Financial ‘advisors’ - the good, the bad, and the needed?

[Paulie Walnuts]

Originally Posted by Locke

My Intern's mother works for a bank. The things he saw run through my office from Banks that he then went home and told her about....it'd make your blood run cold.

I genuinely fear for the future of our finances as people trust banks more and more as they get worse and worse.

One day...I shall write about..."The Galactic Saga of...Attempting to Cash a Cheque!"

Which is probably the closest I've ever come to genuinely wanting to burn a Bank to the ground.

Oh it was good times, the tied selling but not tied selling was fun. Especially to long and loyal clients of the bank.

CLients coming in with every product we have. They want a mortgage oh well yeah we can only match the other bank if you take this credit card otherwise its this other higher rate, while you offer the lower rate to someone off the street.

It will be hilarious when CRM3 comes out and people start asking about fees and rates of return. No one I saw was actually going through fund facts properly or even understood it, or that the rate of return had the MER built in.

These are the companies protected heavily by the government and allowed to rake in billion upon billions in record profits and must charge more for account fees.

[troutman]

Yikes! Fees are going to cost me $400K? Thanks Questrade!

[Manhattanboy]

I look at my statements and the 1% or more of fees I pay and often times think why don’t I just buy 5 or 6 ETFs that track the various indexes. I would be curious on the stats but I have to think very few managers can do better over the long term (assuming the client is not willing to take on more than moderate risk).

The other pet peeve I have is reporting. I can’t even tell whether my returns are net of contributions. I guess I need to ask lol.

[bizaro86]

Originally Posted by Manhattanboy

I look at my statements and the 1% or more of fees I pay and often times think why don’t I just buy 5 or 6 ETFs that track the various indexes. I would be curious on the stats but I have to think very few managers can do better over the long term (assuming the client is not willing to take on more than moderate risk).

The other pet peeve I have is reporting. I can’t even tell whether my returns are net of contributions. I guess I need to ask lol.

It's quite likely you could save the fees and build similar exposure via ETFs. Generally speaking the value of an advisor is the "soft" part, not so much returns/portfolio construction, imo. If they talk you out of panicking and going to 100% cash the next time a March 2020 style panic happens they've earned their fee for your whole life. If you didn't even consider selling in March 2020 then maybe you didn't need that service. Some people need other stuff (estate planning, etc) but I think it's quite likely you're better off buying that type of advice a-la-carte, not bundled into your money management.

If they're showing you a % return I'm fairly sure that would be a compound annual growth rate (ie, not affected by contributions) so you should be fine there.

[Slava]

Originally Posted by bizaro86

It's quite likely you could save the fees and build similar exposure via ETFs. Generally speaking the value of an advisor is the "soft" part, not so much returns/portfolio construction, imo. If they talk you out of panicking and going to 100% cash the next time a March 2020 style panic happens they've earned their fee for your whole life. If you didn't even consider selling in March 2020 then maybe you didn't need that service. Some people need other stuff (estate planning, etc) but I think it's quite likely you're better off buying that type of advice a-la-carte, not bundled into your money management.

If they're showing you a % return I'm fairly sure that would be a compound annual growth rate (ie, not affected by contributions) so you should be fine there.

It's not that I entirely disagree, but I've seen plenty of portfolios that amateurs build "because they can". Frankly, a lot of them are brutal for a variety of reasons. So sure, they're saving 1% by not paying someone and costing themselves much more.

I also think that DIY companies offering free trades or super cheap trades are almost certainly doing a disservice to investors. We know that this has people trading more, and we know that more trading means more poor decisions. So again...you might "save money" in terms of the upfront cost, but are you actually coming out ahead?

As far as quantifying the value of an advisor, there have been plenty of studies on the subject that come to a value of in and around 3%. That isn't going to be the same for everyone, of course, but that's the figure they come to in more than one study that I've seen.

[pseudoreality]

Originally Posted by Slava

It's not that I entirely disagree, but I've seen plenty of portfolios that amateurs build "because they can". Frankly, a lot of them are brutal for a variety of reasons. So sure, they're saving 1% by not paying someone and costing themselves much more.

I also think that DIY companies offering free trades or super cheap trades are almost certainly doing a disservice to investors. We know that this has people trading more, and we know that more trading means more poor decisions. So again...you might "save money" in terms of the upfront cost, but are you actually coming out ahead?

As far as quantifying the value of an advisor, there have been plenty of studies on the subject that come to a value of in and around 3%. That isn't going to be the same for everyone, of course, but that's the figure they come to in more than one study that I've seen.

I can't speak for "people" or even general trends, but ditching the bank advisor selling me mutual funds versus buying my own ETFs through a discount online brokerage has been a godsend thanks to the Coach Potato Canada website. When I first started I had a basket of ETFs and rebalanced using a spreadsheet. Now I just buy the all-in-one ETF and call it a day. I think it costs an extra 0.1% for the auto-rebalancing, which I can live with. Fortunately, I'm far too lazy to track or try to time the market. I also like to make fun of my friend's stock tips.

As long as I am in registered accounts I think this strategy works for me. However, looks like I'll run out of contribution room soon. Once I get into taxable accounts, then I might want to have an advisor help with allocation for tax efficiencies. This is especially true if I go for the Smith Maneuver where you borrow against your home to invest. I've been eying that up for years, but have been too chicken spit to pull the trigger.

[Slava]

Originally Posted by pseudoreality

I can't speak for "people" or even general trends, but ditching the bank advisor selling me mutual funds versus buying my own ETFs through a discount online brokerage has been a godsend thanks to the Coach Potato Canada website. When I first started I had a basket of ETFs and rebalanced using a spreadsheet. Now I just buy the all-in-one ETF and call it a day. I think it costs an extra 0.1% for the auto-rebalancing, which I can live with. Fortunately, I'm far too lazy to track or try to time the market. I also like to make fun of my friend's stock tips.

As long as I am in registered accounts I think this strategy works for me. However, looks like I'll run out of contribution room soon. Once I get into taxable accounts, then I might want to have an advisor help with allocation for tax efficiencies. This is especially true if I go for the Smith Maneuver where you borrow against your home to invest. I've been eying that up for years, but have been too chicken spit to pull the trigger.

Yeah, it does depend on what products you're comparing them to and what kind of "advisor".

[Fuzz]

The problem is if you get screwed over by a bad investment advisor you are very fortunate to even get a sliver of your money back. I've learned there are very little protections when your advisor(and agency) go rouge. The deck is heavily stacked in their favour.

FWIW I moved everything to Questrade and have 3 year returns of 6.5 and 9%(depending on risk profile) and 1 year of 14.7 and 20.6 on their robo-advisor platforms. Good enough for me. I'll be interested to see how they handle downturns.

[Slava]

Originally Posted by Fuzz

The problem is if you get screwed over by a bad investment advisor you are very fortunate to even get a sliver of your money back. I've learned there are very little protections when your advisor(and agency) go rouge. The deck is heavily stacked in their favour.

FWIW I moved everything to Questrade and have 3 year returns of 6.5 and 9%(depending on risk profile) and 1 year of 14.7 and 20.6 on their robo-advisor platforms. Good enough for me. I'll be interested to see how they handle downturns.

I'm curious what you mean about that first part?

[bizaro86]

Originally Posted by Slava

It's not that I entirely disagree, but I've seen plenty of portfolios that amateurs build "because they can". Frankly, a lot of them are brutal for a variety of reasons. So sure, they're saving 1% by not paying someone and costing themselves much more.

I also think that DIY companies offering free trades or super cheap trades are almost certainly doing a disservice to investors. We know that this has people trading more, and we know that more trading means more poor decisions. So again...you might "save money" in terms of the upfront cost, but are you actually coming out ahead?

As far as quantifying the value of an advisor, there have been plenty of studies on the subject that come to a value of in and around 3%. That isn't going to be the same for everyone, of course, but that's the figure they come to in more than one study that I've seen.

Yeah "free" trades are brutal in terms of incentivizing over trading, and they're not actually free given the payment for order flow. But obviously I'm not talking about someone who decides to yolo on meme stocks or single day to expiry options or something. (Even though I personally benefit from that type of trading, I would never encourage it).

I do think a bogleheads/couch potato type portfolio with a couple of ETFs is going to work out comparably to most advisors and be a fee savings, assuming it gets left alone. I would certainly grant that's a big assumption, and that many will decide to add the hot stock the guy at work told them about or sell at a bad time.

And as I mentioned the "don't panic during this downturn" type advice has huge, huge value.

Basically, I think building a pretty good portfolio is actually extremely easy, but not screwing it up somewhere along the way is pretty hard, and imo I think that's where most of the value from an advisor comes in.

[Fuzz]

Originally Posted by Slava

I'm curious what you mean about that first part?

I can't discuss details, but my discussions with someone who has a great deal of knowledge on this on my case frankly told me how long some of these cases drag on for (20+) years, and the companies involved can play games and stretch things out until you are too old to make use of your small settlement, or die. So I asked him what he does, given unknowns and risk and lack of protection or restitution options. "I manage it all myself now." So ya, I'll follow his advice. No offense to you personally of course. I've just been heavily screwed by bad people and multiple systems that failed. It's cool though, they got a slap on the wrist.

[Table 5]

Personally, I don't trust anyone completely with handling my money...and that includes myself. So I diversify on that front, and have about 40% with a traditional advisor (basically "dad's guy"), 40% manage myself, and 20% in other investments.

On paper, I've beaten my advisor every year since I started managing it myself, but I know that may have come down to dumb luck. Being a complete amateur, I'm not sure I'd always make the clearest of decision if things got hairy, so it is nice to have someone looking after your money who has less of an emotional connection. I also like that he thinks differently than I do, which acts as a ballast against my own biases (Ie, he kept me in tech last year, which I hated).

I do like being involved though. I find that consistently listening to some financial podcasts every week (Ie Thoughtful Money, Lance Roberts, Market Huddle etc) helps keep me in the loop, which helps not only my own decision making but also in conversations with the advisor.

[Slava]

Originally Posted by Fuzz

I can't discuss details, but my discussions with someone who has a great deal of knowledge on this on my case frankly told me how long some of these cases drag on for (20+) years, and the companies involved can play games and stretch things out until you are too old to make use of your small settlement, or die. So I asked him what he does, given unknowns and risk and lack of protection or restitution options. "I manage it all myself now." So ya, I'll follow his advice. No offense to you personally of course. I've just been heavily screwed by bad people and multiple systems that failed. It's cool though, they got a slap on the wrist.

I take zero offense, of course, because it's not me! I just find that a little odd. I feel like this industry is (rightly so) one of the most intensely regulated. There are a lot of checks and balances, and a lot of oversight.

And of course, I don't expect you to discuss details or anything like that. It just seems like these things would be settled quickly through insurance if nothing else, and that actual recourse against an offending party might follow (and that part might take years!).

[Dentoman]

Happy to hear it's not just dentists people don't trust

[Fuzz]

The regulators handed out wrist slaps. They have no means to make investors whole, or that they even care about the outcome for investors at all. To me(and the expert I talked with) the regulations give comfort and legitimacy to the industry, that's about it. That was my experience.

I'm not even sure what insurance would cover on this, but I can assure you if it existed, the lawyers would have covered that angle.

[Enoch Root]

Those Questrade ads are brutal. Yes, all else equal, lower fees are better. But lower fees are (or should be) a secondary concern, not the only concern. The biggest challenge, when investing yourself, is overcoming human behavior - we all think we can, because, in normal circumstances, we (mostly) always do. But that isn't where the problem lies. The problem is that when things get difficult/confusing/scary, our emotional subconcience takes over, and NONE of us can remain rational in those circumstances.

I have been presenting on this subject for 30 years, and one of the things I always tell people is "I study this professionally, I present on this, and even when I can see it coming, I am no better at fighting it than anyone else. Why? Because we are hard-wired this way!" People think they can overcome this rationally, but that is literally the opposite of what is happening. And here's the problem: one bad decision can wipe out years of solid work.

As Slava said, studies consistently show that having an advisor is beneficial, to the tune of 2 to 3% per year. The reason isn't because they have better products (they probably do, but that would be a marginal difference) or because they know what the market is going to do (avoid anyone who thinks they do), but because a good advisor keeps themselves between you (your emotional you) and your portfolio. The biggest deterrent, with respect to long term performance, is the big mistake - market-timing out of fear or greed. That, and good financial planning, to help you make good decisions along the way, are the real value generators that an advisor provides. And of course, they should also be able to build good portfolios, but that is pretty easy.