Why would anybody pay 1% of their assets to somebody who can't outperform the S&P500? What's the rationale behind money management when even hedge funds can't even outperform the market?

Because they provide value beyond base investment returns. I would argue, over the course of your financial life, they make you as much (if not more) money than you pay them.

https://www.fidelity.com/viewpoints/investing-ideas/financial-advisor-cost

Efficient market disciples (that's what you're espousing even if you don't know that you are) should read this.


https://www8.gsb.columbia.edu/articles/columbia-business/superinvestors

Afterwards you may still believe in an efficient market, but hopefully you'll be able to understand why some people pay an asset manager 1% (or more) of AUM.

I do agree they provide value on the planning aspect. That being said, if an advisor charges 1% and can't even get you with market returns I would argue they are costing you money in the long run

If you do a lot of your own research you probably don't need one. Most advisors fees can easily be offset with tax savings they provide by educating their customers about what is available to them.

I don't have an advisor now, but I will likely get one later in life so I have someone I trust when my mind starts to go and someone who can continue to advise my wife once I am gone since she doesn't care to do any of the managing herself.

not hedge said:

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I do agree they provide value on the planning aspect. That being said, if an advisor charges 1% and can't even get you with market returns I would argue they are costing you money in the long run

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Weren't you an advisor like 12 months ago?

Analyst

Because most Americans are dumb and do not know how to invest, so they pay someone to do it for them.

I think your question would be better posed as, "Question about bad advisors?"

not hedge said:

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Why would anybody pay 1% of their assets to somebody who can't outperform the S&P500? What's the rationale behind money management when even hedge funds can't even outperform the market?

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Well, smart people don't pay 1% because that is not the going rate anymore.

I pay about 0.1% at this point. I started out around 0.5%, but as our wealth has increased our fee has only increased incrementally.

Well kudos to you for not paying 1%, can't imagine having a mil and paying some guy 10k a year to watch it fall

A good advisor is one that helps with your holistic financial plan, not a money manager that tries to outperform the market.

A good advisor will get to know you and your life goals and help devise a plan to achieve those goals as efficiently as possible. Life and goals tend to change over time, and they should be there to help update your strategies to align with your new circumstances. They can also help educate you on different financial products that may increase tax efficiencies, educate pros and cons of each tool, as well as how major decisions you make might impact your financial future. And help you invest based on your risk tolerance.

A good advisor also helps the vast majority of people stay disciplined. Beginning to save and invest sooner instead of putting it off "when it's a better time" or to stay invested and continue to invest when the market is down vs being spooked and taking money out.

Sometimes we need that other voice of reason to tell us what we may already know but just need that extra Pat on the back saying "you know XYZ is stupid so don't do it."

billikenag said:

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Efficient market disciples (that's what you're espousing even if you don't know that you are) should read this.


https://www8.gsb.columbia.edu/articles/columbia-business/superinvestors

Afterwards you may still believe in an efficient market, but hopefully you'll be able to understand why some people pay an asset manager 1% (or more) of AUM.

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That article just proves it is possible. From there, you have to have to look at the ratio of advisors who beat the market consistently over time vs. those who don't. How does a random person find that needle in the advisor haystack? By the time an active manager proves he's worth the fee, the odds are that one of the following are true:

A) the average Joe can't afford the minimum investment required to access the fund in the first place;
B) the actively managed fund has gotten so large, that it becomes extremely difficult to maintain its past performance (Buffet himself says as much);
C) the market has put a premium on the shares of the investment company relative to its portfolio of stocks such that the opportunity for outsized returns is diminished.

I've been a passive index-based investor for these reasons, but I would absolutely love to be proven wrong and learn your secret sauce (seriously).

And all this being said, if having an advisor is enough to provide someone a safeguard against rash decisions (e.g., selling in March 2020 when you have 20+ years left on your investment horizon), then hiring one could easily be worth it for that value alone. And of course there is value to planning, tax advice, etc. for those who don't want to handle it themselves, but that is outside the context of the linked article.

Who are you using?

I'm not here to defend one way or another - I will say that it's likely that people see an advisor as an accountability partner that helps keep your goals on the forefront (because it's easy to not hold yourself accountable), trustworthy to look at your financial situation holistically (They know your entire money mgmt scenario), and a sounding partner that can help talk you off the ledge (whatever that might be). I think if you find the right partner, 1% is likely immaterial.

One more thing to add (and this is key), but a money mgr does not get money on the employer 401k account, which can be a substantial portion of a portfolio. So the 1% (or whatever fee) is diluted down even further when you look at what they are vs not managing (and still advising on)

BoydCrowder13 said:

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not hedge said:

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I do agree they provide value on the planning aspect. That being said, if an advisor charges 1% and can't even get you with market returns I would argue they are costing you money in the long run

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Weren't you an advisor like 12 months ago?

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Have been observing this progression as well, ha. I was recruited into that lane years ago and learned pretty quickly it wasnt a good fit. Most people think advisors job is to actively manage their savings, while 95%+ advisors actual job is to dial for dollars all day every day, provide said dollars to their bosses who take 1-2% or whatever the going rate happens to be, then park the rest in 3-5 predefined/passive index fund strategies depending on risk tolerance. Rinse and repeat 50-100 phone calls a day.

There's not much to it if you take a little effort to learn it, but millions do it because they dont know any differnet and would rather pay someone else to do it for them. Just like mowing their yard, installing their christmas lights, changing their oil, cooking/bringing them dinner, etc.

My advisor has beaten the S&P for the 4 years I've been retired. 1% is the base fee for the minimum investment amount, I pay 25 BP's. I originally hired him BC my wife has no clue and if I "left" she would likely have done something she shouldn't. Well, she died and our kids are even more clueless so my team will make sure they do what they have to do and dole out spending advice. A lot of people think they have this transition stuff all figured out, I spent 28 years working in finance and I could write a book about the estates of smart guys who became dumb once they died. I had an estate lawyer tell me once he was going to sue BC I told him it took 3 days to settle a stock trade, he wanted the check that afternoon. He wasn't even the executor or the attorney on the estate, just "an interested family member." If you've ever been the executor of a considerable estate then you may appreciate the assistance of a decent advisor.
And again, mine beats the S&P as a bonus. You just have to find the right one.

Beating the S&P this year would have you down to -17%.

I wonder if a good advisor could have positioned you differently to shelter you from that kind of downturn and maybe even put you in a position to capitalize on it.

The goal of a financial plan isn't always beating whatever benchmark you choose.

not hedge said:

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Why would anybody pay 1% of their assets to somebody who can't outperform the S&P500? What's the rationale behind money management when even hedge funds can't even outperform the market?

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My mother has a manager that she pays a sizable fee to. They aren't killing it, but I don't want to be responsible for her assets, balancing portfolio, shifting to different investment mixes, etc. They are incentivized to do well and they do "ok"

YouBet said:

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I pay about 0.1% at this point. I started out around 0.5%, but as our wealth has increased our fee has only increased incrementally.

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.5% to .1% is not an increase.

If his AUM has increased by over 5x since he paid .5% to now paying .1% then the dollar amount of fees would have increased.

I.e. .5% of 100k is $500 and .1% of 600k is $600 so his fee would have gone up by $100

12thMan9 said:

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YouBet said:

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I pay about 0.1% at this point. I started out around 0.5%, but as our wealth has increased our fee has only increased incrementally.

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.5% to .1% is not an increase.

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LOL. Example #1 why I have someone else looking at our money...I don't do math gud.

While our absolute fee has slightly increased since we first started using this advisor around 6-7 years ago, as a percentage of the total it has decreased because our total investment dollars have increased.

Hopefully, my dumbass explained that correctly.

not hedge said:

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Why would anybody pay 1% of their assets to somebody who can't outperform the S&P500? What's the rationale behind money management when even hedge funds can't even outperform the market?

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There is a study out there (I need to find it and post it) that says 85% of financial advisers out there can't beat the market. On top of that they get you into sector specific high fee mutual funds that eat away at your returns.

No one should be using a financial adviser unless you are worth tens of millions and then it's wealth mgmt. Dollar cost average into VOO and or SPY and you will crush almost every adviser out there over the long haul.

THEKingKong said:

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not hedge said:

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Why would anybody pay 1% of their assets to somebody who can't outperform the S&P500? What's the rationale behind money management when even hedge funds can't even outperform the market?

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There is a study out there (I need to find it and post it) that says 85% of financial advisers out there can't beat the market. On top of that they get you into sector specific high fee mutual funds that eat away at your returns.

No one should be using a financial adviser unless you are worth tens of millions and then it's wealth mgmt. Dollar cost average into VOO and or SPY and you will crush almost every adviser out there over the long haul.

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I don't even understand this premise. My advisor has never claimed they would beat the market or could beat the market. Never come up. That isn't why I use an advisor. If that is anyone's primary reason for using an advisor you are in for disappointment.

I managed our investments until I was in early 40s when things just got too complicated and navigating the tax implications got complex enough to outstrip my desire to understand it and keep up with it.

THEKingKong said:

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No one should be using a financial adviser unless you are worth tens of millions and then it's wealth mgmt. Dollar cost average into VOO and or SPY and you will crush almost every adviser out there over the long haul.

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I'm sorry, but this is just bad advice. There are millions of people, literally millions, who would do well to hire a financial advisor that won't because they believe this same thing. A good advisor is going to help with so many other parts of your financial life that whether they "beat" the market or not is far less important over the long run than statements like this imply. An advisor who can help navigate future tax implications can often save you more in taxes than their annual fee. Not to mention the psychology of money aspect that everyone is different about, keeping you to your plan when life happens, helping you pivot when needed, and just generally being a truly objective sounding board for what constitutes good or bad money decisions. I do believe a fee only financial planner is the best bet for the majority of people and you can even find fixed fee folks now who cost less than $10,000 per year regardless of assets. A good planner is worth so much more than that over your lifetime contrary to the idea that NO ONE should be using a financial advisor.

No one should be using a crappy financial advisor that sells them products they don't need with huge commissions on the back end. That much I can agree with you on. But with the disastrous financial statement most Americans find themselves in these days, most people need a financial advisor more than they need all the crap they pay for each month in an attempt to keep up with their neighbors. Because those streaming subscriptions won't pay for their retirement or kid's college.

THEKingKong said:

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not hedge said:

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Why would anybody pay 1% of their assets to somebody who can't outperform the S&P500? What's the rationale behind money management when even hedge funds can't even outperform the market?

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There is a study out there (I need to find it and post it) that says 85% of financial advisers out there can't beat the market. On top of that they get you into sector specific high fee mutual funds that eat away at your returns.

No one should be using a financial adviser unless you are worth tens of millions and then it's wealth mgmt. Dollar cost average into VOO and or SPY and you will crush almost every adviser out there over the long haul.

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What account should I do this in?

chrisfield said:

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THEKingKong said:

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No one should be using a financial adviser unless you are worth tens of millions and then it's wealth mgmt. Dollar cost average into VOO and or SPY and you will crush almost every adviser out there over the long haul.

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I'm sorry, but this is just bad advice. There are millions of people, literally millions, who would do well to hire a financial advisor that won't because they believe this same thing. A good advisor is going to help with so many other parts of your financial life that whether they "beat" the market or not is far less important over the long run than statements like this imply. An advisor who can help navigate future tax implications can often save you more in taxes than their annual fee. Not to mention the psychology of money aspect that everyone is different about, keeping you to your plan when life happens, helping you pivot when needed, and just generally being a truly objective sounding board for what constitutes good or bad money decisions. I do believe a fee only financial planner is the best bet for the majority of people and you can even find fixed fee folks now who cost less than $10,000 per year regardless of assets. A good planner is worth so much more than that over your lifetime contrary to the idea that NO ONE should be using a financial advisor.

No one should be using a crappy financial advisor that sells them products they don't need with huge commissions on the back end. That much I can agree with you on. But with the disastrous financial statement most Americans find themselves in these days, most people need a financial advisor more than they need all the crap they pay for each month in an attempt to keep up with their neighbors. Because those streaming subscriptions won't pay for their retirement or kid's college.

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Agreed. However, you do have a bit of chicken and the egg here. Most people don't have enough in investments/assets to mentally justify spending up to $10K. With average nest eggs in the $40K-80K range in this country thats a big lift. Should they still spending that money even with it being a large percentage of what they actually have saved? Maybe so depending on the situation.

We didn't start using one until we were in our early 40s (and not tens of millions) but i also am more knowledgeable than the average investor (granted not a high bar to clear). You can do much on your own without one but at some point stuff gets complicated and tax implications come into play that are simply beyond Joe America's capability.

I hit that point, recognized it, and brought an advisor in.

Grown Pear said:

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A good advisor is one that helps with your holistic financial plan, not a money manager that tries to outperform the market.

A good advisor will get to know you and your life goals and help devise a plan to achieve those goals as efficiently as possible. Life and goals tend to change over time, and they should be there to help update your strategies to align with your new circumstances. They can also help educate you on different financial products that may increase tax efficiencies, educate pros and cons of each tool, as well as how major decisions you make might impact your financial future. And help you invest based on your risk tolerance.

A good advisor also helps the vast majority of people stay disciplined. Beginning to save and invest sooner instead of putting it off "when it's a better time" or to stay invested and continue to invest when the market is down vs being spooked and taking money out.

Sometimes we need that other voice of reason to tell us what we may already know but just need that extra Pat on the back saying "you know XYZ is stupid so don't do it."

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Yup. Its this. And its worth it.

THEKingKong said:

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not hedge said:

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Why would anybody pay 1% of their assets to somebody who can't outperform the S&P500? What's the rationale behind money management when even hedge funds can't even outperform the market?

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There is a study out there (I need to find it and post it) that says 85% of financial advisers out there can't beat the market. On top of that they get you into sector specific high fee mutual funds that eat away at your returns.

No one should be using a financial adviser unless you are worth tens of millions and then it's wealth mgmt. Dollar cost average into VOO and or SPY and you will crush almost every adviser out there over the long haul.

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No is saying there aren't bad advisors out there.

But if you have a good one, then, yes, its worth it.

This is bad advice.

12thAngryMan said:

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That article just proves it is possible. From there, you have to have to look at the ratio of advisors who beat the market consistently over time vs. those who don't. How does a random person find that needle in the advisor haystack?

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Well I think what Warren is arguing is that the preponderance of managers who beat the S&P (or some other benchmark) over a long time horizon adhere to the investment philosophy of Ben Graham--evaluation of securities to determine the intrinsic value of the security and strict discipline on the purchasing of securities only when the price represents a significant discount to conservatively estimated intrinsic value (so-called value investing). Any search for the rare manager who can outperform over the long term (and multiple academic studies have proven that these individuals are rare) should begin with individuals who adhere to this philosophy of investment.

I'd note that of the managers mentioned in the essay, two continue to run their own fund for which they charge no investment fees. This fund (which you've likely figured out is Berkshire Hathaway) has total returns that outperform the S&P over the last 1, 3, and 20 year periods while the S&P outperforms BRK over the past 5 and 10 year periods.

12thAngryMan said:

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By the time an active manager proves he's worth the fee, the odds are that one of the following are true:

A) the average Joe can't afford the minimum investment required to access the fund in the first place;
B) the actively managed fund has gotten so large, that it becomes extremely difficult to maintain its past performance (Buffet himself says as much);
C) the market has put a premium on the shares of the investment company relative to its portfolio of stocks such that the opportunity for outsized returns is diminished.

I've been a passive index-based investor for these reasons, but I would absolutely love to be proven wrong and learn your secret sauce (seriously).

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Aye, there's the rub. There is no secret sauce, and in some ways selecting and sticking with a manager is like religious faith.

You may endure years of underperformance compared to a benchmark only to sell just before the manager begins a streak of outperformance that leads to outperformance over a long term period. And even if you have perfect faith and stick with a manger for 30+ years you're not guaranteed that you'll have long term outperformance compared to a benchmark over that period.

It's easy to see why many smart, rational people just decide to passively index.

For me personally, I was a pure passive indexer with the equity portion of my portfolio for 10 years while I was reading Graham, Buffett, Munger, Lynch, Bernstein, Siegel, Malkiel, Nick Sleep, Allan Meacham, and others. Over that time period I encountered an early-career manager whose investing philosophy fully aligned with my own and who I felt demonstrated the necessary talent, competence, and discipline to outperform the S&P over a 30+ year period (net of fees). As the equity portion of my portfolio reached $1 million, I took half of the capital and placed it under the manager's control while maintaining the other half in passive index funds. I have faith that over 30+ years the actively managed portion will outperform the S&P. And if it doesn't, I'll be objectively ok with that half of the capital compounding annually at 7% (or whatever) compared to the S&P compounding annually at 9% (or whatever).

Never mind the philosophical problems that I have with selecting an index benchmark in the first place. I know of a retired individual who is not obscenely rich (say $5-6 million net worth) who spends half the year slow-travelling around the world with his wife. In the past when his portfolio manager has brought up comparison of his portfolio to a benchmark, the retired individual has stated, "the only benchmark he has is whether he's able to continue slow-travelling with his wife or has to come home and start eating Alpo". There's a part of me that considers his take on benchmarks to be the correct one.

if said advisor had encouraged me to stay away from all these ****bird microcap growth plays on TexAgs, the 1% would have been a bargain.