Tuesday, June 26, 2012

Financial Advisors

I was visited by two financial advisors this morning. They seemed like nice guys, and had some useful information to impart. But I told them my misgivings about f.a.'s, how they charge too much, push people into high-cost managed funds, and generally skim off too much client money over lengthy periods of time.

Given my skepticism about financial advisors, it pleased me to read this:

Becoming a winning investor often means adopting a new investment philosophy that’s in conflict with your adviser’s self-interest. This is particularly true when you decide to transform a high-cost actively managed portfolio into a low-cost index fund strategy. ...

Expect that your adviser will urge you to meet in his or her office. If you go, be prepared.

You’ll get a barrage of information about your current investment performance. Most of these reports will compare investments to market benchmarks that aren’t really relevant ...

Next you’ll hear nasty stories about index funds and how they failed investors over the years. They will keep talking about the S&P 500 as the only index fund in the universe, and that the current price is below where it was in 1999. They’ll forget to talk about the S&P 500 total return including dividends ...

Funny thing about the S & P 500. This is what happened when I brought up the subject of Standard and Poor's benchmark index ...

Letting go of my broker/financial advisor of twenty-plus years wasn't difficult.

I had been quietly seething about costs and the nature of the investments he had me in for some time. Finally there was a meeting in my advisor's palatial offices in Newport Beach, California. He and his sons (who worked with him in the palatial offices) rolled out the pretty bar graphs to show how much my money had grown. When the presentation ended, I said:

"So how have my accounts done compared to the S & P 500?"

"Oh, we're outpacing the index. By a good 1%"

"Is that before or after you charge your 2%?"

Long pause.

Finally one of the sons said: "Uh, before."

"So if I'd just put my money in an S & P 500 Index fund, I would have done better."

By this time I wasn't getting much eye contact. Finally another of the sons piped up: "Yeah."

Soon thereafter, I vacated the accounts my broker/financial advisor had been managing for two decades. I didn't receive a lot of cooperation with the money transfers, and drove down from Los Angeles to make sure I got the checks.

By that time, firing my advisor wasn't hard at all. In fact, it was a pleasure. There were no farewell lunches.

Despite the above, I think there are useful purposes for financial advisors. When animation artists don't have a foggy clue about stocks and bonds or managing their money, advisors provide a service getting clients into savings/investment plans, in setting them up with a budget that gets over-the-top spending under control.

That part of the business is good. But 2% off the top? That's a pretty steep price for providing a budgeting service.


Celshader said...

Despite the above, I think there are useful purposes for financial advisors. When animation artists don't have a foggy clue about stocks and bonds or managing their money, advisors provide a service getting clients into savings/investment plans...

There's some truth in this. I have a co-worker who's great about saving his money and wants to invest for his retirement, but he does not know how to invest. I told him, "Age in bonds + total-market index funds." However, he wants to know where the "growth" is before he invests. He also doesn't want to take any risk with his investments.

I know another VFX artist who also saves diligently, but most of his portfolio is tilted towards real estate.

I also know a third VFX artist who refuses to roll over his old 401(k) to an indexed Vanguard IRA because he wants his individual stock picks to regain their original value before he can bear to sell them.

I can see where William J Bernstein's coming from when he quipped, "I have come to the sad conclusion that only a tiny minority will ever succeed in managing their money even tolerably well."

Steve Hulett said...

Absolutely correct, Celshader.

The dirty little secret of smart investing is ... it's easy. People who just used the tried-and-true three-fund portfolio (Vanguard Total Stock Market; Vanguard Total International Index; Vanguard Total Bond) would outperform 80% of their fellow investors.

But the other part of the secret is, people louse themselves up by over-complicating their investments and bailing out of equities when they plummet.

-hoops said...

The 401k was designed to let corporations off the hook for Pensions they no longer wanted to provide, as well as a nice new stream of income for Wall Sreet.

I suggest reading this book before "investing" in any of Wall Streets schemes to part you from your money.

Killing Sacred Cows: Overcoming the Financial Myths That Are Destroying Your Prosperity


Celshader said...

@hoops - don't fret about me. I'm a VFX artist with no access whatsoever to a 401(k) or a defined benefit pension plan. My co-workers are stuck in the same boat.

From my understanding, a defined benefit plan is more secure than a 401(k) because of four reasons:

-- First, the employee is force to save for retirement no matter what, because the employee has no choice of opting-out of the employer's tax-deferred contributions to his pension fund. So the defined-benefit employee has a greater chance of saving more money for retirement than an employee that blows off his 401(k) contributions.

-- Second, the investments are taken out of the employee's hands and put in the hands of a pension fund manager, who is less likely to freak out over day-to-day stock market fluctuations than the employee.

-- Third, the pension fund has an annuity-like component in the sense that money that would have otherwise gone to the retirees that died young goes instead to the retirees that would otherwise have outlived their savings, reducing longevity risk.

-- Finally, the contributions of the young help fund the expenses of the old so that the retirees' collective pot of money doesn't run out.


As a VFX artist, I have no access to a defined benefit plan OR a 401(k). I have to nail together my own individual "pension fund." So:

-- I'm forcing myself to save as least as much as employees with pension benefits are forced to save. At least, I hope I am matching their savings rate.

-- When I run out of tax-sheltered space in my IRA, I save in tax-deferred I-Bonds and tax-efficient total stock market index funds from Vanguard. My stock/bond/cash portfolio will be simpler than that of a pension fund, but I must invest if I want to beat inflation.

-- to reduce longevity risk when I retire, I may purchase an annuity or (as William J Bernstein suggested in his latest eBook) defer taking my Social Security until age 70 to "purchase" a federally guaranteed "annuity."

-- I'm also considering working part-time in retirement to reduce the chance of my individual pot of money running out.


For what it's worth, a Dilbert cartoon on the cost of portfolio expenses:

Dogbert's Retirement Planning Service

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