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  #51  
Old 09-07-2017, 05:36 PM
Dewey Finn Dewey Finn is offline
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My guess why people don't do that is if you're the sort to want an investment advisor, you're going to want continued advice, particularly when there is a bear market, or when your circumstances change (your children start approaching college age, for instance or you approach retirement age).
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  #52  
Old 09-07-2017, 08:11 PM
Tired and Cranky Tired and Cranky is offline
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Originally Posted by drad dog View Post
Why don't people just sign up, get the advice, get a strategy and take their money out of management?
My father-in-law did exactly that without originally intending to. He signed up for an advisory service at Wells Fargo. The cost was, if I remember correctly, 1% of assets under management per year plus the cost of the underlying mutual funds in the portfolio. After I talked to him, he decided to keep the funds for a little while but drop the advisory services. He switched to Vanguard funds later.

I think Dewey Finn is probably right that most people want continuing service, but don't discount simple inertia.
  #53  
Old 09-07-2017, 08:24 PM
jasg jasg is offline
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Originally Posted by Tired and Cranky View Post
My father-in-law did exactly that without originally intending to. He signed up for an advisory service at Wells Fargo. The cost was, if I remember correctly, 1% of assets under management per year plus the cost of the underlying mutual funds in the portfolio. After I talked to him, he decided to keep the funds for a little while but drop the advisory services. He switched to Vanguard funds later.

I think Dewey Finn is probably right that most people want continuing service, but don't discount simple inertia.
I spent almost 20 years with an advisor, ending at Wells Fargo. I consider it the biggest mistake of my investing life. At the same time I had a low fee 401k plan with mostly index funds that out performed the funds with the advisor.
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  #54  
Old 09-07-2017, 10:20 PM
drad dog drad dog is offline
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Originally Posted by Dewey Finn View Post
My guess why people don't do that is if you're the sort to want an investment advisor, you're going to want continued advice, particularly when there is a bear market, or when your circumstances change (your children start approaching college age, for instance or you approach retirement age).
But it seems like we are getting a real consensus here that a strategy based on some very basic principles can compete with third party oversight management.
  #55  
Old 09-09-2017, 01:33 AM
drad dog drad dog is offline
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I had a really bitchin idea just now. I'm just going to roll with both companies and allot the strays to Vanguard. I'll get an idea of what strategies might be best, but I'll avoid a fee on the bulk. I'll check in here to report.
  #56  
Old 09-09-2017, 09:48 PM
edwardcoast edwardcoast is offline
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Originally Posted by Dewey Finn View Post
Except that the advisers who cost nothing usually work on commission. The best, least biased advice might come from an adviser whom you actually pay for the advice (i.e., a "fee only financial planner".
They have a fiduciary responsibility and above and beyond that, if they didn't make money for their clients they wouldn't be able to stay in business. The free-market would have driven them out many years ago. A fee only planner isn't going to be around to advise you. Anyone can come up with a plan for today for this quarter, but it won't work for you quarter after quarter. A Financial Advisor with a major brokerage firm has much more access to what is going to work for you and make chances and save you money than someone you pay thousands of dollars of fees to produce a report for you that can't guide your future investments. You want a Financial Advisor to make money, because this is what drives them to give you the best investment options. People who go at this alone, and take advise from the internet to buy Vanguard or whatever are gambling. Again, wealthy people have a Financial Advisor with a major brokerage firm, because they know this requires a professional.
  #57  
Old 09-09-2017, 09:58 PM
edwardcoast edwardcoast is offline
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Originally Posted by Ispolkom View Post
Cite?

Here are some contrary views:

Bad times for active managers


Even top-rated active funds underperform


99% of actively managed US funds underperform

I'd agree that meeting with a fee-only financial planner to create a long-term plan is a good idea, but pay a manager for a investment plan that will be on autopilot? I'd just as soon buy a whole life insurance policy.

A couple of websites I'd look at for investment advice:

humbledollar.com

bogleheads.org

Both focus on the fundamentals of buying broad index funds, watching costs, and resisting emotional responses to the market.
DIY are just gamblers. If all those websites and people telling you to buy Vanguard and so great, then the Financial Advisors in major brokerage firms would have been out of business long ago.

But if you are a control freak, and most do everything yourself, you are the type of people who will loose money, but constantly claim victory because of your personality. I have seen this time and time ago. Gamblers with the stock market are no different than those at the casinos, they only brag about their winnings.

Do you honestly think people with net worth in the millions use Financial Advisors at major brokerage firms because they are stupid? And think of what your own time is worth. I've seen this before, they grab Valueline and other websites, and spend hours every week reading and discussing it as if no one else has access to the same information, and in the end they don't do as well and have wasted their time. Like most gamblers they think they can beat the house, because they are just so much smarter than everyone else.

When the major brokerage firms close, then I will consider doing my own investing, but until then, don't fool yourself.
  #58  
Old 09-09-2017, 10:10 PM
edwardcoast edwardcoast is offline
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Originally Posted by Corry El View Post
+1. I don't know if edwardcoast meant that a broker was likely to increase your returns over indexing. If so that's not 'upsetting' it's just not correct. All the active managers together, including people trading on their own must get the same return as the index. That's a mathematical identity not a theory. But brokers charge more than index funds, or on top of index funds they have clients trade in and out of. So after expenses active investors must get less *on average* than index investors.

You can only get more return with a broker/active manager than indexing if you choose a better than average one. But how do you know who is better than average? As others have stated, the stats show that overperformance is not consistent enough over time to determine this from past performance.

However reading the pro-professional advice position more broadly, it does have merit in other respects:
1. A professional can help with basic set up, say in this case consolidating several inherited IRA's into one.
2. A professional can help you deal with tax and other govt rules, Social Security as you said, estate planning, etc.
3. A professional can help you understand your own risk tolerance to make the most appropriate decision about asset allocation *in terms of risk*, not which investment 'is going to make the most' (they can help educate you to begin with how that's not the right question).

By and large reading lots of threads on 'Bogleheads' forum is a good free education. Though as you'll see if you do, even once everyone agrees indexing with low cost funds is the way to go, there's is no single answer to 'how much of my assets should be in safer v riskier?'. A flaw of that forum community IMO is too many people too gung ho on stocks. The 'Boglehead Philosophy' leaves that question open to each individual, but that forum community tends to be perma-bullish on higher allocations to stocks than make sense for many people IMO.

Starting from a very basic level, a pro adviser might add value to help a person better understand their own risk tolerance and set that risky % appropriately...to where they don't panic and bail out at the bottom of some future stock market downturn, then be afraid to get back in till it's gone way back up, as millions of people did between 2008/9 and more recently.

So again I agree. A professional fee only planner to help set things up and choose a risk allocation a person is more likely to be able to stick with, for less experienced investors: yes. An ongoing active manager type broker: no.
Investing is about having a goal. That's the point of it. Worrying about how well you beat an index this week or month doesn't mean anything. This ignores the risk tolerance for people too. Indexes aren't a genius move, they don't just go up, they go down and they go down hard too. A smart investment avoids those hard downturns.

Everything has fees. I don't know where people get the idea they are getting anything for free. Unless others are getting paid, things aren't going to get done. You care about net return, not fees. Everyone is smart after the fact, if you only invested in index funds you would be fine...but they ignores the horrible crashes along the way and no one wants to live through those.

As I mentioned, long-term investor. I'm not a trader and I'm certainly not a gambler. You get what you pay for with dealing with a real professional. People over the years have bragged to me about beating the market that week, but they can't do that every week. People totally ignore the amount of time they spend when doing this all themselves. Sure they say "I don't spend time on it..." but every time I have a conversation with then, they give me a 10 minute update on the market and what they think about it. Come on, that's time wasted. You want to spend your time doing that, fine, but I prefer to spend it on my business, because the vast majority of wealth is going to come from what you earn and not the investments.
  #59  
Old 09-10-2017, 07:31 AM
Bill Door Bill Door is offline
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edwardcoast, you're as wrong as can be about a lot of things. You pretend to believe that the point of index investing is to beat the market and erect this magnificent strawman that says you can't beat the market because the market goes down as well as up.

The point of index investing is to meet the market, not beat the marked, and index investors do that. Advisors charge big fees because they claim to be able to beat the market, not index investors. Your whole premise is specious.

You claim that index investors aren't aware of the fees they pay. We are completely aware. I know just what the fees are on every vehicle I own. The fees for my entire portfolio average 0.065%. The fees for managed accounts are ten times that amount or more just for the AUM fee, and they pay fees on their investment vehicles just like I do.

You pretend to believe that investment advisors can beat the market, yet you've been presented with evidence that they can't. There's a law of large numbers that allows a lot of them to randomly string together a series of market beating years but it's random chance. You saw that Financial Times article that had data proving that 99% of actively managed funds underperform. They have to, half of them do worse than the average and they add huge fees on top of their underlying expenses.

You act like investing with an advisor is not a gamble. That's nonsense. Everything in the market is risk, that's why there's a reward. Without risk there's no reward. The only thing an advisor provides your portfolio is a smooth talking tout who'll take a piece of your action regardless of whether you win or lose.

I've been in the stock market since 1988, and my market performance since inception is 10.9% annually as of the last day in August of this year. I don't discount or forget my losses.

And the vast majority of wealth doesn't come from what you earn. The vast majority of wealth comes from what you own.
  #60  
Old 09-10-2017, 07:51 AM
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edwardcoast, you are indeed completely wrong in pretty much everything that you said, and Bill Door has laid out the main points.

But I'll just add one thing. A financial planner can add value by analyzing your financial needs, understanding when you will need your money and what for; and advising how much you should allocate to stocks vs bonds taking into account your age, your personal tolerance for risk etc. What a financial planner can not do is beat the market.

Think about it. As others have said, it's a simple mathematical identity that the sum of the performance of all active managers (before fees) equals the performance of the entire market, i.e. the performance of a broad market index. When you subtract fees, only a small proportion of active managers beat the market, the vast majority underperform.

Where do you think the rare active managers who do consistently beat the market are working? They are certainly not advising retail clients like you, to manage your few hundred thousand to few million dollars. They are working at hedge funds, managing billions of dollars and earning millions in performance fees.

I agree with your point that very few individual investors who choose to manage their own portfolios actively can beat the market. But that's a straw man, none of us is advocating that. The point is that it's also a virtual certainty that any financial manager at a retail-oriented institution also cannot beat the market through doing any kind of active trading.

What we are advocating is passive low-cost indexed investing over any kind of active trading.
  #61  
Old 09-10-2017, 10:11 AM
jasg jasg is offline
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Bill Door and riemann nailed it but the importance of the following is critical.

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What we are advocating is passive low-cost indexed investing over any kind of active trading.
  #62  
Old 09-10-2017, 10:51 AM
Dewey Finn Dewey Finn is offline
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Originally Posted by edwardcoast View Post
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Originally Posted by Dewey Finn View Post
Except that the advisers who cost nothing usually work on commission. The best, least biased advice might come from an adviser whom you actually pay for the advice (i.e., a "fee only financial planner".
They have a fiduciary responsibility and above and beyond that, if they didn't make money for their clients they wouldn't be able to stay in business.
It’s interesting that you use the word fiduciary. Does your broker or financial adviser at your brokerage firm act as a fiduciary, particularly for your non-retirement accounts? Have you ever asked? If they say yes, have they said so in writing?
  #63  
Old 09-10-2017, 11:06 AM
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Itís interesting that you use the word fiduciary. Does your broker or financial adviser at your brokerage firm act as a fiduciary, particularly for your non-retirement accounts? Have you ever asked? If they say yes, have they said so in writing?
As of this past July, they all do.
  #64  
Old 09-10-2017, 11:09 AM
Dewey Finn Dewey Finn is offline
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Even when they're advising on your non-retirement account?
  #65  
Old 09-10-2017, 11:31 AM
Jonathan Chance Jonathan Chance is offline
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As of this past July, they all do.
Exactly right. The new regulations mean I am a fiduciary on all retirement plans that I manage. I can personally be on the hook for my behavior. This is causing some consternation as you can imagine.

Look, I am a financial advisor. But a great deal of my time is spent NOT picking stocks. At least half my time is spent being a life coach to my clients. At least half the 401ks I run into have been emptied to some extent by people who 'just need a little' or 'are in a tight spot'.

"Why do you need that RV?"
"Is that the best use of your money?"
"I know someone who can put together a will. You need one."

That sort of thing. It was a surprise, actually, how much of the job is just people needing reassurance and encouragement to move in the right direction.
  #66  
Old 09-10-2017, 11:32 AM
Munch Munch is offline
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Even when they're advising on your non-retirement account?
If by "non-retirement account" you mean any non-IRA or 401(k), then no - unless the purpose of that account is for retirement, even though it's not given any beneficial tax treatment. That's a pretty small subset of accounts out there, at least on an individual basis (as opposed to say, a corporate account). And if you have an advisor working for you on a non-retirement account, it's pretty hard to do that in a vacuum without your retirement accounts being at least part of an overall assessment - at which point they're back to being a fiduciary. But yes - your IAR should have documentation regarding their status, and their broker-dealer will very likely already have such language available.
  #67  
Old 09-10-2017, 12:49 PM
Corry El Corry El is offline
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Originally Posted by edwardcoast View Post
Investing is about having a goal. That's the point of it. Worrying about how well you beat an index this week or month doesn't mean anything. This ignores the risk tolerance for people too. Indexes aren't a genius move, they don't just go up, they go down and they go down hard too. A smart investment avoids those hard downturns.
Not to pile on but specifically address the sort of new aspect you've brought up. The axiom that all invested dollars put together get the same return as the index applies equally to trading in and out of the index as it does to buying just parts of the index.

For every dollar of increased return made by 'wisely stepping back from the market to avoid the hard downturns' somebody else has to lose a dollar of return being more heavily in the market during downturns, or less invested during up turns.

The axiom holds...that's why we can call it an axiom. If one retail stock adviser (and/or typically a much smarter professional market trader or hedge fund manager) is giving the right calls to increase/decrease stock allocation to boost return, another one has to be giving calls which reduce return, relative to that the index investor gets, before fees, and active client pays more fees.

So it comes back to the question how you pick the retail stock adviser who is better than average, probably needs to be significantly better than average. Obvious answer being you can't and are likely on average to pick an average market timing adviser, hence get worse net returns than an index investor, because you're paying more. The expected outcome is to pay something more for, *on average*, nothing more.

The two caveats being:
a) like I and others said, a professional adviser can add value for naive investors in areas such as set up, tax efficiency, and understanding how to choose a risk allocation *according to personal circumstances*, not according to what you or they think the market is going to do.
b) there are anomalies in the market relative to the conventional modern financial theory of the relation of risk and return. But as a general rule those things will only work for you if you can understand them yourself and implement them yourself using financial instruments retail investors can easily access. And generally on the basis of 'worked in the past, might or might not in the future'. Whereas if you have to pay somebody else to understand it and do it for you, as a rule: forget it. The downside of just ignoring techniques you don't fully understand and can do yourself is negligible. Whereas the downside of going ahead but it turns out you don't really understand and blow yourself up, is very non-negligible for most people.
  #68  
Old 09-10-2017, 12:49 PM
Dewey Finn Dewey Finn is offline
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Yes, brokers are required to act as fiduciaries, for retirement accounts only, under the fiduciary rule introduced by the Obama administration but which didn't take effect until this summer. This would seem to be obviously a good thing. So why did the financial industry fight this rule so fiercely? And why was the Trump administration so hostile to the rule? The answer is that, unlike what edwardcoast is arguing, many brokers and investment advisers don't put the client's interests first.

(I am obviously excepting Jonathan Chance here, as I trust that he, and a few of his colleagues, acted in their clients' best interests, without needing to be required to do so.)
  #69  
Old 09-10-2017, 12:58 PM
Jonathan Chance Jonathan Chance is offline
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You're exactly right about that. I work for a very large firm and our compliance is a bear to deal with. As they should be.

I've never been afraid of being a fiduciary because the secret to success - long term - is to do the best possible job for my clients. When I do that they bring me more clients.

I'd take issue with the 'Trump hates the fiduciary rule' argument, though. He had the ability to suspend or amend it early on and failed to do so.
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Old 09-10-2017, 01:03 PM
Dewey Finn Dewey Finn is offline
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So do you have any comment on what edwardcoast said upthread?
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Old 09-10-2017, 01:27 PM
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Originally Posted by Dewey Finn View Post

(I am obviously excepting Jonathan Chance here, as I trust that he, and a few of his colleagues, acted in their clients' best interests, without needing to be required to do so.)
Interesting that you use the term "best interest". Do you know what standard advisors were held to prior to the most recent DOL rule?
  #72  
Old 09-10-2017, 01:30 PM
Dewey Finn Dewey Finn is offline
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No idea.
  #73  
Old 09-10-2017, 02:37 PM
Jonathan Chance Jonathan Chance is offline
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He's baiting you. The old standard was called 'best interest'. It's a standard so amorphous that almost any justification would serve.
  #74  
Old 09-10-2017, 02:44 PM
Jonathan Chance Jonathan Chance is offline
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So do you have any comment on what edwardcoast said upthread?
I do believe that, for the right client, I add value. It's not necessarily return but financial health overall. Defining the plan, executing it and periodic meetings to ensure its flexibility is important.

The focus on return is both useful and weak. As I said, a lot of my job is coaching. Encouraging people to save, advising the on college planning and life insurance needs. I also spend some time running 401k plans for small to medium sized companies.

Can people do it themselves? Certainly. I encourage them to do so. But people can do their own taxes, too. But some people simply want the help and I can provide it.
  #75  
Old 09-10-2017, 02:57 PM
Dewey Finn Dewey Finn is offline
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Thanks. I've heard stories of stockbrokers "churning" their client's account, or promoting variable annuities (with very large commissions) or other complex securities to unsophisticated investors. Or just promoting funds with high fees. So I'm happier with my Vanguard index funds.
  #76  
Old 09-10-2017, 03:06 PM
Jonathan Chance Jonathan Chance is offline
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My firm has specific controls against such things. Churning will get your ass fired in a hurry. Selling an investment - other than recommended circumstances such as a firm going under - will result in a refund of any fees from the original sale. We do sell annuities but not in retirement accounts. I don't much like them.

That's actually one of my hallmarks for a dodgy advisor. Annuities pay VERY well. A lot of the independent advisors go with them as their first recommendation because of the money to be made. But I think that's a large, ugly red flag to watch for. While they can be right for a client it's a very small percentage.
  #77  
Old 09-10-2017, 03:17 PM
jasg jasg is offline
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Thanks. I've heard stories of stockbrokers "churning" their client's account, or promoting variable annuities (with very large commissions) or other complex securities to unsophisticated investors. Or just promoting funds with high fees. So I'm happier with my Vanguard index funds.
Something like this happened to my parents and I wish I had butted in (they never asked).

An uncle left them a few hundred thousand. The invested it with one of the smaller, well known advisors - recommended by someone at church. He put them in a diverse set of munis and a variable annuity that paid him a 7% commission. He then switched firms several times, each time he had them sell funds and buy the new ones "recommended by the new firm".

Lots of commissions for him, little benefit for them.
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  #78  
Old 09-10-2017, 05:33 PM
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Thanks. I've heard stories of stockbrokers "churning" their client's account, or promoting variable annuities (with very large commissions) or other complex securities to unsophisticated investors. Or just promoting funds with high fees. So I'm happier with my Vanguard index funds.
Why would anyone let someone trade in their account without knowing what they were doing? Maybe for a quarter but then you look at the list of things...I never understood this.
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Old 09-10-2017, 05:50 PM
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I'm going to split my retirement between Fidelity and Vanguard and compare them. My mom actually left a perfect bouquet of vanguard funds. She must've been reading a little bogle. And I can go in to Fidelity in town for face time. I can divide the smaller companies to reflect a 50-50 split in portfolios. I'll see which I like better.

Any tips as I go along with these two companies? What fees to watch. I don't think I would want to have a half million of my funds under management anyway. Most will not be I assume.
  #80  
Old 09-10-2017, 06:38 PM
jasg jasg is offline
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Watch the fees (ER/Expense Ratio) on the funds you buy. Keep them low (IMHO ~0.5% as an upper limit, ideally under 0.2%). Watch out for funds that pay 12-b fees - those "marketing and distribution costs" are commissions, plain and simple.
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Old 09-10-2017, 06:47 PM
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Watch the fees (ER/Expense Ratio) on the funds you buy. Keep them low (IMHO ~0.5% as an upper limit, ideally under 0.2%). Watch out for funds that pay 12-b fees - those "marketing and distribution costs" are commissions, plain and simple.
"Funds that pay 12-B fees" What does this mean? The fund pays fees to my broker that come out of me?
  #82  
Old 09-10-2017, 07:30 PM
Jonathan Chance Jonathan Chance is offline
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Yes, 12b1 fees are an annual fee fund companies pay to whichever brokerage handles your money. Usually they can run between 0.1-0.25%.

I avoid them for my clients by choosing index ETFs, most of which do not have such.
  #83  
Old 09-10-2017, 08:11 PM
Tired and Cranky Tired and Cranky is offline
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Quote:
Originally Posted by Dewey Finn
It’s interesting that you use the word fiduciary. Does your broker or financial adviser at your brokerage firm act as a fiduciary, particularly for your non-retirement accounts? Have you ever asked? If they say yes, have they said so in writing?
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Originally Posted by Munch View Post
As of this past July, they all do.
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Originally Posted by Dewey Finn View Post
Even when they're advising on your non-retirement account?
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Originally Posted by Jonathan Chance View Post
Exactly right. The new regulations mean I am a fiduciary on all retirement plans that I manage.
Not quite, Mr. Chance. The Department of Labor's fiduciary rule applies to ERISA plans and IRA accounts, not all accounts. Mr. Finn was asking about non-retirement accounts.
http://webapps.dol.gov/FederalRegist...px?DocId=28806 (pdf).
You do say the rule applies to all the retirement plans you manage, which is true for U.S. plans.

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Look, I am a financial advisor. But a great deal of my time is spent NOT picking stocks. At least half my time is spent being a life coach to my clients. At least half the 401ks I run into have been emptied to some extent by people who 'just need a little' or 'are in a tight spot'.

"Why do you need that RV?"
"Is that the best use of your money?"
"I know someone who can put together a will. You need one."

That sort of thing. It was a surprise, actually, how much of the job is just people needing reassurance and encouragement to move in the right direction.
This is exactly the type of advice that earns a good financial adviser his or her fee. Not everyone needs the hand holding but for those who do, the money paid may be worth it. I don't need the guidance but I'm glad it's available for people who do.

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Originally Posted by Jonathan Chance View Post
He's baiting you. The old standard was called 'best interest'. It's a standard so amorphous that almost any justification would serve.
If you are a registered representative of a broker-dealer, the standard before the DOL fiduciary rule was the "suitability" standard. Technically, it still applies. The SEC and FINRA have not changed their rules on suitability but most people agree that the DOL's fiduciary rule will prohibit some recommendations that are perfectly permissible under the suitability standard, but there aren't really any recommendations that will unsuitable but consistent with the fiduciary duty. As a result, if you comply with the DOL's fiduciary rule, you should not have to worry about suitability.

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Originally Posted by drad dog View Post
"Funds that pay 12-B fees" What does this mean? The fund pays fees to my broker that come out of me?
This is a reference to Advisers Act Rule 12b-1. In short, the rule allows a mutual fund to use its investors' money to pay broker-dealers for helping to "distribute" (sell) the mutual fund shares. This fee is generally between 0.25% and 1% per year. It is separate from and in addition to a mutual fund's management fee. In my opinion, it's just another expense that helps brokers make money but it is of no benefit to investors. Last I knew, no Vanguard funds charged 12b-1 fees. Some Fidelity funds do, so watch carefully.

Last edited by Tired and Cranky; 09-10-2017 at 08:13 PM. Reason: Clarification
  #84  
Old 09-10-2017, 10:02 PM
Jonathan Chance Jonathan Chance is offline
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Quote:
Originally Posted by Tired and Cranky View Post
Not quite, Mr. Chance. The Department of Labor's fiduciary rule applies to ERISA plans and IRA accounts, not all accounts. Mr. Finn was asking about non-retirement accounts.
http://webapps.dol.gov/FederalRegist...px?DocId=28806 (pdf).
You do say the rule applies to all the retirement plans you manage, which is true for U.S. plans.
I could have sworn that was what I said. It goes this way, folks, because the Department of Labor has regulatory authority over only retirement accounts. Non-qualified money - which is non-retirement money in industry-speak - is not governed under the new rules. At my firm annuities are allowed under non-qualified accounts but not under qualified accounts. Another investment that's off our approved list with the new regulatory system is Unit Investment Trusts.

Quote:
This is exactly the type of advice that earns a good financial adviser his or her fee. Not everyone needs the hand holding but for those who do, the money paid may be worth it. I don't need the guidance but I'm glad it's available for people who do.
I blush. But, as I said before, people could do their own taxes or change their own oil. I help those who don't want to do that, whether it's discipline, fear, time or whatever.

I am absolutely not kidding about that RV thing. Clients, never had any real money. He's retired from the service and doing maintenance, she's a SAHM (with no kids). Inherited $1.3MM. It's been a steady holding action of 'you want to retire? You can't spend all of this? $7000 for a massage chair? No. $75K for an RV? Why?' and helping them get set up in a new life. Busy time.

Quote:
If you are a registered representative of a broker-dealer, the standard before the DOL fiduciary rule was the "suitability" standard. Technically, it still applies. The SEC and FINRA have not changed their rules on suitability but most people agree that the DOL's fiduciary rule will prohibit some recommendations that are perfectly permissible under the suitability standard, but there aren't really any recommendations that will unsuitable but consistent with the fiduciary duty. As a result, if you comply with the DOL's fiduciary rule, you should not have to worry about suitability.
You say suitability, my firm says 'best interest'. There is a carve-out under the new rules for a 'best interest' exemption in which the client signs away the fiduciary responsibility. I've never done one, but it's there and allows for the client to go forward as if the old rules were still in place.

Quote:
This is a reference to Advisers Act Rule 12b-1. In short, the rule allows a mutual fund to use its investors' money to pay broker-dealers for helping to "distribute" (sell) the mutual fund shares. This fee is generally between 0.25% and 1% per year. It is separate from and in addition to a mutual fund's management fee. In my opinion, it's just another expense that helps brokers make money but it is of no benefit to investors. Last I knew, no Vanguard funds charged 12b-1 fees. Some Fidelity funds do, so watch carefully.
In my career, I have never seen a 12b-1 fee above 0.25%. I'd be astonished if there were many - though I'm sure there must be some. Looking it up that's the maximum allowed. I wouldn't put my clients into anything with that high a 12b-1, though.
  #85  
Old 09-10-2017, 10:36 PM
drad dog drad dog is offline
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Quote:
Originally Posted by Jonathan Chance View Post
Yes, 12b1 fees are an annual fee fund companies pay to whichever brokerage handles your money. Usually they can run between 0.1-0.25%.

I avoid them for my clients by choosing index ETFs, most of which do not have such.
How common are these fees among transactions? I hope I'm not being naive but say when you go in and start your account are you signing off on these fees?
  #86  
Old 09-11-2017, 09:34 AM
Jonathan Chance Jonathan Chance is offline
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Yes, you'll agree to everything when you sign. I don't see a way around it.

They're not transaction-based, 12b-1 fees are product-based. So when you buy a mutual fund it'll be included in the prospectus.

To avoid them, you can take the riskier route of buying individual stocks or just buy ETFs. Check the ETF literature carefully, however, some behave like mutual funds and may include a 12b-1.
  #87  
Old 09-11-2017, 09:52 AM
Tired and Cranky Tired and Cranky is offline
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Correction to my cite above -- I meant to refer to Investment Company Act Rule 12b-1. (There is no Advisers Act Rule 12b-1.)

Quote:
Originally Posted by Jonathan Chance View Post
I could have sworn that was what I said.

[Snip]

You say suitability, my firm says 'best interest'. There is a carve-out under the new rules for a 'best interest' exemption in which the client signs away the fiduciary responsibility. I've never done one, but it's there and allows for the client to go forward as if the old rules were still in place.
On the first point, it is what you said, and it was correct, but it was inappposite to Dewey Finn's question. He was asking about non-retirement account recommendations by a broker representative. Your answer seemingly applied to retirement accounts or to accounts advised by someone other than a broker-dealer representative.

I'm not sure what your firm is describing as "best interest." Generally people refer to fiduciary duties as requiring a person to act in the best interests of their clients. Broker-dealers are not subject to a fiduciary standard in all of their transactions. There is a lot of ongoing discussion of whether they should be.

Perhaps you are subject to a fiduciary standard in all your securities business because you are also an investment adviser representative and are acting in that capacity with your clients. If so, you would owe your clients fiduciary duties and would be expected to act in their "best interests." Alternatively, if you advise only on 401(k) plans and IRA accounts, the DOL fiduciary rule would apply. It's also possible, though unlikely, that your firm essentially imposed this best interest standard on itself. If your firm tells its clients it will act in their best interests, it must do so, even if it would not otherwise be required.

A simplified outline of the varying conduct standards that apply to various financial market professionals looks something like this:

(1) registered representatives of broker-dealers: suitability, under FINRA rules and SEC anti-fraud rules.

(2) representatives of federally-registered investment advisers: fiduciary duties under the federal securities laws, as interpreted by the SEC.

(3) essentially anyone making recommendations about retirement plans (e.g., 401(k) plans and IRA accounts): fiduciary duties, as interpreted by the Department of Labor.

(4) representatives of state-registered investment advisers: duties imposed by state law, which will generally be fiduciary duties as interpreted by the states.

(5) insurance salesmen: duties imposed by state law, which I hate to say, are generally something like "buyer beware."

(6) bank representatives: It's really complicated because they may be acting as:
(a) broker-dealer representatives: see (1) above (They should make it obvious when they are acting a broker-dealer representatives by using a different card and taking other steps. Customers don't actually understand the distinction but the bank and the regulators do, so that's good enough in the regulators' opinions.);

(b) investment adviser representatives: see (2) above;

(c) trustees: fiduciary duties as interpreted by banking regulators and state trust law;

(d) securities dealers relying on the dealer registration exemption for banks: ? (I'm not sure, but federal anti-fraud provisions apply, which leads me to believe that the SEC's suitability standard should apply, and there may be additional bank regulations that apply. FINRA rules won't apply. I could some research if anyone really cares.)

(e) securities brokers relying on the broker exemption for banks: See (6)(d) immediately above;

(f) regular bank representatives doing things like opening bank accounts and not the things above: bank regulations.
Sometimes, more than one standard may apply. As I noted, a broker-dealer representative advising on an IRA account is subject to both the suitability rule and the DOL's fiduciary standard. The same is true of an insurance agent selling variable annuities, which are subject to both state insurance laws and federal securities laws.

Different standards might also apply to the same person who has more than one role in the financial industry. These people are sometimes referred to as "dual-hatted" because they can change roles (and the duties they owe to customers) just by changing who they tell you they work for or what they do ("changing hats"). It's like a superpower. A common example is a person who is a registered representative of a broker-dealer who is also an insurance salesman. Depending on which metaphorical hat the person is wearing when you do business with him or her, the responsibilities he or she owes you could be very different.

Quote:
Originally Posted by drad dog View Post
How common are these fees among transactions? I hope I'm not being naive but say when you go in and start your account are you signing off on these fees?
If a mutual fund charges 12b-1 fees, all the shareholders in that fund pay the fee. It is disclosed in the mutual fund's prospectus. The way you pay the fee is that your performance in the fund is continuously reduced by the amount of the 12b-1 fee. It's not a fee assessed at the time of the transaction and it does not show up as any sort of itemized fee disclosure just about your investment.

A mutual fund's expense ratio includes its management fee and its 12b-1 fee (if any). It doesn't matter how frequent 12b-1 fees are, you can avoid them by reading your disclosure documents and not buying funds that have unacceptably high expense ratios.
  #88  
Old 09-11-2017, 10:00 AM
Tired and Cranky Tired and Cranky is offline
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Quote:
Originally Posted by Jonathan Chance View Post
Yes, you'll agree to everything when you sign. I don't see a way around it.

They're not transaction-based, 12b-1 fees are product-based. So when you buy a mutual fund it'll be included in the prospectus.

To avoid them, you can take the riskier route of buying individual stocks or just buy ETFs. Check the ETF literature carefully, however, some behave like mutual funds and may include a 12b-1.
You can avoid 12b-1 fees even buying mutual funds. There are plenty of funds that don't charge 12b-1 fees. Reading the prospectus is the best advice.

I'm also not aware of any ETFs that charge 12b-1 fees. For quirky reasons I don't want to go into, many ETFs have authorized 12b-1 fees so their prospectuses discuss potential 12b-1 fees but I understand that these ETFs are not actually charging 12b-1 fees or paying them to broker-dealers. The reasons for this weird state of affairs are hard to explain. Jonathan Chance, if there are actually ETFs that are charging 12b-1 fees, I would sincerely appreciate your pointing one or two examples out to me. Thanks.
  #89  
Old 09-11-2017, 11:34 AM
drad dog drad dog is offline
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Quote:
Originally Posted by Tired and Cranky View Post
Correction to my cite above -- I meant to refer to Investment Company Act Rule 12b-1. (There is no Advisers Act Rule 12b-1.)



On the first point, it is what you said, and it was correct, but it was inappposite to Dewey Finn's question. He was asking about non-retirement account recommendations by a broker representative. Your answer seemingly applied to retirement accounts or to accounts advised by someone other than a broker-dealer representative.

I'm not sure what your firm is describing as "best interest." Generally people refer to fiduciary duties as requiring a person to act in the best interests of their clients. Broker-dealers are not subject to a fiduciary standard in all of their transactions. There is a lot of ongoing discussion of whether they should be.

Perhaps you are subject to a fiduciary standard in all your securities business because you are also an investment adviser representative and are acting in that capacity with your clients. If so, you would owe your clients fiduciary duties and would be expected to act in their "best interests." Alternatively, if you advise only on 401(k) plans and IRA accounts, the DOL fiduciary rule would apply. It's also possible, though unlikely, that your firm essentially imposed this best interest standard on itself. If your firm tells its clients it will act in their best interests, it must do so, even if it would not otherwise be required.

A simplified outline of the varying conduct standards that apply to various financial market professionals looks something like this:

(1) registered representatives of broker-dealers: suitability, under FINRA rules and SEC anti-fraud rules.

(2) representatives of federally-registered investment advisers: fiduciary duties under the federal securities laws, as interpreted by the SEC.

(3) essentially anyone making recommendations about retirement plans (e.g., 401(k) plans and IRA accounts): fiduciary duties, as interpreted by the Department of Labor.

(4) representatives of state-registered investment advisers: duties imposed by state law, which will generally be fiduciary duties as interpreted by the states.

(5) insurance salesmen: duties imposed by state law, which I hate to say, are generally something like "buyer beware."

(6) bank representatives: It's really complicated because they may be acting as:
(a) broker-dealer representatives: see (1) above (They should make it obvious when they are acting a broker-dealer representatives by using a different card and taking other steps. Customers don't actually understand the distinction but the bank and the regulators do, so that's good enough in the regulators' opinions.);

(b) investment adviser representatives: see (2) above;

(c) trustees: fiduciary duties as interpreted by banking regulators and state trust law;

(d) securities dealers relying on the dealer registration exemption for banks: ? (I'm not sure, but federal anti-fraud provisions apply, which leads me to believe that the SEC's suitability standard should apply, and there may be additional bank regulations that apply. FINRA rules won't apply. I could some research if anyone really cares.)

(e) securities brokers relying on the broker exemption for banks: See (6)(d) immediately above;

(f) regular bank representatives doing things like opening bank accounts and not the things above: bank regulations.
Sometimes, more than one standard may apply. As I noted, a broker-dealer representative advising on an IRA account is subject to both the suitability rule and the DOL's fiduciary standard. The same is true of an insurance agent selling variable annuities, which are subject to both state insurance laws and federal securities laws.

Different standards might also apply to the same person who has more than one role in the financial industry. These people are sometimes referred to as "dual-hatted" because they can change roles (and the duties they owe to customers) just by changing who they tell you they work for or what they do ("changing hats"). It's like a superpower. A common example is a person who is a registered representative of a broker-dealer who is also an insurance salesman. Depending on which metaphorical hat the person is wearing when you do business with him or her, the responsibilities he or she owes you could be very different.



If a mutual fund charges 12b-1 fees, all the shareholders in that fund pay the fee. It is disclosed in the mutual fund's prospectus. The way you pay the fee is that your performance in the fund is continuously reduced by the amount of the 12b-1 fee. It's not a fee assessed at the time of the transaction and it does not show up as any sort of itemized fee disclosure just about your investment.

A mutual fund's expense ratio includes its management fee and its 12b-1 fee (if any). It doesn't matter how frequent 12b-1 fees are, you can avoid them by reading your disclosure documents and not buying funds that have unacceptably high expense ratios.
Disclosure documents of a particular fund, or for the whole firm you are at?

If it's the fund, I'm getting that in deciding whether to invest one should look for 12b-1 activity, but also to check the expense ratio. Anything else to take into account?
  #90  
Old 09-11-2017, 01:22 PM
Tired and Cranky Tired and Cranky is offline
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Quote:
Originally Posted by drad dog View Post
Disclosure documents of a particular fund, or for the whole firm you are at?

If it's the fund, I'm getting that in deciding whether to invest one should look for 12b-1 activity, but also to check the expense ratio. Anything else to take into account?
To learn about 12b-1 fees and management fees, you want to review the disclosure documents, i.e., the prospectus, for each of the mutual funds you invest in.

There is a lot to understand and consider when picking your own investments. Factors to consider include:
* Your Time horizon (When do you plan to take the money?)
* Risk (How much of a decline in the value of the assets can you take, and is it worth taking that much risk in the hopes of achieving extra gains?)
*Cash flow (You inherited an IRA. I believe you will need, at a minimum, to make substantially equal periodic payments from the account, so you will probably want a fund that generates some income to help make these payments.)
* Diversification (Which asset classes should you invest in? Generally, combining multiple asset classes, such as U.S. stocks, foreign stocks, government bonds, high-yield bonds, real estate, and commodities in the appropriate proportions can help you to reduce your risk, or to achieve better expected returns for the same amount of risk.)
* Management strategy (Index funds or actively-managed? Value or growth stocks? market timing? Leverage? I use index funds and I don't use leverage. Your ability to use leverage in an IRA is limited.)

The truth is, I'm sure there are some great guides to investing that will help you if you want to do this on your own or to help you understand your adviser's recommendations if you choose to use one.

Many years ago, the first I read was "The Only Investment Guide You'll Ever Need," and I've read many more advanced books in the years since. I don't know how current that book is or whether better guides have come out since. Good luck.
  #91  
Old 09-11-2017, 01:43 PM
Riemann Riemann is offline
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SMBC today: long term saving.

http://www.smbc-comics.com/comic/longterm-saving
  #92  
Old 09-26-2017, 10:30 AM
jasg jasg is offline
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This weekend, Freakonomics Radio had a very good broadcast that is germane to this thread. Very much worth a listen. (Link is to transcript and to a podcast link)
  #93  
Old 09-26-2017, 11:46 AM
drad dog drad dog is offline
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Thanks. Sounds very interesting.
  #94  
Old 09-26-2017, 02:13 PM
friedo friedo is offline
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Originally Posted by jasg View Post
This weekend, Freakonomics Radio had a very good broadcast that is germane to this thread. Very much worth a listen. (Link is to transcript and to a podcast link)
OMG. Jack Bogle and The Mooch on one podcast? Amazeballs.
  #95  
Old 09-26-2017, 02:45 PM
jasg jasg is offline
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Originally Posted by friedo View Post
OMG. Jack Bogle and The Mooch on one podcast? Amazeballs.
and The Mooch presented a better case for index funds!
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  #96  
Old 09-27-2017, 10:57 AM
JustinC JustinC is offline
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Thanks for the great link to the Freakonomics podcast, jasg.

I have a link to a post on Seeking Alpha which may be of interest; Dalbar 2017: Investors Suck At Investing & Tips For Advisors

In addition to that, and as was mentioned in the podcast, managed funds often close. If this happens deep into a bear market and you're not aware of it (because checking your investments makes you physically sick), you could miss the chance to reinvest the proceeds and ride the early stages of the next bull.

A last couple of points: I'm not aware of the tax implications but I don't recall anyone mentioning how fast to buy the new funds. Do you put it all in at once or dollar-cost average? And are the dividends automatically reinvested (which is what I do) or do you collect them to make small side bets on individual stocks?

Everyone has their own level of risk aversion, so what might be the best choices for return may not be the best choices for you. If I were to come into a six-figure windfall I'd be worried I'd take more risks with it, so would try to do the opposite and be more cautious; stick it in a low-cost index tracker/s and forget about it.
  #97  
Old 09-27-2017, 10:59 AM
Dewey Finn Dewey Finn is offline
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I had a six-figure amount from a 401(k) I wanted to roll over into an existing Rollover IRA. I chose to move about 1/12 each month in. But this was during a rising market, and I might have been better off moving it all at once.
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