Financial Planning Talk

[Enoch Root]

Originally Posted by Sr. Mints

This thread depresses the #### out of me. I wiped out my entire savings and accumulated a lot of debt after a prolonged injury and some dumb financial decisions. Turned 34 yesterday . . . so I guess I'm working til I'm 102.

34 is still very young with respect to your financial future. Start saving. Keep saving.

You will be surprised how quickly your financial health returns and begins to flourish.

[Slava]

Originally Posted by CroFlames

I am pretty good at home budgeting, saving, discipline & the like.

But if I wanted to take the next step, what does a guy like Slava charge to help? (That website looks pretty swanky) Is it worth going to one of these guys?

I'm pretty sure I have no interest in visiting with a 25 year old financial advisor who works at a bank and would just stuff money into mutual funds, GICs and bonds.

I'm super glad to hear that my website looks swanky! You must not be in web-design or anything though because those guys might disagree, I have no idea.

As far as costs there are a few ways, depending on what you're doing and what I'm doing for you. I do believe that costs are a drag on your portfolio...but they're also how I get paid and I can't work for free. For things like insurance though, I get paid a straight commission from the insurer. For things like mutual funds its the same where I get paid a commission. For securites like ETFs or stocks/bonds I either set-up flat fee accounts and get paid a flat fee with the trades included or get paid per transaction. I have clients in all sorts of arrangements, but the one thing I can say is that its completely transparent.

Shameless plug: contact me and we can have a coffee and casual chat if you like.

Originally Posted by heep223

All-in costs including fees for service, commissions and MERs from products such as ETFs or funds should be less than 100bps. That's just my opinion.

Well in an ideal world that could work. Thing is that if you have $100k and the entire fee is $1000 that doesn't equal much of a living for an advisor. For an independent advisor (i.e. not someone who is an employee) that means that you deduct from that $1000 at least all of the following:

- MERs/trading expenses
- business overhead including licensing, insurance, office lease and associated office overhead, staff
- taxes
- time spent "working" on CP

So the last line is a joke, but seriously not many businesses can operate on margins that slim. There are costs to running an advisory practice as well (things like compliance costs and things like that which are more industry specific). Its not a lot different than a law office in the sense that if you see a bill for $500 it wouldn't mean that the lawyer just gets $500. I'm certainly not crying poverty here, but its not quite the gravy train that some people think it is either.

[CroFlames]

Sure, let's meet up some time. But I'm not paying for your round trip flight to LA

[Slava]

^ Haha, I didn't even look! I would imagine there is no shortage of guys to meet with there though!

[Enoch Root]

Originally Posted by heep223

All-in costs including fees for service, commissions and MERs from products such as ETFs or funds should be less than 100bps. That's just my opinion.

Yeah, as Slava has said, this statement simply doesn't apply to all situations. As portfolio size grows, that should become more and more likely, but is still overly simplistic.

As a CFA charterholder, that should be immediately obvious to you.

And again, you have ignored that fact that good advice goes far beyond slapping a few ETFs together.

[DoubleF]

Originally Posted by Sr. Mints

This thread depresses the #### out of me. I wiped out my entire savings and accumulated a lot of debt after a prolonged injury and some dumb financial decisions. Turned 34 yesterday . . . so I guess I'm working til I'm 102.

I met a guy with similar situation. He's in his mid 40s with kids. He had a serious enough injury he no longer could continue the career he was trained for. Within 3-4 years he dug a substantial financial hole. He and his wife decided that path was unacceptable, did a complete overhaul of their lifestyle, and after around 5-6 years but are debt free and doing well financially.

Don't give up.

[heep223]

Sure that's simplistic.

There's only a few things retail investors can control.

a) Asset allocation (90% of returns)
b) Their emotions.
c) Taxes and fees.

Obviously 100bps fee would limit high MER mutual funds that will probably underperform anyways. Is that what you take issue with?

[OMG!WTF!]

Originally Posted by heep223

Sure that's simplistic.

There's only a few things retail investors can control.

a) Asset allocation (90% of returns)
b) Their emotions.
c) Taxes and fees.

Obviously 100bps fee would limit high MER mutual funds that will probably underperform anyways. Is that what you take issue with?

d) risk

[heep223]

Originally Posted by OMG!WTF!

d) risk

I'd put risk under asset allocation.

[Slava]

Originally Posted by heep223

Sure that's simplistic.

There's only a few things retail investors can control.

a) Asset allocation (90% of returns)
b) Their emotions.
c) Taxes and fees.

Obviously 100bps fee would limit high MER mutual funds that will probably underperform anyways. Is that what you take issue with?

I just think that advisors do a lot more than just invest for their clients. Tax planning, estate planning and more and more we do a lot of income planning. Investing is a major component, but its also not everything.

[Enoch Root]

Originally Posted by heep223

Sure that's simplistic.

There's only a few things retail investors can control.

a) Asset allocation (90% of returns)
b) Their emotions.
c) Taxes and fees.

Obviously 100bps fee would limit high MER mutual funds that will probably underperform anyways. Is that what you take issue with?

Originally Posted by OMG!WTF!

d) risk

Originally Posted by heep223

I'd put risk under asset allocation.

AGAIN, I am absolutely astounded that you think that individual investors can simply manage risk the way you can. They are not all CFAs. The vast majority of investors have little understanding of risk, how it differs between investments, and how it can, AND CAN'T, be managed/controlled.

Second point, their emotions: If you think ANY investors, including professionals, can control their emotions (at the most critical and stressful times), well we'll just have to agree to disagree.

Taxes and fees: yes, keeping a lid on fees is a good starting point. But if you can't see that advice is valuable with respect to taxes, I just don't know what to say to you.

As Slava said (and I have already said), advice goes far beyond what you listed there.

[heep223]

Originally Posted by Enoch Root

AGAIN, I am absolutely astounded that you think that individual investors can simply manage risk the way you can. They are not all CFAs. The vast majority of investors have little understanding of risk, how it differs between investments, and how it can, AND CAN'T, be managed/controlled.

Second point, their emotions: If you think ANY investors, including professionals, can control their emotions (at the most critical and stressful times), well we'll just have to agree to disagree.

Taxes and fees: yes, keeping a lid on fees is a good starting point. But if you can't see that advice is valuable with respect to taxes, I just don't know what to say to you.

As Slava said (and I have already said), advice goes far beyond what you listed there.

Yours and Slava’s point in regards to paying for the financial planning side of things is a good one.

In terms of the actual investment side though, I personally think that you aren’t giving people enough credit. If a professional that has amassed enough savings for a meaningful portfolio of financial assets can’t educate themselves on the basics of creating a balanced portfolio of ETFs, and the principle of rebalancing, then ok I agree go pay an advisor 150 bps to do it for you + the 100bps (minimum) MERs of the funds that you’ll be in.

My only retail experience has been informally with friends and family from all walks of life, and I can tell you that the vast majority of them, with a bit of guidance as to where to find the proper information, have figured out how to create a basic balanced portfolio for significantly less than 50bps. That has been far more effective at achieving their goals than the gongshow that their advisors put together for them.

Here, for giggles, is a long term portfolio earning a nominal 8%, with 50bps fees vs. 250bps fees.

Spoiler!

Lastly – I will take some responsibility for not expressing myself properly and fully in these posts, but I’d appreciate it if you could try to limit the demeaning tone in your replies, just because I’m presenting a different view than you (ie. “I just don’t know what to say to you”, “as a Charterholder that should be obvious to you”, “I am absolutely astounded that you think individual investors can manage risk as well as you”). PS that last one I never said.

PPS. I'm going to report you for improper use of the CFA designation ("a CFA").

PPPS. ^ is a bad, nerdy joke

[MoneyGuy]

It bothers me that people automatically think that 1% or 2% lower fees automatically means the equivalent higher return, because it doesn't. As Slava has pointed out, there is evidence that people with advisors do better than DIY'rs.

Oh, if it was only that simple. And that easy.

[heep223]

Retail advisors need to outperform their equivalent passive portfolios by 200bps per year, every year to justify their fees.

Institutional investors are ecstatic with consistent 50bps outperformance.

[Enoch Root]

Originally Posted by heep223

Yours and Slava’s point in regards to paying for the financial planning side of things is a good one.

In terms of the actual investment side though, I personally think that you aren’t giving people enough credit. If a professional that has amassed enough savings for a meaningful portfolio of financial assets can’t educate themselves on the basics of creating a balanced portfolio of ETFs, and the principle of rebalancing, then ok I agree go pay an advisor 150 bps to do it for you + the 100bps (minimum) MERs of the funds that you’ll be in.

My only retail experience has been informally with friends and family from all walks of life, and I can tell you that the vast majority of them, with a bit of guidance as to where to find the proper information, have figured out how to create a basic balanced portfolio for significantly less than 50bps. That has been far more effective at achieving their goals than the gongshow that their advisors put together for them.

Here, for giggles, is a long term portfolio earning a nominal 8%, with 50bps fees vs. 250bps fees.

Spoiler!

Lastly – I will take some responsibility for not expressing myself properly and fully in these posts, but I’d appreciate it if you could try to limit the demeaning tone in your replies, just because I’m presenting a different view than you (ie. “I just don’t know what to say to you”, “as a Charterholder that should be obvious to you”, “I am absolutely astounded that you think individual investors can manage risk as well as you”). PS that last one I never said.

PPS. I'm going to report you for improper use of the CFA designation ("a CFA").

PPPS. ^ is a bad, nerdy joke

You're right, I was overly harsh with some comments, but I strongly believe that telling people to avoid professional advice is bad advice. And you have continually ignored (until this post) many other aspects of said professional advice.

While I fully agree that, with some reading, effort and self-education, many people should be able to build a 'basic balanced portfolio' for themselves. However, there is more to it than that.

Tax planning, for instance, is only useful when done in advance (mostly, for the sake of this argument). Far too often I have been approached by people saying they have this massive tax bill, what should they do to reduce it (the answer being: buy a time machine).

Another issue I have brought up with your expectation that people can 'do it themselves' is that the evidence overwhelmingly shows that people over-manage, and can't stick to their plans. Emotional decisions are both normal, and devastating. Most people, including people who are more than capable of doing it themselves, fail when it comes to the discipline of sticking to their plan.

The interesting thing about who gets advice (vs who does it themselves) is that as wealth (total savings) increases, the likelihood of seeking advice also increases. In other words, as people become more wealthy, they are more likely to seek professional advice. If your suggestion that professionals can do it themselves were true in practice, wouldn't the opposite be true? Wouldn't the likelihood of people seeking professional help decrease as their personal wealth increased?

The reason it increases (or at least one of the major reasons) is that, as wealth increases, so do the complexities of managing it. And this goes back to what Slava and I <edit: and MoneyGuy> have been saying about there being more to advice than asset allocation.

Another likely factor influencing that, I believe, is that wealth tends to increase with age and experience, and many people seek advice after having experienced 'doing it themselves'. In other words, after learning that they could probably benefit from some professional advice.

[Enoch Root]

Originally Posted by heep223

Retail advisors need to outperform their equivalent passive portfolios by 200bps per year, every year to justify their fees.

Institutional investors are ecstatic with consistent 50bps outperformance.

No they don't.

There is value in tax advice, estate planning, defining goals, etc.

There is also the fact that individuals tend to make mistakes sooner or later.

The institutional investors that you referenced have well defined investment policies that they follow. They are far more likely to understand risk, know what they are doing, stick to their plan, etc. So yes, outperforming benchmarks by 50 bps is huge for them.

For 'retail investors' as you want to call them, getting anything close to their benchmarks, for extensive periods of time, is rare.

Advisors aren't up against institutional benchmarks, they are up against what the investor can and would experience elsewhere. And when that is 'doing it yourself', benchmarks aren't the benchmark (unfortunately).

[heep223]

Originally Posted by Enoch Root

No they don't.

There is value in tax advice, estate planning, defining goals, etc.

There is also the fact that individuals tend to make mistakes sooner or later.

The institutional investors that you referenced have well defined investment policies that they follow. They are far more likely to understand risk, know what they are doing, stick to their plan, etc. So yes, outperforming benchmarks by 50 bps is huge for them.

For 'retail investors' as you want to call them, getting anything close to their benchmarks, for extensive periods of time, is rare.

Advisors aren't up against institutional benchmarks, they are up against what the investor can and would experience elsewhere. And when that is 'doing it yourself', benchmarks aren't the benchmark (unfortunately).

Ok I hear you on the "other services" such as tax, estate, financial planning, monte carlo retirement and all of that. There is value there.

I'm really not sure where you're going with the benchmarks though. In lots of cases institutional investors have the same benchmarks for asset classes as retail investors ie. S&P 500 for US equities. The sophisticated investor is thrilled with 50bps outperformance. The typical advisor is going to underperform the S&P 500, and then charge 200 bps.

To bolded above, it's exactly my point. So just buy the index.

Anyways man, I appreciate this debate and I hope people take value out of it, but I think at this point we can take to PM any further conversation.

[Enoch Root]

Originally Posted by heep223

Ok I hear you on the "other services" such as tax, estate, financial planning, monte carlo retirement and all of that. There is value there.

I'm really not sure where you're going with the benchmarks though. In lots of cases institutional investors have the same benchmarks for asset classes as retail investors ie. S&P 500 for US equities. The sophisticated investor is thrilled with 50bps outperformance. The typical advisor is going to underperform the S&P 500, and then charge 200 bps.

To bolded above, it's exactly my point. So just buy the index.

Anyways man, I appreciate this debate and I hope people take value out of it, but I think at this point we can take to PM any further conversation.

Because individual investors don't get anything close to benchmark returns (because they make mistakes, changes, etc)

And you continue to ignore the value of advice for things other than asset allocation.

But yes, you're right: we've gone far enough with this.

[OMG!WTF!]

I think if your goal is to match market performance it might not be worth your while to manage your own portfolio. The skills you need to effectively buy and maintain a portfolio are much more than buying a broad range of etf's based on some portfolio model. Diversification through etf's is essentially leading lambs to slaughter. If you're doing it yourself your goal should be to beat the market and those skills, while simple, are not easy. If you're going to do it, do it right. Doing it right will one way or another cost you money. So either pay the manager or pay for the education.

On the other hand, stocks are not the only thing out there. Mortgages provide great returns with lots of security. You can do it yourself via a lawyer of course or through a private lending company or through a mortgage investment corp. I've found borrowers on kijiji, through lending corps and I've bought publicly traded MIC's on the stock market. Super easy. Super safe. Easy to understand. It's amazing how many people are happy to pay 12% for a first mortgage with 70% LTV. It's not very tax efficient but I like it.

[theJuice]

Hey guys, kind of a random question, but how important is a CFA in regards to being an Portfolio Manager? I'm not really too knowledgeable regarding alot of the titles in the finance world, but is it potentially a cause for concern or not really. I fall into the perhaps foolish view that having one as opposed to not having one simply means somebody is more qualified/better educated etc. Typically, I would have thought its always preferred. I will admit that when I was originally looking, that I thought it seemed more like a bare minimum that they needed to have, and not something that would set them apart from the other potential portfolio managers. Again, maybe I'm mistaken, and that it is something more important for financial advisers who I think are those who tell me how to spend my money/make plans for saving etc, whereas the PM is more doing the actual investing help?

I was discussing this with a friend, and the viewpoint they had was that my Portfolio Manager was more of a, I dunno, customer relations guy I was dealing with. Somebody I'm meeting once a year to kinda go over my plan, talk with briefly for like 15 minutes, and then never really speak with again for about a year. That they are not really "doing" most of the stuff behind the scenes, and thus in my case, them not having a CFA is not really that big of a deal.

I will say that it is at one of the main banks, and the account is a fairly large one with more than a million.