The argument for paying fees

[ajm184]

Though discipline is certainly lacking in some investors, I find it a bad argument.  Yes, investors generally don't get the same returns printed on the prospectus.  Someone getting one percent to whisper in my ear every three months 'stay the course' needs a life coach at $50/hour every three months versus a financial advisor.

 

https://www.bloomberg.com/view/articles/2017-09-28/fees-are-not-the-enemy-of-investors

[Peds]

Yea fees are one of the biggest enemies.

[Donnie]

In fairness, everyone looks like a genius when the market is up 200%+ since the low point in 2009. Hedge funds and other active investors complain about the correlation of returns on stocks during this bull market. Such correlation may indeed have been spurred by the unprecedented quantitative easing actions by central banks that Crixus has been mentioning in other threads. We will see how everyone reacts during the next downturn. It's possible active investors will do better then or if market returns stagnate.

[VagabondMD]

ajm184 wrote:

Though discipline is certainly lacking in some investors, I find it a bad argument.  Yes, investors generally don’t get the same returns printed on the prospectus.  Someone getting one percent to whisper in my ear every three months ‘stay the course’ needs a life coach at $50/hour every three months versus a financial advisor.

 

https://www.bloomberg.com/view/articles/2017-09-28/fees-are-not-the-enemy-of-investors

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Where do you get a life coach for $50/hour? That's outrageous!

Of course, a group like the one here or at bogleheads could help serve that role, for no cost. When the SHTF, there will be some siren calls to sell in the panic, for sure, but on these forums, I expect cooler heads will prevail.

[The White Coat Investor]

I don't think everyone needs an advisor, but you don't have to get very far away from forums like this one to realize that there are a lot of people for whom 1% a year is a heck of a deal compared to what they're going to do or not do on their own.

[Steven Podnos MD CFP]

I'd argue that one percent a year to have the discipline of a good advisor in the face of either market or stock overvaluation (greed-tech stocks in 1999, ? amazon stock now) or stock declines (2008-9) is worth a great deal.  Many of my clients told me that holding their hands and reassuring them in 2008-9 was the factor that kept them from selling in panic.

 

But the fact is that you should get much more for your 1% then just investment discipline.  Just about any fee only planner will not only provide a good diversified low cost portfolio and behavioral discipline, but also constant advice on your practice (business side), retirement planning, estate planning, insurance planning, educational planning and more.  If you want only investment advice and think you have adequate behavioral discipline to fight fear and greed, then you can find good portfolios for under 0.3% a year at numerous vendors.

 

And, if you are using a fee only advisor, they won't see you an annuity!

[q-school]

in my observations, WCI members are a tiny minority of physicians.  the vast majority of physicians trust their impressive incomes will win out as they spend spend spend.  and the vast majority still do okay as long as 'retire early' isn't a big priority.  if they are happy, who am i to judge?  the rest think about it even less.  someday a light bulb comes on and they realize they aren't going to work forever.  if they are smart, they realize they lost our on compound interest opportunities and can course correct.  it is possible an advisor may have helped them see this sooner.  and that 1% when someone is starting out is not a lot of money.  the part of the article i agree with is-i'm not sure someone who charges $500 for a one time visit and works with average wealth 500k can map out something good for someone worth 4 million in one visit.  and it's fine for WCI people who read a lot and think about it often and pay attention and make adjustments, but for people who think they can get 15k of advisor value for $500--and plan not to think about it otherwise cause they have the advisor, i'm not sure that is the case.  i could be wrong however.

they are so suspicious of the fees that imo it hurts them.  there's nothing wrong with throwing money at a problem if you don't want to address it yourself.  that's the whole purpose of money.

yes i know i'm an outlier here again.

 

[djohnflatfeecfp]

Rex wrote:

I never see people post about how their advisor saved them just advisors claiming they do.

Actually only time I see them pushing stay the course is when the course is loaded with fees.

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Vanguard did a paper a few years back on the value an advisor brings where they broke out how value is added and in what percentages.  It shows it is worth paying the advisor IF that advisor truly does everything they outline in the study. Not sure how many do, especially if you are only being paid to manage assets.

Your second point is where I think advisors who charge based on the assets they manage have too many inherent conflicts. In my case my "ah ha" moment to launch my own flat-fee firm was when I heard an advisor say "I cannot lose those assets" when one of his physician clients said he wanted to take some money out of his account to do some charitable giving. Being paid based on how much assets you control sets up too many points where a client could question whether the advisor is making the recommendation in the client's best interest or the advisor's.

[q-school]

are we sure there is no role whatsoever for annuities?  they exist solely to make money for insurance companies and salespeople?

my parents have a pension.  it's very nice to know that they have this pension.  they don't need to worry about the market at all.  it might be argued that they were too conservative in the market given that they had a pension.  they will never run out of money completely.   i'm not saying put everything in an annuity,  but for those who worry that social security won't exist, that pensions (if available) will disappear, annuities appear to offer an additional layer of security (at a cost).

thoughts?

 

[djohnflatfeecfp]

q-school wrote:

are we sure there is no role whatsoever for annuities?  they exist solely to make money for insurance companies and salespeople?

my parents have a pension.  it’s very nice to know that they have this pension.  they don’t need to worry about the market at all.  it might be argued that they were too conservative in the market given that they had a pension.  they will never run out of money completely.   i’m not saying put everything in an annuity,  but for those who worry that social security won’t exist, that pensions (if available) will disappear, annuities appear to offer an additional layer of security (at a cost).

thoughts?

 

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It sounds like you are already on top of the additional costs inherent in an annuity and my guess is others will share some insight.  One other thing to be aware of is the stability of not only the insurance company issuing the annuity but also the state in which it is sold.  State insurance regulators are the backstops in case an insurance company fails and states have different amounts they guarantee they will cover.  Unfortunately, most state guarantee funds are lacking in their funding levels.  So, if you are looking at buying an annuity you should research what level of backstop is provided by your state, just in case the company goes under.

Now, not many insurance carriers go under as they seem to operate like casinos (house always wins). However, I was at an educational event a year ago where some old school insurance-based advisors were there to talk about how to use insurance to do charitable giving. I was surprised the warnings these guys were throwing up about the future stability of a lot of insurance companies.  Their premise was many insurance companies are being taken over by private equity firms and were taking on riskier bets within their insurance coverages.  Not sure if they were just crying wolf, but it caught my ear.

[djohnflatfeecfp]

Rex wrote:

States don’t actually back the insurance companies. The state guarantee association taxes other insurance companies or facilities transferring policy to intact companies up to the state limits. In the past they have made people whole 94% of time last I read.

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Rex - Thanks for clarifying.  I should have said limits instead of backstops.  I know in OH the limit is $250,000 for an annuity from one company and it applies if you are a resident of the state when the insurance company is liquidated. The 94% number is better than I anticipated.

[jfoxcpacfp]

q-school wrote:

but for people who think they can get 15k of advisor value for $500–and plan not to think about it otherwise cause they have the advisor, i’m not sure that is the case.  i could be wrong however.

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You are not wrong. There is no way I could do justice to planning for any one-shot deal like that and it would not be fair to the client. We are lucky if we break even on a financial checkup ($3k). Until you've really worked with a financial planner (a real financial planner), it is practically impossible to imagine what goes into the relationship. I know that only because our clients say so  

[The White Coat Investor]

Rex wrote:

I never see people post about how their advisor saved them just advisors claiming they do.

Actually only time I see them pushing stay the course is when the course is loaded with fees.

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You don't get it Rex. These folks don't post. They don't comment. They don't send in guest posts. They don't talk to peers about money at work. They just send me emails like the one I got yesterday from a lady in her 60s whose primary care husband hates his EMR but also hates dealing with investment accounts and use phrases like "I'm frightened" and "we really need to get a grip on this" and "we know we need an advisor but can't get around to hiring one." etc.

These are people who don't know WLI is a bad idea and index funds are a good idea. Who have no idea about a safe savings rate or a safe withdrawal rate. Yes, they're targets for salesmen. That's why it is critical to get them into the hands of fee-only advisors. If you can get them to someone charging hourly or a flat annual fee, great. If not, an AUM is better than a salesman and certainly better than nothing.

But they're not going to go read 10 books, start hanging out on the forum, or successfully build and manage a portfolio.

[Steven Podnos MD CFP]

Jim,  you are so very correct.  I believe at least 95% of my medical peers use brokers or insurance agents as advisors.  They pay 2% plus a year to get an asset allocation or worse with no general financial planning advice.  Many of your readers (as with the Bogleheads) are outliers-those who take the time and energy to learn about financial planning themselves.  But they are a very small minority of physicians.

I would have killed to be able to hire someone like me when I first started in practice.  It would have saved me many mistakes, many unnecessary costs, and produced much better investment returns.  Steve

[Donnie]

Rex wrote:

While I don’t doubt they would post less, it’s a real stretch to say I don’t get it.

I don’t like taking out the trash but I still do it. If someone wants to pay someone else to do anything….taking out trash…investing….whatever then they have that right but let’s not pretend there is a high chance that these situations are optimal and going to work out. Fee only advisors are less common and for the most part that fee doesn’t include unlimited calls about how nervous they are and getting them to stay the course. These people will decide they aren’t getting enough attention or get unhappy with the high hourly charge for “doing nothing “ and find the “usual” advisor. Have you ever noticed some of the happiest people with their advisor are getting soaked the most?

You don’t wish to educate that person (not that you should). You want someone take it off your hands. I don’t like investing topics. I learned them and it isn’t beyond the reach of most people. You have decided it’s better that they get pushed to a fee advisor or an AUM advisor. I’m not sure that’s true. The evidence seems very thin that the costs will change destructive financial behavior.

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I agree with WCI.  Taking out the trash is a poor analogy.  A car mechanic analogy would be better:

• Could most people do this work themselves? Yes.


• Would it take time and effort to learn to do it?  Yes.


• Is it something everyone wants to take the time and effort to learn how to do?  No.


• What do people who don't want to learn how to fix their car do?  Hire someone who specializes in it.


• Are there rogue mechanics who upsell you on car fixes? Of course, but that doesn't mean that everyone should fix their car themselves.