending method. The flat rate cost is less than VG's advisor percentage rate, since my rate has not increased since I opened the account, and I have the same advisor since the beginning, not just someone with similar qualifications who answers the phone or my message at a giant low cost brokerage. I was very happy with the tax advice when maxing my annual Roth conversions during my early-retirement-to-age-70 period. My wife was unfamiliar with mutual funds when we married late, but was thriftier than I was, so the advisor would have been a buffer if I had died early. My future will include some mental loss, as did both my parents in their old ages, so having the trusted advisor contributes to current SWAN. Bottom line, I believe my low cost, enduring flat rate advisor, has been a good investment for my situation.

Others could do whatever suits them for their own situations, while being aware that not everyone is the same as they are.
Presumably even most Bogleheads would be on-board with an advisor costing less than PAS - although they'd probably insist (s)he do things like credit card and bank account signup bonuses for them, and make sure none of their frequent traveler accounts expire. So, basically manage their finances exactly like they would.
2tall4economy
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Re: Why do people have financial/wealth/portfolio managers?

Post by 2tall4economy »

Well discussed topic, but I researched it a bit and I like talking about it so will add my perspective :)

First, there are 4 general "buckets" of wealth advisors based on my research. The higher up you go the lower the fees (as a %) and the better the service:

Marketed as
1. “Economy class wealth” / “401k investor” / "Private Client"
2. “Business class wealth” / “wealth management”
3. “First class wealth” / “private wealth management”
4. “Private jet wealth” / "family office” / "multi-generational wealth"

With rough $ amounts of
1. Less than $2m
2. At least $2m, average mid single digits
3. At least $10m, average $25m or more
4. $100m or more

And treated as
1. Untouchable/mass market/let me introduce you to the corner bank/no reply
2. Get assigned an advisor and variable team members that service a lot of people. Get cell phone number of your advisor. Get some very limited access to non traditional investments. Often tell you what you should do outside of financials (ie "you need to get a trust") but don't provide that service to you, you need to get it separately. Some do bundle though - these are the ones you want.
3. Get assigned an advisor and relatively fixed team that services a handful of people. Get cell phone numbers for all. Get access to any investment you want. They bundle everything so it's a one stop shop.
4. You essentially employ them directly and skys the limit. And you pay them for it. Some people with this sort of wealth will band together with other wealthy folks and create their own mini-bank called a family office.


People who should definitely have a wealth advisor regardless of their capabilities:
Anyone in Bucket 4 (ie multi-generational wealth)
and Bucket 3 people who are
-High income but no interest or ability in managing money (ie most celebrities, sports personalities, entertainers, some doctors, lawyers, F500 execs, fortunate Silicon Valley RSU holders)
-Business owners who regularly need business financing
-Business owners who are spending all their time growing their business

People who should definitely not have a wealth advisor (unless they are incompetent with money and investing)
Anyone in bucket 1
and Bucket 2 people where
-Wealth consists primarily of home and 401k
-Wealth is non-liquid (ie real estate rentals vs stock market)

Which leaves us with the "maybe" folks. To me this is Bucket 2 or 3 folks only, and is more specific to what they're looking to get from it.
Personally, despite being a DIYer for a long time, I got an advisor because of all the things they offer OUTSIDE of their core advice.

For me, it was because:
-I'm transitioning from a substantial real estate holding to all market holding and wanted a second opinion
-I'm in the last phase of my employment before retirement (ie I almost have "my number") and wanted comparisons to paths of other individuals in similar situations (can also be gotten on bogleheads!
-They include trust services - I'm likely to be whacked by estate tax and estate planning and trusts have become important
-They include tax return review service - less of an issue since I do my own and once I'm all in the market it will be simple but a second set of eyes as I unwind my rental houses is helpful to me
-They provide a insurance service - captive insurance that is used to dealing with high net work individuals and the unique challenges they have -- and they were also very competitive with the market (because I of course price-shopped them :) )

Will I need all that in a few years? Probably not. I think I stay with them through the transitions and sales of the rentals and when things calm, unless I hit bucket 3 I'll probably go back to DIY.

Very happy so far though.
You can do anything you want in life. The rub is that there are consequences.
RedTailedHawk
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Re: Why do people have financial/wealth/portfolio managers?

Post by RedTailedHawk »

arcticpineapplecorp. wrote: Fri Oct 08, 2021 10:09 am another thought regarding the fees is there's a disconnect between the fee and the feeling of paying the fee.

similar to how people spend more when using credit cards as opposed to cash, i think there would be a lot more pain associated if people had to pay separately by check to their advisor, rather than having the fee automatically deducted from their investment account.

also if the account increased by an amount that's more than the fee, i think people don't care, though they should:

example:
acct starts with $100k
by end of year grew to $108,000 (8% growth),
advisor then takes out $1080 (1% of $108k)
which leaves the ending acct value $106,920

since $106,920 is still more than the $100,000 they started with, do you think people react positively or negatively?

Would they react the same if they have to pay $1080 fee at the end of the year out of pocket?
This is a good point. However, it's not always about optimizing your earning. For some people, it's about getting the desired service for money paid. I've been playing tennis for 40 years, self taught, not a professional. I'm pretty decent at it and I sometime chuckle at the guys who pay a tennis instructor $60/hr and still don't play at my level. I can think that they're wasting their money and that they can teach themselves to play tennis at the same level as me because I did it. Well that's not fair to them because I probably have better eye-hand coordination than these guys and I spent a lot of hours practicing over 40 years. Most of these guys are probably happy to pay the tennis instructor because their game have improved due to the professional coaching. They have more fun playing the game. Now if their kids are eating Ramen because the $60 came from the grocery budget, well in that case, they should be watching tennis tips on YouTube like me!
mikejuss
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Re: Why do people have financial/wealth/portfolio managers?

Post by mikejuss »

2tall4economy wrote: Fri Oct 08, 2021 12:51 pm Well discussed topic, but I researched it a bit and I like talking about it so will add my perspective :)

First, there are 4 general "buckets" of wealth advisors based on my research. The higher up you go the lower the fees (as a %) and the better the service:

Marketed as
1. “Economy class wealth” / “401k investor” / "Private Client"
2. “Business class wealth” / “wealth management”
3. “First class wealth” / “private wealth management”
4. “Private jet wealth” / "family office” / "multi-generational wealth"

With rough $ amounts of
1. Less than $2m
2. At least $2m, average mid single digits
3. At least $10m, average $25m or more
4. $100m or more

And treated as
1. Untouchable/mass market/let me introduce you to the corner bank/no reply
2. Get assigned an advisor and variable team members that service a lot of people. Get cell phone number of your advisor. Get some very limited access to non traditional investments. Often tell you what you should do outside of financials (ie "you need to get a trust") but don't provide that service to you, you need to get it separately. Some do bundle though - these are the ones you want.
3. Get assigned an advisor and relatively fixed team that services a handful of people. Get cell phone numbers for all. Get access to any investment you want. They bundle everything so it's a one stop shop.
4. You essentially employ them directly and skys the limit. And you pay them for it. Some people with this sort of wealth will band together with other wealthy folks and create their own mini-bank called a family office.


People who should definitely have a wealth advisor regardless of their capabilities:
Anyone in Bucket 4 (ie multi-generational wealth)
and Bucket 3 people who are
-High income but no interest or ability in managing money (ie most celebrities, sports personalities, entertainers, some doctors, lawyers, F500 execs, fortunate Silicon Valley RSU holders)
-Business owners who regularly need business financing
-Business owners who are spending all their time growing their business

People who should definitely not have a wealth advisor (unless they are incompetent with money and investing)
Anyone in bucket 1
and Bucket 2 people where
-Wealth consists primarily of home and 401k
-Wealth is non-liquid (ie real estate rentals vs stock market)

Which leaves us with the "maybe" folks. To me this is Bucket 2 or 3 folks only, and is more specific to what they're looking to get from it.
Personally, despite being a DIYer for a long time, I got an advisor because of all the things they offer OUTSIDE of their core advice.

For me, it was because:
-I'm transitioning from a substantial real estate holding to all market holding and wanted a second opinion
-I'm in the last phase of my employment before retirement (ie I almost have "my number") and wanted comparisons to paths of other individuals in similar situations (can also be gotten on bogleheads!
-They include trust services - I'm likely to be whacked by estate tax and estate planning and trusts have become important
-They include tax return review service - less of an issue since I do my own and once I'm all in the market it will be simple but a second set of eyes as I unwind my rental houses is helpful to me
-They provide a insurance service - captive insurance that is used to dealing with high net work individuals and the unique challenges they have -- and they were also very competitive with the market (because I of course price-shopped them :) )

Will I need all that in a few years? Probably not. I think I stay with them through the transitions and sales of the rentals and when things calm, unless I hit bucket 3 I'll probably go back to DIY.

Very happy so far though.
Really interesting post, 2tall4economy. Thanks for this information.

But about one matter I've long wondered: what are the financial instruments that millionaires have access to that are proven to do better than the humble index fund over a meaningful stretch of time? I don't doubt that they exist, but could you say more about what they are? I often hear people in that class of wealth talk about these things in vague terms, and I'd like to learn more.

To be clear, I'm not talking about financial planning related to lowering one's tax bills. I'm talking about actual investment vehicles.
2tall4economy
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Re: Why do people have financial/wealth/portfolio managers?

Post by 2tall4economy »

DrivingFun wrote: Fri Oct 08, 2021 7:43 am
hnd wrote: Thu Oct 07, 2021 5:01 pm There is much more to wealth managment than choosing a investment portfolio. Most people are also less risk averse than they believe and will make stupid decisions when they are losing money.

Why do people hire personal trainers? Everyone knows that eating right and exercising is the key to being healthy?!!
I'm kind of confused by this entire thread, probably because I'm missing something. I suppose if we're talking about the very narrow scope of an advisor that would literally do nothing more than advise on which financial instruments to put your money in, I get it. But the world of wealth management/financial planning, early retirement planning, taxation, etc. is very complicated. If you're at all interested in FIRE, it makes my head spin the sort of gymnastics that need to be done to minimize taxes, eligibility for Obamacare, etc. It takes some very very serious understanding and planning. But maybe I'm thinking of something else and not what everyone else in this thread is talking about.
This is exactly it. I think most people don't realize that wealth management is a full service offering if you do it right, either because they're only seeing the offerings that they qualify for (generally the lower ones) or because they don't have the wealth necessary or are so early in their life to see the value in the other services that can be provided.

I personally didn't see any value in certain insurance or trust products (as in negative value since they weren't free) AT ALL until very, very recently (and I'm mid-40s). And now I see enormous value that I maybe never would have if I wasn't researching private banks and private bankers just to learn more about it. Huge ah-ha moment for me talking to real full service wealth managers for the first time instead of the fly by night predatory financial advisors who were the only ones that were willing to speak with me when I didn't have enough money to interest the wealth managers.

Sure, I could be bitter about them not wanting to give me the time of day until I had the right level of assets, but honestly, it would have been a waste of their time and mine. Nothing of significance to protect meant nothing they offer has value, and they know it. In fact I should thank them for not taking me as a client so I could avoid their fees :)
You can do anything you want in life. The rub is that there are consequences.
2tall4economy
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Re: Why do people have financial/wealth/portfolio managers?

Post by 2tall4economy »

mikejuss wrote: Fri Oct 08, 2021 1:34 pm

Really interesting post, 2tall4economy. Thanks for this information.

But about one matter I've long wondered: what are the financial instruments that millionaires have access to that are proven to do better than the humble index fund over a meaningful stretch of time? I don't doubt that they exist, but could you say more about what they are? I often hear people in that class of wealth talk about these things in vague terms, and I'd like to learn more.

To be clear, I'm not talking about financial planning related to lowering one's tax bills. I'm talking about actual investment vehicles.
Everything and nothing...

They can get you anything you want, but that doesn't mean it will beat the market.

However, here are scenarios where you may still want this advantage (both are real life examples I've seen first hand -- but not me):

1) you're a business owner who specializes in retail. You have struggled with supply chain issues for a decade and understand their business inside out as well since it's so critical to your business. You find out about a company that is revolutionizing the supply chain in your industry and you understand the subject deeply and know they will succeed since it's exactly what you've been searching for all these years. Your banker can let you buy into it and later you cash out because it succeeded just like you thought it would.

2) you're a successful real estate developer worth $50M. you have a lot of deals in play at any given time but you would still prefer to have 20% of your net worth in the business you're intimately familiar with but you can only find $8M of deals. The banker will bring you real estate deals for your review as an angel investor to invest the difference directly. Since you know deals and you're an expert in the field, you're earning alpha on that $2M that you wouldn't have if you were just putting it into a REIT.
You can do anything you want in life. The rub is that there are consequences.
mikejuss
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Re: Why do people have financial/wealth/portfolio managers?

Post by mikejuss »

2tall4economy wrote: Fri Oct 08, 2021 1:47 pm
mikejuss wrote: Fri Oct 08, 2021 1:34 pm

Really interesting post, 2tall4economy. Thanks for this information.

But about one matter I've long wondered: what are the financial instruments that millionaires have access to that are proven to do better than the humble index fund over a meaningful stretch of time? I don't doubt that they exist, but could you say more about what they are? I often hear people in that class of wealth talk about these things in vague terms, and I'd like to learn more.

To be clear, I'm not talking about financial planning related to lowering one's tax bills. I'm talking about actual investment vehicles.
Everything and nothing...

They can get you anything you want, but that doesn't mean it will beat the market.

However, here are scenarios where you may still want this advantage (both are real life examples I've seen first hand -- but not me):

1) you're a business owner who specializes in retail. You have struggled with supply chain issues for a decade and understand their business inside out as well since it's so critical to your business. You find out about a company that is revolutionizing the supply chain in your industry and you understand the subject deeply and know they will succeed since it's exactly what you've been searching for all these years. Your banker can let you buy into it and later you cash out because it succeeded just like you thought it would.

2) you're a successful real estate developer worth $50M. you have a lot of deals in play at any given time but you would still prefer to have 20% of your net worth in the business you're intimately familiar with but you can only find $8M of deals. The banker will bring you real estate deals for your review as an angel investor to invest the difference directly. Since you know deals and you're an expert in the field, you're earning alpha on that $2M that you wouldn't have if you were just putting it into a REIT.
Oh--I guess that in the narrow instances you outline a wealth adviser would come in handy. But, gosh, those bets seem really risky and advisable only around the edges of one's core net worth. Am I wrong in assuming that most alternative investments--private equity, venture capital, hedge funds--have subpar performance against market indexes over time?
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JoeRetire
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Re: Why do people have financial/wealth/portfolio managers?

Post by JoeRetire »

ruralavalon wrote: Fri Oct 08, 2021 8:58 am
JoeRetire wrote: Thu Oct 07, 2021 4:13 pm
MrCheapo wrote: Thu Oct 07, 2021 4:01 pm I must be missing something but in this age of ultra-cheap index funds why would you use a money manager?
Probably for the same reasons that some people have someone mow their lawn, paint their nails, clean their house, cook some of their meals, wash their car, make their coffee, etc, etc.

Some people want to do most things themselves. Others would rather spend their time elsewhere and are willing to pay for services.
Some of us are old/impaired and need/want some help.

We can handle the money management, but can't easily handle mowing the lawn, shoveling snow, cleaning house, cooking meals, doing laundry, washing the car, etc, etc.
Of course.
The point is that sometimes people pay others to do the things they can't easily handle, or don't want to handle.

Cooking meals is pretty easy for some, but not for others.
Financial planning, money management, asset depletion, etc, are pretty easy for some, but not for others.

Your impairments may mean standing up for long periods of time isn't easy. That would preclude some activities.
Others might have impairments that make financial work not so easy.
Just remember: it's not a lie if you believe it.
CascadiaSoonish
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Re: Why do people have financial/wealth/portfolio managers?

Post by CascadiaSoonish »

Relatives have a professional adviser. They see a lot of value in having a neutral sounding board for thinking through financial decisions. The adviser also does a good job of getting the generations to talk as a whole. I don't think I personally would hire them, but I see the value they add to the family dynamic when making decisions.
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ruralavalon
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Re: Why do people have financial/wealth/portfolio managers?

Post by ruralavalon »

Before becoming an index fund fan, we had a friend as an advisor who was with a well known national full service brokerage.

He taught me not to jump in and out of the stock market, telling that some very large percentage the annual gains occurred on just a few days during the year. I don't remember percentage of gains, or the number of days, but it surprised me.

He taught me not to try to time the market.

Of course he also had us allocated 100% stocks.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
2tall4economy
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Re: Why do people have financial/wealth/portfolio managers?

Post by 2tall4economy »

mikejuss wrote: Fri Oct 08, 2021 1:55 pm
2tall4economy wrote: Fri Oct 08, 2021 1:47 pm
mikejuss wrote: Fri Oct 08, 2021 1:34 pm

Really interesting post, 2tall4economy. Thanks for this information.

But about one matter I've long wondered: what are the financial instruments that millionaires have access to that are proven to do better than the humble index fund over a meaningful stretch of time? I don't doubt that they exist, but could you say more about what they are? I often hear people in that class of wealth talk about these things in vague terms, and I'd like to learn more.

To be clear, I'm not talking about financial planning related to lowering one's tax bills. I'm talking about actual investment vehicles.
Everything and nothing...

They can get you anything you want, but that doesn't mean it will beat the market.

However, here are scenarios where you may still want this advantage (both are real life examples I've seen first hand -- but not me):

1) you're a business owner who specializes in retail. You have struggled with supply chain issues for a decade and understand their business inside out as well since it's so critical to your business. You find out about a company that is revolutionizing the supply chain in your industry and you understand the subject deeply and know they will succeed since it's exactly what you've been searching for all these years. Your banker can let you buy into it and later you cash out because it succeeded just like you thought it would.

2) you're a successful real estate developer worth $50M. you have a lot of deals in play at any given time but you would still prefer to have 20% of your net worth in the business you're intimately familiar with but you can only find $8M of deals. The banker will bring you real estate deals for your review as an angel investor to invest the difference directly. Since you know deals and you're an expert in the field, you're earning alpha on that $2M that you wouldn't have if you were just putting it into a REIT.
Oh--I guess that in the narrow instances you outline a wealth adviser would come in handy. But, gosh, those bets seem really risky and advisable only around the edges of one's core net worth. Am I wrong in assuming that most alternative investments--private equity, venture capital, hedge funds--have subpar performance against market indexes over time?
"those bets seem really risky and advisable only around the edges of one's core net worth"

I would not say that's really risk and only around the edges of core net worth.

I would say it differently - you have an avenue to invest in something you know intimately based on decades of experience of beating others at the same game that you otherwise would not.

In my opinion (and experience, though your mileage may vary) someone who has 20 years experience in an area and has competed and won against many others to get where there are is very likely to have a skillset that allows them to have alpha in investments related to their area of expertise vs the general market.

Some might not agree and that's fine, and some might not have a skillset that overperforms or that translates well into an investment. But I believe those situations do exist and I've seen a few. It gives me enough reason to believe alpha is possible in these situations.

But to your point the average mid-level manager in random company X is unlikely to have a unique skillset they can bring to bear to gain alpha and therefore are better off 3-funding it.
You can do anything you want in life. The rub is that there are consequences.
mikejuss
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Re: Why do people have financial/wealth/portfolio managers?

Post by mikejuss »

2tall4economy wrote: Fri Oct 08, 2021 2:02 pm
mikejuss wrote: Fri Oct 08, 2021 1:55 pm
2tall4economy wrote: Fri Oct 08, 2021 1:47 pm
mikejuss wrote: Fri Oct 08, 2021 1:34 pm

Really interesting post, 2tall4economy. Thanks for this information.

But about one matter I've long wondered: what are the financial instruments that millionaires have access to that are proven to do better than the humble index fund over a meaningful stretch of time? I don't doubt that they exist, but could you say more about what they are? I often hear people in that class of wealth talk about these things in vague terms, and I'd like to learn more.

To be clear, I'm not talking about financial planning related to lowering one's tax bills. I'm talking about actual investment vehicles.
Everything and nothing...

They can get you anything you want, but that doesn't mean it will beat the market.

However, here are scenarios where you may still want this advantage (both are real life examples I've seen first hand -- but not me):

1) you're a business owner who specializes in retail. You have struggled with supply chain issues for a decade and understand their business inside out as well since it's so critical to your business. You find out about a company that is revolutionizing the supply chain in your industry and you understand the subject deeply and know they will succeed since it's exactly what you've been searching for all these years. Your banker can let you buy into it and later you cash out because it succeeded just like you thought it would.

2) you're a successful real estate developer worth $50M. you have a lot of deals in play at any given time but you would still prefer to have 20% of your net worth in the business you're intimately familiar with but you can only find $8M of deals. The banker will bring you real estate deals for your review as an angel investor to invest the difference directly. Since you know deals and you're an expert in the field, you're earning alpha on that $2M that you wouldn't have if you were just putting it into a REIT.
Oh--I guess that in the narrow instances you outline a wealth adviser would come in handy. But, gosh, those bets seem really risky and advisable only around the edges of one's core net worth. Am I wrong in assuming that most alternative investments--private equity, venture capital, hedge funds--have subpar performance against market indexes over time?
"those bets seem really risky and advisable only around the edges of one's core net worth"

I would not say that's really risk and only around the edges of core net worth.

I would say it differently - you have an avenue to invest in something you know intimately based on decades of experience of beating others at the same game that you otherwise would not.

In my opinion (and experience, though your mileage may vary) someone who has 20 years experience in an area and has competed and won against many others to get where there are is very likely to have a skillset that allows them to have alpha in investments related to their area of expertise vs the general market.

Some might not agree and that's fine, and some might not have a skillset that overperforms or that translates well into an investment. But I believe those situations do exist and I've seen a few. It gives me enough reason to believe alpha is possible in these situations.

But to your point the average mid-level manager in random company X is unlikely to have a unique skillset they can bring to bear to gain alpha and therefore are better off 3-funding it.
Fair enough. I guess you'd also say, following the logic of your argument, that there's room for people with deep knowledge to pick individual stocks, no? I suppose I'm telling on myself by admitting that my job and life experience thus far have not afforded me any god-level insights into a particular sector of the economy I can make a fortune by investing in. :annoyed
Rd123123
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Re: Why do people have financial/wealth/portfolio managers?

Post by Rd123123 »

tibbitts wrote: Fri Oct 08, 2021 10:03 am Something I've learned here over the years is that most Bogleheads take an engineering approach to a problem: they have a compulsion to understand exactly how something works, what caused a problem, and only then maybe decide whether to have someone else deal with the details. Example: while I was sitting in traffic a few days ago, my car suddenly dumped most of its cooling system contents onto the street. The Boglehead approach would be to analyze exactly why that happened, probably down to the exact component that failed. But lots of people would accept that the problem was the engine suddenly overheated, and simply get the car to a mechanic. Bogleheads just can't comprehend the latter approach to almost anything in life, because it's generally not optimal from a financial standpoint, and Bogleheads are all about optimizing... everything.
:) I think that is a very insightful observation about Bogleheads.
2tall4economy wrote: Fri Oct 08, 2021 12:51 pm First, there are 4 general "buckets" of wealth advisors based on my research. The higher up you go the lower the fees (as a %) and the better the service:

Marketed as
1. “Economy class wealth” / “401k investor” / "Private Client"
2. “Business class wealth” / “wealth management”
3. “First class wealth” / “private wealth management”
4. “Private jet wealth” / "family office” / "multi-generational wealth"

With rough $ amounts of
1. Less than $2m
2. At least $2m, average mid single digits
3. At least $10m, average $25m or more
4. $100m or more

And treated as
1. Untouchable/mass market/let me introduce you to the corner bank/no reply
2. Get assigned an advisor and variable team members that service a lot of people. Get cell phone number of your advisor. Get some very limited access to non traditional investments. Often tell you what you should do outside of financials (ie "you need to get a trust") but don't provide that service to you, you need to get it separately. Some do bundle though - these are the ones you want.
3. Get assigned an advisor and relatively fixed team that services a handful of people. Get cell phone numbers for all. Get access to any investment you want. They bundle everything so it's a one stop shop.
4. You essentially employ them directly and skys the limit. And you pay them for it. Some people with this sort of wealth will band together with other wealthy folks and create their own mini-bank called a family office.
...
Great summary, thanks for sharing your research and experience. Like most service industries, it appears there are multiple tiers of service quality.

Speaking from my own limited experience, my parents have reached the point where mental decline has made it increasingly difficult for them to make decisions that require follow-through. My mom used to do her own taxes, but can no longer keep up with or remember the recent changes in tax laws, and estate/gift tax is entirely outside of her wheelhouse. The end result is decision-making paralysis for both parents, as they have gone from DIY'ing their finances to mentally struggling to understand their finances. Before their decline reached this stage, I wish that they had cultivated a trusted third-party advisor they could lean on now. While I agree that it's hard to find a true fiduciary and well-versed financial advisor at the lower tiers, our whole family would have benefited from having one at this current stage in my parents' retirement.
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Re: Why do people have financial/wealth/portfolio managers?

Post by 2tall4economy »

mikejuss wrote: Fri Oct 08, 2021 2:09 pm

Fair enough. I guess you'd also say, following the logic of your argument, that there's room for people with deep knowledge to pick individual stocks, no? I suppose I'm telling on myself by admitting that my job and life experience thus far have not afforded me any god-level insights into a particular sector of the economy I can make a fortune by investing in. :annoyed
No, it's tempting to infer that but publicly traded individual stock investors are too far removed from the day to day workings of the business. You'd have to have industry knowledge and also specific, proprietary knowledge of the business itself and the goings - on. Possible with private equity / smaller investments, early stage start ups. Not possible with huge companies, unless you work for them (in which case you're an insider, which is the whole reason they banned that).
You can do anything you want in life. The rub is that there are consequences.
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Re: Why do people have financial/wealth/portfolio managers?

Post by 2tall4economy »

Rd123123 wrote: Fri Oct 08, 2021 3:37 pm Speaking from my own limited experience, my parents have reached the point where mental decline has made it increasingly difficult for them to make decisions that require follow-through. My mom used to do her own taxes, but can no longer keep up with or remember the recent changes in tax laws, and estate/gift tax is entirely outside of her wheelhouse. The end result is decision-making paralysis for both parents, as they have gone from DIY'ing their finances to mentally struggling to understand their finances. Before their decline reached this stage, I wish that they had cultivated a trusted third-party advisor they could lean on now. While I agree that it's hard to find a true fiduciary and well-versed financial advisor at the lower tiers, our whole family would have benefited from having one at this current stage in my parents' retirement.
Also a good reason! Though internal family members, if trustworthy, are potentially better. Depends on family dynamic though, and even then I recommend a trust (I manage my mother's money but I put a trust in place). But yes, they are good for this as well and now who's to say the person is trustworthy... I totally hear you.
You can do anything you want in life. The rub is that there are consequences.
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Re: Why do people have financial/wealth/portfolio managers?

Post by Fallible »

MrCheapo wrote: Thu Oct 07, 2021 4:01 pm Hi,

So I see a few post every day asking about financial/wealth/portfolio managers, that is, people who make investments decisions for you. And it seems whenever I go to parties (not that often now) that people are very happy with their money managers.

I must be missing something but in this age of ultra-cheap index funds why would you use a money manager? My understanding is that no manager could out-perform a good balanced index portfolio. Further, no one will look after your money better than you will. Even if you are ultra-busy, not too-bright etc. why not use a 3 fund portfolio.

Please enlighten me why you use a money manager rather than handling your money yourself? I'm genuinely curious and eager to learn why.
I think the topic as you put it differs from what’s out there. As could be expected, there probably are as many reasons investors have advisors as there are individual differences, and many of those reasons are nicely described here. There also are different ways to be advised and not just have decisions made for clients without their input; e.g., good advisors provide clients info needed to understand and informatively agree to their recommendation. As for investors looking out for their money better than any advisor, that’s not what always happens, as we see almost daily on the forum. It is probably true that nobody cares more about an investor’s money than the investor. As for what people say at parties...

To answer your questions, I started out 30-plus years ago with an advisor who put me into an 8.5% load mutual fund and was ready to add more load funds until I discovered Jack Bogle and simple, low-cost indexing for the long term.
"Yes, investing is simple. But it is not easy, for it requires discipline, patience, steadfastness, and that most uncommon of all gifts, common sense." ~Jack Bogle
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Ape68
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Re: Why do people have financial/wealth/portfolio managers?

Post by Ape68 »

arcticpineapplecorp. wrote: Fri Oct 08, 2021 10:09 am another thought regarding the fees is there's a disconnect between the fee and the feeling of paying the fee.

similar to how people spend more when using credit cards as opposed to cash, i think there would be a lot more pain associated if people had to pay separately by check to their advisor, rather than having the fee automatically deducted from their investment account.

also if the account increased by an amount that's more than the fee, i think people don't care, though they should:

example:
acct starts with $100k
by end of year grew to $108,000 (8% growth),
advisor then takes out $1080 (1% of $108k)
which leaves the ending acct value $106,920

since $106,920 is still more than the $100,000 they started with, do you think people react positively or negatively?

Would they react the same if they have to pay $1080 fee at the end of the year out of pocket?
This is such a great point! And I agree. This is one of those tricks of mental accounting.
Jamech
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Re: Why do people have financial/wealth/portfolio managers?

Post by Jamech »

I was lucky. My first "advisor" was a coworker in the early 90"s who was a Boglehead before being a Boglehead was cool. Many lunchtime conversations about Vanguard, mutual funds and investing laid the groundwork for my investing education. I still made plenty of mistakes (enthusiastically chased tech heavy managed funds in the late 90's) so my education did have a cost. Everyone takes advice from or is influenced by the opinions of others. Many advisors (salesmen) are skilled at convincing potential client of the need for their services especially those with limited financial literacy. People that I know with an advisor (EJ) are convinced that "their guy" will provide them with superior returns and they have no idea about the specific costs. They are comfortable turning over their investments to "their guy".
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Re: Why do people have financial/wealth/portfolio managers?

Post by AnnetteLouisan »

ruralavalon wrote: Fri Oct 08, 2021 8:58 am
JoeRetire wrote: Thu Oct 07, 2021 4:13 pm
MrCheapo wrote: Thu Oct 07, 2021 4:01 pm I must be missing something but in this age of ultra-cheap index funds why would you use a money manager?
Probably for the same reasons that some people have someone mow their lawn, paint their nails, clean their house, cook some of their meals, wash their car, make their coffee, etc, etc.

Some people want to do most things themselves. Others would rather spend their time elsewhere and are willing to pay for services.
Some of us are old/impaired and need/want some help.

We can handle the money management, but can't easily handle mowing the lawn, shoveling snow, cleaning house, cooking meals, doing laundry, washing the car, etc, etc.
Exactly. Everyone’s good at some things and not at others, and we all have enough demands on our ever dwindling time. I don’t use an investment manager, but I utilize RE lawyer services, estate lawyer services, tax prep, housekeeping services, doorman, super and porter services, driving services, delivery services and IT services. And if I ever have a garden, I’m going to get that sucker landscaped on the regular.

I intended to open a taxable brokerage but I’m concerned about the lack of guardrails frankly so I’m reconsidering this evening.
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LilyFleur
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Re: Why do people have financial/wealth/portfolio managers?

Post by LilyFleur »

Jags4186 wrote: Fri Oct 08, 2021 8:19 am People have money managers because they either don't want to manage their own money or believe that someone else can manage it better than they can.

It's that simple.
In many cases, they are right.
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LilyFleur
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Re: Why do people have financial/wealth/portfolio managers?

Post by LilyFleur »

AnnetteLouisan wrote: Fri Oct 08, 2021 9:49 pm
ruralavalon wrote: Fri Oct 08, 2021 8:58 am
JoeRetire wrote: Thu Oct 07, 2021 4:13 pm
MrCheapo wrote: Thu Oct 07, 2021 4:01 pm I must be missing something but in this age of ultra-cheap index funds why would you use a money manager?
Probably for the same reasons that some people have someone mow their lawn, paint their nails, clean their house, cook some of their meals, wash their car, make their coffee, etc, etc.

Some people want to do most things themselves. Others would rather spend their time elsewhere and are willing to pay for services.
Some of us are old/impaired and need/want some help.

We can handle the money management, but can't easily handle mowing the lawn, shoveling snow, cleaning house, cooking meals, doing laundry, washing the car, etc, etc.
Exactly. Everyone’s good at some things and not at others, and we all have enough demands on our ever dwindling time. I don’t use an investment manager, but I utilize RE lawyer services, estate lawyer services, tax prep, housekeeping services, doorman, super and porter services, driving services, delivery services and IT services. And if I ever have a garden, I’m going to get that sucker landscaped on the regular.

I intended to open a taxable brokerage but I’m concerned about the lack of guardrails frankly so I’m reconsidering this evening.
There are plenty of well-respected, Boglehead-approved index funds available in taxable brokerage accounts. And, in a brokerage account, you have the guardrail of tax-loss harvesting, which isn't available in a 401k or IRA.
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ruralavalon
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Re: Why do people have financial/wealth/portfolio managers?

Post by ruralavalon »

AnnetteLouisan wrote: Fri Oct 08, 2021 9:49 pm
ruralavalon wrote: Fri Oct 08, 2021 8:58 am
JoeRetire wrote: Thu Oct 07, 2021 4:13 pm
MrCheapo wrote: Thu Oct 07, 2021 4:01 pm I must be missing something but in this age of ultra-cheap index funds why would you use a money manager?
Probably for the same reasons that some people have someone mow their lawn, paint their nails, clean their house, cook some of their meals, wash their car, make their coffee, etc, etc.

Some people want to do most things themselves. Others would rather spend their time elsewhere and are willing to pay for services.
Some of us are old/impaired and need/want some help.

We can handle the money management, but can't easily handle mowing the lawn, shoveling snow, cleaning house, cooking meals, doing laundry, washing the car, etc, etc.
Exactly. Everyone’s good at some things and not at others, and we all have enough demands on our ever dwindling time. I don’t use an investment manager, but I utilize RE lawyer services, estate lawyer services, tax prep, housekeeping services, doorman, super and porter services, driving services, delivery services and IT services. And if I ever have a garden, I’m going to get that sucker landscaped on the regular.

I intended to open a taxable brokerage but I’m concerned about the lack of guardrails frankly so I’m reconsidering this evening.
Guardrails for a taxable brokerage account:

(1) Use only very tax-efficient stock index funds such as Vanguard Total Stock Market Index Fund (VTSAX), the ETF share class is VTI, or Vanguard Total International Stock Index Fund (VTIAX), the ETF share class is VXUS, or both;

(2) Bogleheads® investment philosophy.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
student
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Re: Why do people have financial/wealth/portfolio managers?

Post by student »

eye.surgeon wrote: Thu Oct 07, 2021 9:15 pm
MrCheapo wrote: Thu Oct 07, 2021 4:01 pm Hi,

So I see a few post every day asking about financial/wealth/portfolio managers, that is, people who make investments decisions for you. And it seems whenever I go to parties (not that often now) that people are very happy with their money managers.

I must be missing something but in this age of ultra-cheap index funds why would you use a money manager? My understanding is that no manager could out-perform a good balanced index portfolio. Further, no one will look after your money better than you will. Even if you are ultra-busy, not too-bright etc. why not use a 3 fund portfolio.

Please enlighten me why you use a money manager rather than handling your money yourself? I'm genuinely curious and eager to learn why.
I've asked myself the same question. I think it's the same reason some people still use travel agents.
I know someone who uses travel agents. His rationale is when there are issues, they can help with rebooking. It did pay off at least once.
student
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Re: Why do people have financial/wealth/portfolio managers?

Post by student »

I can see rich people needing a private banker/wealth manager to help with retirement, taxes, estate planning etc with one company. For regular joe like myself, I don't need a wealth manager and I don't have enough to worth their time. As for regular financial consultant/salesperson, no thank you. I don't recall receiving any call from Fidelity in the past 10 years but got a call and an email from a local Fidelity guy. Checked his history, new to Fidelity and had a bankruptcy in the disclosure at broker check.
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MrCheapo
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Re: Why do people have financial/wealth/portfolio managers?

Post by MrCheapo »

Soon2BXProgrammer wrote: Fri Oct 08, 2021 10:18 am
MrCheapo wrote: Thu Oct 07, 2021 4:01 pm Hi,

So I see a few post every day asking about financial/wealth/portfolio managers, that is, people who make investments decisions for you. And it seems whenever I go to parties (not that often now) that people are very happy with their money managers.

I must be missing something but in this age of ultra-cheap index funds why would you use a money manager? My understanding is that no manager could out-perform a good balanced index portfolio. Further, no one will look after your money better than you will. Even if you are ultra-busy, not too-bright etc. why not use a 3 fund portfolio.

Please enlighten me why you use a money manager rather than handling your money yourself? I'm genuinely curious and eager to learn why.
People don't understand that after costs and adjusting for risk, a 3 fund portfolio will statistically outperform.
Is it really that simple. I'm not doubting you, just confirming this.
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Re: Why do people have financial/wealth/portfolio managers?

Post by Soon2BXProgrammer »

MrCheapo wrote: Mon Oct 11, 2021 10:09 pm
Soon2BXProgrammer wrote: Fri Oct 08, 2021 10:18 am
MrCheapo wrote: Thu Oct 07, 2021 4:01 pm Hi,

So I see a few post every day asking about financial/wealth/portfolio managers, that is, people who make investments decisions for you. And it seems whenever I go to parties (not that often now) that people are very happy with their money managers.

I must be missing something but in this age of ultra-cheap index funds why would you use a money manager? My understanding is that no manager could out-perform a good balanced index portfolio. Further, no one will look after your money better than you will. Even if you are ultra-busy, not too-bright etc. why not use a 3 fund portfolio.

Please enlighten me why you use a money manager rather than handling your money yourself? I'm genuinely curious and eager to learn why.
People don't understand that after costs and adjusting for risk, a 3 fund portfolio will statistically outperform.
Is it really that simple. I'm not doubting you, just confirming this.
Yes, they think they are missing out, they think advisors can outperform, but don't realize that costs matter the most when it comes to a diversified portfolio that when you look at it using a morningstar xray, looks mostly similtar to a total stock market portfolio (with some international thrown in).

If advisors have a hard time generating alpha, and their return is mostly beta minus fees. They are destined to outperform. The best way to generate alpha is to make concentrated bets and not be diversified, however, it becomes more gambling, and the advisor wins some and loses some, but most compliance offices do not like advisors doing this, and for compliance reasons force portfolios towards being diversified.

Winning over time with high costs, if just plain hard.
Earned 34 (and counting) credit hours of financial planning related education from a regionally accredited university, but I am not your advisor.
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DWesterb2iz2
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Re: Why do people have financial/wealth/portfolio managers?

Post by DWesterb2iz2 »

Lots of very good financial advisors have financial advisors. I’ve heard them call it taking their own medicine. It’s a good way to keep emotions out of investing.
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Re: Why do people have financial/wealth/portfolio managers?

Post by phxjcc »

Caveat: I have not read the entire thread.

One reason? FEAR.

They fear that if they fail they have themselves to blame.

I have two very well edumicated friends....one M.A. and one PhD.
Both tenured college retired university instructors/professor+department chair.
Math and Education Dept.

They will look you in the eye and tell you that they do not understand the financial markets nor products and therefore hire someone to do it. They are LITERALLY (not metaphorically) afraid of doing the wrong things.

They are also dependent upon others/contractors for EVERYTHING other than lightbulb replacement.

They also have more money than og.

And are childless.

And own 50,000 sq ft of rented/long term leased commercial real estate in music city USA.

And buy cars, but never sell them, just give them away when they are done with them.

They have accountants, lawyers, money managers--just like "momma and daddy did".

A different lifestyle.
(Doesn't everyone go LaJolla for the summer and Vail on Winter Break and Palm Springs on spring break?....and they have been doing so since their early 30's!)
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MrCheapo
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Summary of the responses

Post by MrCheapo »

I think the main responses are:

a) Fear of missing out on higher dividends
b) Fear of screwing things up
c) Too much money to handle all by themselves.

Did I miss something out?

I find c) compelling, because if I had $20M I'd not want to waste my time when I could be skiing or doing something else.

but a) and b) make no sense as managing it yourself gives you a higher dividend (no fees to pay) and what better way to prevent a screw up than doing it yourself and double checking.
RCL
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Re: Summary of the responses

Post by RCL »

MrCheapo wrote: Tue Oct 12, 2021 3:02 pm I think the main responses are:

a) Fear of missing out on higher dividends
b) Fear of screwing things up
c) Too much money to handle all by themselves.

Did I miss something out?

I find c) compelling, because if I had $20M I'd not want to waste my time when I could be skiing or doing something else.

but a) and b) make no sense as managing it yourself gives you a higher dividend (no fees to pay) and what better way to prevent a screw up than doing it yourself and double checking.
I have several acquaintances who would be in category d) Have enough money they really don't care if paying for the service.
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Re: Why do people have financial/wealth/portfolio managers?

Post by oldmotos »

Almost all of my friends and relatives use a financial advisor. I think if they received a bill once a year and had to write a check for the fees many would jump ship. I plan to hire an advisor soon for the first time in my life but it will be on an hourly fee basis to help with withdrawal strategies etc. It is a shame there are so few hourly fee advisors around.
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Re: Why do people have financial/wealth/portfolio managers?

Post by sunnysunshine »

GerryL wrote: Thu Oct 07, 2021 9:04 pm I just signed my estate planning documents this week, after several rounds of edits. The POA was the scariest, because it essentially gives your designated agent the power to do anything with your money that you can do.

Well, there are some things I would not do, and I certainly don't want my agent to do. I had the lawyer remove a couple of paragraphs, including one that said the agent could hand over "the keys to my kingdom" to a broker who could them make decisions and execute trades without having to consult the agent.
How did you go about picking an estate planning lawyer ? I am thinking of doing this myself
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Re: Why do people have financial/wealth/portfolio managers?

Post by sunnysunshine »

DrivingFun wrote: Fri Oct 08, 2021 7:43 am
hnd wrote: Thu Oct 07, 2021 5:01 pm There is much more to wealth managment than choosing a investment portfolio. Most people are also less risk averse than they believe and will make stupid decisions when they are losing money.

Why do people hire personal trainers? Everyone knows that eating right and exercising is the key to being healthy?!!
I'm kind of confused by this entire thread, probably because I'm missing something. I suppose if we're talking about the very narrow scope of an advisor that would literally do nothing more than advise on which financial instruments to put your money in, I get it. But the world of wealth management/financial planning, early retirement planning, taxation, etc. is very complicated. If you're at all interested in FIRE, it makes my head spin the sort of gymnastics that need to be done to minimize taxes, eligibility for Obamacare, etc. It takes some very very serious understanding and planning. But maybe I'm thinking of something else and not what everyone else in this thread is talking about.
All the "advisors" I have come across are just he kind that say put your money here- we will show you how to allocate funds etc.,
I have never seen the kind who engage in the gymnastics you speak of- where are these people and what are they called ?
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arcticpineapplecorp.
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Re: Why do people have financial/wealth/portfolio managers?

Post by arcticpineapplecorp. »

phxjcc wrote: Tue Oct 12, 2021 12:52 pm
One reason? FEAR.

They fear that if they fail they have themselves to blame.
I think I heard on the rational reminder podcast it works both ways:

1. You do well? It's because your "guy" is brilliant.
2. You do poorly? It wasn't my fault. I wasn't handling my investments.

Heads you win. Tails I lose. You're good either way.
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events. Asking Portfolio Questions | Wiki
DrivingFun
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Re: Why do people have financial/wealth/portfolio managers?

Post by DrivingFun »

sunnysunshine wrote: Tue Oct 12, 2021 9:17 pm
DrivingFun wrote: Fri Oct 08, 2021 7:43 am
hnd wrote: Thu Oct 07, 2021 5:01 pm There is much more to wealth managment than choosing a investment portfolio. Most people are also less risk averse than they believe and will make stupid decisions when they are losing money.

Why do people hire personal trainers? Everyone knows that eating right and exercising is the key to being healthy?!!
I'm kind of confused by this entire thread, probably because I'm missing something. I suppose if we're talking about the very narrow scope of an advisor that would literally do nothing more than advise on which financial instruments to put your money in, I get it. But the world of wealth management/financial planning, early retirement planning, taxation, etc. is very complicated. If you're at all interested in FIRE, it makes my head spin the sort of gymnastics that need to be done to minimize taxes, eligibility for Obamacare, etc. It takes some very very serious understanding and planning. But maybe I'm thinking of something else and not what everyone else in this thread is talking about.
All the "advisors" I have come across are just he kind that say put your money here- we will show you how to allocate funds etc.,
I have never seen the kind who engage in the gymnastics you speak of- where are these people and what are they called ?
Check out the money guy show on youtube
MHA556
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Re: Why do people have financial/wealth/portfolio managers?

Post by MHA556 »

Just had this conversation with my mom, the quote from her was “you pick your own funds?” as though that was some magical ability or something. Picking a good index fund for me is pretty darned easy- check expense ratios, make sure it is a vanguard fund... pretty much it.

The ability to do things yourself these days is tremendous. I don’t feel that paying someone over 1% a year to do the same thing I would do makes much sense. I like having control and being able to check balances whenever I want. For example my wife has a small 403b and a small IRA. We get statements 4 times a year on those. I started a Roth, and I can check that any time I want, and I know exactly how it is invested. My 457b is the same way. I can also check her main retirement fund easily. But that orphan 403b and IRA drive me crazy as I can’t see what they are doing.

My parents probably need the help. Apparently when my dad retired, his entire deferred comp account was in a money market fund. And my dad complains that my mom doesn’t understand how the income tax brackets actually work. They have simple taxes, but pay someone else to do them. They likely are paying around 1.5% for advisor fees, and likely are invested in a lot of conservative funds, despite the fact that they absolutely do not need the money (my dad said he has yet to spend any of his deferred comp money. He is 75 or so with a state pension, and actually with SS has a surplus every month). Personally I think their investing strategy may not be in line with how they intend to spend (or not spend in this case) their money, but I don’t really know what they have. So despite them needing the help, I am not certain they are really invested optimally. Maybe they want to ensure they can pay for many years of assisted living and medical expenses. Most likely they will leave us a small pile of money that: #1- they should have been enjoying themselves, and #2- was invested very conservatively if they just intended to never use it.

At the same time, they don’t understand or care much about retirement finances. My mom was convinced that my pension will reduce my SS, because that happened to my dad. But she could not tell me why it happened- I asked about the WEP, and she had no idea what I was talking about. (WEP does not apply to me). So again, for people who don’t understand what they need to know, don’t internet well, etc, an advisor makes some sense. But it sure is costly. I will likely have to suffer a stroke before I want to spend that much money for advice once or twice a year.
secondopinion
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Re: Why do people have financial/wealth/portfolio managers?

Post by secondopinion »

MrCheapo wrote: Thu Oct 07, 2021 4:01 pm Hi,

So I see a few post every day asking about financial/wealth/portfolio managers, that is, people who make investments decisions for you. And it seems whenever I go to parties (not that often now) that people are very happy with their money managers.

I must be missing something but in this age of ultra-cheap index funds why would you use a money manager? My understanding is that no manager could out-perform a good balanced index portfolio. Further, no one will look after your money better than you will. Even if you are ultra-busy, not too-bright etc. why not use a 3 fund portfolio.

Please enlighten me why you use a money manager rather than handling your money yourself? I'm genuinely curious and eager to learn why.
Managers hopefully are doing other stuff than just for picking investments to outperform; good ones are there to ensure you have the best chances of meeting your goals and keeping you on track. Taxes, retirement planning, and such topics should be the primary focus. No picking of allocations will help you in these regards if you are clueless of what is needed.

I act as a financial advisor for family members; I charge nothing but it gives me experience handling it. The last thing I want to do is to force outperformance and come short instead (they are rather conservative). Why they do not do it themselves is not smarts or busyness, but really not wanting to worry about it. They want to come back decades later and be happy that their nest egg is bigger and better.

For myself, I manage my own money because it is a part-time job/hobby.

I have toned down my opinions of advisors as more people express confidence in my advise. I might not need one ever, but so many would have done better if they had.
gtrplayer
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Re: Why do people have financial/wealth/portfolio managers?

Post by gtrplayer »

ThankYouJack wrote: Thu Oct 07, 2021 5:31 pm
MrCheapo wrote: Thu Oct 07, 2021 4:01 pm
I must be missing something but in this age of ultra-cheap index funds why would you use a money manager? My understanding is that no manager could out-perform a good balanced index portfolio. Further, no one will look after your money better than you will. Even if you are ultra-busy, not too-bright etc. why not use a 3 fund portfolio.
Can you explain more about your understanding?

I bet plenty of money managers are doing better than my 3 fund portfolio, especially with US thumping international and the bond market. My sibling's portfolio (managed by her financial manager) I'm sure is destroying mine. Maybe I'll make up some ground whenever there's a bear market, but hopefully this bull continues on for a while.
I’d be curious if this is actually true. Wouldn’t most managers also include some kind of international? And if they’re choosing a bunch of actively managed funds, they could be winning but not many people are good at choosing what active funds will do good any given year.

The real question is who comes out ahead in the long run. Buffett’s SP500 vs hedge fund bet didn’t work out for the hedge funds.
rockstar
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Re: Why do people have financial/wealth/portfolio managers?

Post by rockstar »

I know two people that use active managers. One doesn't care about investing and prefers someone else to do it. The other can't handle the volatility. Both reasons make sense to me even though they're giving up potential returns in fees.
tomsense76
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Re: Why do people have financial/wealth/portfolio managers?

Post by tomsense76 »

Are you familiar with the anthropological study of the rituals of people from Nacirema? Or what it meant?

Let's similarly flip this question on its head. Why do people go on online and ask strangers they have never met before for financial advice?

To be clear I'm not trying to be critical as I do this as well. Instead am trying to raise a question, namely is it not possible that others look at how we approach finance as strange and what they do with their advisor as normal?
"Anyone who claims to understand quantum theory is either lying or crazy" -- Richard Feynman
Northern Flicker
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Re: Why do people have financial/wealth/portfolio managers?

Post by Northern Flicker »

nedsaid wrote: This effect is one reason that individuals should not invest in individual stocks. The buy decision is relatively easy, the sell decision is relatively difficult.
If the buy decision to hold an individual stock means holding something requiring a future sale but no easy way to predict when, then the decision to purchase was a bad decision. The buy decision only becomes easy when you always say no to the opportunity to buy an individual stock, which I believe was your point.

The above applies equally to an advisor.
Last edited by Northern Flicker on Thu Oct 14, 2021 12:22 pm, edited 1 time in total.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
student
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Re: Why do people have financial/wealth/portfolio managers?

Post by student »

phxjcc wrote: Tue Oct 12, 2021 12:52 pm I have two very well edumicated friends....one M.A. and one PhD.
Both tenured college retired university instructors/professor+department chair.
Math and Education Dept.

They will look you in the eye and tell you that they do not understand the financial markets nor products and therefore hire someone to do it. They are LITERALLY (not metaphorically) afraid of doing the wrong things.

They are also dependent upon others/contractors for EVERYTHING other than lightbulb replacement.

They also have more money than og.

And are childless.

And own 50,000 sq ft of rented/long term leased commercial real estate in music city USA.

And buy cars, but never sell them, just give them away when they are done with them.

They have accountants, lawyers, money managers--just like "momma and daddy did".

A different lifestyle.
(Doesn't everyone go LaJolla for the summer and Vail on Winter Break and Palm Springs on spring break?....and they have been doing so since their early 30's!)
Are they rich to begin with? I am in higher ed and I don't see this type of wealth for regular faculty members.
JackoC
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Re: Why do people have financial/wealth/portfolio managers?

Post by JackoC »

MrCheapo wrote: Thu Oct 07, 2021 4:01 pm Hi,

So I see a few post every day asking about financial/wealth/portfolio managers, that is, people who make investments decisions for you. And it seems whenever I go to parties (not that often now) that people are very happy with their money managers.

I must be missing something but in this age of ultra-cheap index funds why would you use a money manager? My understanding is that no manager could out-perform a good balanced index portfolio. Further, no one will look after your money better than you will. Even if you are ultra-busy, not too-bright etc. why not use a 3 fund portfolio.

Please enlighten me why you use a money manager rather than handling your money yourself? I'm genuinely curious and eager to learn why.
Other posts have pointed out your error or at least sloppiness in saying "no manager could out-perform a good balanced index portfolio." It's axiomatic that, speaking of the public company equity index, all $'s together earn the market return pre expense, so $'s invested with high expenses must underperform $'s invested with low expenses, on average. It by no means excludes *any* manager from outperforming index funds after expenses, just means it can't be true for the average $ invested. And, while not technically axiomatic, a simple corollary in terms of human nature and markets is that if you could identify the managers who can consistently outperform, they themselves would also tend to realize this and charge accordingly, cutting the likelihood of outperforming after expenses back to a likely unattractive level. So perhaps it's a long winded way of saying what you actually meant, but it isn't actually that everyone who says they've done well with managers (after expenses*) is untruthful or deluded.

Another theme was the value of management for people above some threshold of NW where the managers give them access to asset classes not available in a '3 fund portfolio'. For example venture capital and private equity funds tend to have high expenses, but there's no axiom that says they still can't outperform public equity net. It really depends. Similarly for various among myriad hedge fund strategies. If the strategy is 'pick public company stocks which outperform the market' then it falls into the first paragraph. If it's something much more esoteric, perhaps entirely outside the public equity world, that doesn't mean the fund is a good deal, but it's not correct to invoke the axiom to say it's a bad deal.

A theme I didn't see directly mentioned though is one perhaps not relevant for younger people in the accumulating phase and those of us further on still don't like to think about: cognitive decline. On the one hand that could make one even more likely to pursue unwise management options, even with people who are dishonest. But OTOH *somebody* has to make basic rational decisions if you no longer can. Some people have family members capable of that, others don't. Choosing an at least honest manager while you're still sure you know what's what could be justified even if it has worse than even odds of beating 3 fund.

*and post tax is another hurdle if the active management incurs more or sooner recognition of taxable income, it's more likely people with good reports of their experience with managers would not be taking this into account.
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nedsaid
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Re: Why do people have financial/wealth/portfolio managers?

Post by nedsaid »

Northern Flicker wrote: Thu Oct 14, 2021 2:23 am
nedsaid wrote: This effect is one reason that individuals should not invest in individual stocks. The buy decision is relatively easy, the sell decision is relatively difficult.
If the buy decision to hold an individual stick means holding something requiring a future sale but no easy way to predict when, then the decision to purchase was a bad decision. The buy decision only becomes easy when you always say no to the opportunity to buy an individual stock, which I believe was your point.

The above applies equally to an advisor.
The reason it is difficult to sell a stock, particularly if you are a Value investor, is that even when a stock becomes "fully valued" it isn't always easy to know if the stock has more room to run. Stocks can look expensive and zoom for years. If a company is experiencing problems, it isn't easy to know if the problems are temporary or permanent. We can get to where our beliefs in the story and the buzz surrounding a stock can be so strong, it becomes almost like a religion. When this happens, you tend not to see negative news or contrary evidence. The good news and growth story will go on forever it seems. In the 1990's there was the church of GE, the Church of Coke, the Church of Pfizer, etc. Stocks that were popular and that celebrity CEO's and were beloved by Wall Street analysts.

In short, sometimes you sell a stock too early when a stock is "fully valued" or when you get discouraged with it. When a great company is running into trouble, hard to tell if those issues will persist. Hence, you can make a mistake of selling too late. Most often, the error is selling too early.

By the way, I do own individual stocks and have for years. I am thinking of selling them and buying a couple of Vanguard ETFs in their place. So I have a lot of experience with this. My experience was good but it took a fair amount of effort. I could have bought a Large Value Index fund and had about the same result.
A fool and his money are good for business.
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