The Value Of A Financial Advisor

crispydoc Uncategorized 6 Comments

A recently widowed loved one, familiar with my interest in finance, forwarded me a newsletter from her advisor that was written on the pretext of honoring the late Jack Bogle's innovations at Vanguard.

It was an odd tribute coming from this particular advisor. This loved one once asked me to look over the investments her advisor had placed her in, and I pointed out an alarming number of high load, actively managed funds.

He also charged under an Assets Under Management model, which was an extremely high price to pay for financial advice at this level of assets. Despite the multiple red flags I pointed out, decades of loyalty prevailed and my loved one declined to part ways with her advisor.

I read the newsletter as requested, and was disappointed (if not in the least surprised) by what it contained. He began with praise of Jack Bogle's insight in recognizing that passively managed, low cost index funds that achieve market returns beat 85% of actively managed funds over the long-term.

He then proceeded to mansplain how this particular advisory firm used proprietary strategies to identify only those active managers who were truly exceptional and could beat the index, and how the fees paid to those managers were worth every penny.

It reminded me of an oncologist I formerly knew who earned 30% of his income from pharmaceutical speaking and promotional engagements, but insisted that while of course such inducements might lead other doctors to develop conflicts of interest in their prescribing recommendations, his exceptional integrity remained pure and unaffected. It reflected a combined epidemic lack of insight, the inflated sense of skill typical of the Dunning-Kruger effect, and financial self-interest.

I am a vigorous proponent of Do-It-Yourself investing via low cost, passive index funds, and I believe most typical high-income professionals possess the faculties (if not the interest) to manage a simple and low-maintenance portfolio.

This can erroneously strike some as my being anti-advisor, which is not the case. I am opposed to advisors placing personal financial interests before those of their clients. Not all advisory models are created equally, as The Physician Philosopher has eloquently explored in a prior post.

So why do I not categorize this advisor as one more exploiter enriching himself at the cost of my unsuspecting loved one?

Because when she became a widow, and was completely distraught and numb, this advisor's partner came and executed the plan they had put in place decades earlier.

The partner accompanied my loved one to the bank to ensure all assets were transferred appropriately.

The partner counseled my loved one on the number of certified copies of the death certificate that needed to be made and specified where such copies were to be sent.

The advisor and partner attended the funeral, and comforted her in her time of need.

No doubt these services were obtained at a far higher price than I feel was reasonable, but at this enormous life transition, the services provided by this financial advisor were extremely valuable and welcome.

Comments 6

  1. Let’s say a typical AUM charges 0.5% on a 3M account or 15K per year. Let’s say he puts you in 20bp funds which actually are documented more efficient in terms of return than Vanguard funds because they have different trading rules and are optimized, not active but optimized. The optimization might yield an extra 40bp return

    Vanguard funds are huge, but they are NOT market index funds they are market index tracking funds. They are an accumulation of stocks that behave “as if” they track the market with less than the full compliment of stocks contained in the index. VTI does not contain 5000 stocks, more like 180. Let’s say the market dives and people start cashing in VTI in droves. What gets sold to get people their money? The 180 stocks. Rapid and huge sale of unmitigated quantities of 180 stocks therefore add huge volatility to VTI that would not exist in the index although VTI’s volatility will filter into the index. Tell me again how smart you are for owning VTI. When times are normal it’s a reasonable investment, when it hits the fan, it’s a liability, but of course since you’re a bogglehead and buy the bogglehead rap you kind of missed the point. Jack Bogel wrote a lot about this concern but somehow it gets conveniently ignored by DIY.

    You see hawking of the 3 fund which includes “Foreign”. If you analyze “Foreign” it gives you some diversity on the way up. On the way down however the ride is NOT a reverse mirror of the way up. The diversification correlation normalizes to 1.0 in direction but the loss is often magnified. In 2008 the loss on S&P was about 45%. The loss on “Foreign” was as high as 70%. Your “diversity” didn’t buy you a damn thing but a bigger loss. If you have 1M in S&P and 1M in foreign a 45% loss in S&P takes you down to 550,000 and you need to make 450K (90%) to get back to zero. In Foreign a 70% loss takes you down to 300K and you need to make 700K (233%) on your 300K to get back to zero for a total of 1.15M needed to get back to zero. If you had 2M in S&P to start you would have to make 90% or 900K to get back to zero. Who gets back to zero sooner? You don’t start compounding again in a passive investment till you get back to zero. That’s an extra 250K you need to make back to get back to zero just for owning a 3 fund and not understanding the exacerbated volatility. Tell me again about DIY brilliance. In one study I read the average DIY is said to leave 4%/yr return on the table because of inefficiency in investing. That never quite getting around to to pulling the trigger on investing that 400K cash that’s been sitting in the bank you’ve been meaning to invest takes it’s toll. Any day now we may see a pull back, you know the market is getting frothy, and a better entry point might emerge, in the mean time that 4% on 400K costs you 16,000 bucks! Wait a minute? The financial adviser only cost $15,000! Your DIY arrogance nailed you a greater loss than his cost. If you don’t have a way to measure real return, you are pretending.

    I save more than what my adviser costs me by 3x in tax efficiency and fund efficiency vs retail funds. That means for every 15K that goes in his pocket 30K in improved efficiency goes into mine. In the mean time the average DIY is leaving 16K/yr on the table with his indecision. It’s one thing to talk a good game, entirely another to actually execute. Execution is what makes the money, talking makes CO2. You don’t become a scratch golfer by watching YOUTUBE you become a scratch golfer by execution and you loose by not executing. Just ask Tiger Woods about execution. Way too much DIY is like watching YOUTUBE. The only thing is your future wealth depends on actual execution not consuming bogglehead books and boiler plate. If you’re honest you know this to be true.

    The hand holding in the face of a spouses death is a bonus also not to be missed. A lot of things happen with this transition beside sending out the requisite paperwork. There is loss of 2 social security incomes down to 1 and you possibly might need to claim survivor benefits to get a better deal. There is a huge increase in taxes and if you didn’t play that correctly Uncle Sam lays in wait to rob you blind. Whole lotta moving parts and there is virtually nothing written in the DIY community about those moving parts because the analysis of taxes is hard and doesn’t lend itself to snappy formula. The only defense is a decades old plan of a good offense created and updated regularly and then executed when the need arises.

    Do not overestimate your skill set. Just because you slapped in a chest tube in an advanced trauma course doesn’t mean you know jack about thoracic surgery. And just because you’re a thoracic surgeon doesn’t mean you know jack about the anesthetic techniques needed to accomplish successful thoracic surgery. A man’s gotta know his limitations.

    1. Post

      Point well made, Gasem, with inimitable style. The right advisor can provide risk mitigation in excess of their cost when waters get turbulent. The wrong one can exploit you.

      While the wrong ones gets most of the press in the Physician Finance Blogger world, the right ones are often overlooked at risk of missing out on the benefits they can provide via tax efficiency and fund efficiency. I am as guilty as any of overlooking those benefits, although my bias is having seen multiple people I love put into high load funds that did not make much sense for their goals.

      There is no shortage of DIY hubris – probably partly explained by medical hubris, partly explained by the Dunning-Kruger effect at work.

      Dr. MB has recently written some refreshing posts about hitting her limit on her desire for DIY optimization, instead favoring a simplified portfolio that could be continued by her husband if something happened to her. There’s a great deal of wisdom in recognizing when you are significantly moving the needle and when the tweaks are more intellectual and less likely to make or break you once you’ve reached the destination. Her approach to being good enough resonates.



  2. I think the transition after the death of a loved one, especially if that person handled the finances, can be overwhelming for the surviving spouse. This person may not have any interest in finance or have a clue what had been set up. A financial advisor in this situation could be the thing that ties it all together

    1. Post

      Some things hold together naturally, others by mysterious forces like duct tape, repurposed chewing gum and love. This advisor helped steer my loved one during a period where we all had concerns about the latter being strong enough to hold.

  3. I think there are reasons to use a financial advisor. But I also recommend that people fine the least conflicted model, because of what you outlined in the post.

    Financial advisors view their business models as “simply different, not worse” than other FA models. The fact is that they have to disclose their fee structure, but they certainly don’t have to explain the contacts inherent to their models. And they rarely do.

    Unlike when I give financial talks to my reidents and students and openly disclose how I make money on my site, advisors simply say “this is my model and why I do it this way” instead of disclosing all the inherent conflicts. No conflict of interest disclosure seems required in that profession, and – if it is – it is in fine print.

    P.s. thanks for the shout out


    1. Post

      There’s disclosure and then there’s misrepresentation or minimizing of conflicts. Skepticism is certainly warranted whenever your money is potentially in jeopardy.
      Thanks for stopping by, Jimmy.

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