The one time I consulted with an advisor was when I transitioned from the accumulation phase to the spending phase of my portfolio. I talked about it in this thread. I don’t think I need an ongoing relationship with an advisor, although now that I’ve consolidated my 401k into an IRA at Vanguard I have access to one for free.
I re-balance quarterly, although that’s really overkill and annually would work just as well, but with free trades I figure, why not? My particular portfolio doesn’t take much tweaking, I can just take my hands off the yoke and glide, but I’ve been steering it for so long I wouldn’t know what to do with myself if I didn’t keep track.
Your point about the funds which change over time is correct. You can get a target date fund, 2020, 2025, out through 2040, maybe even later. My issue with these is that they’re based on an assumed risk tolerance that might not be applicable to you.
The amount of risk you can tolerate is based on your need for the money. If your needs are small, and you have secure money coming in from other sources, you can take a larger stock allocation than the typical investor. If you need every cent coming in from your investments and can not tolerate a loss of principle you can’t afford to be in stocks. A target date fund doesn’t take this into account.
I must have been unclear. I don’t pay an AUM fee at Vanguard. It’s practically against my religion. You’d asked what the rates commonly were and I told you what I knew. The only advice I ever paid for was a one-time payment to a fee-only Certified Financial Planner.
Yes, a target date fund is designed for people who plan to retire in that year, so, for example, the Vanguard 2020 fund is 55% stocks and 45% bonds. The stocks and bonds are both divided into domestic and international and there is a little dab of TIPS in there but by and large a 55%/45% split. Because I have other money coming in, and have investments outside the IRA, I’m comfortable with a higher percentage of stocks. I’m closer to 70/30. I’m 40% domestic stocks, 20% international stocks, 10% REIT stocks, and 30% bonds.
I see where the confusion is. Vanguard doesn’t charge a 0.3% fee to everyone, only people who sign up to partner with an advisor.
You can buy Vanguard funds with no trading fees, and the underlying fees are clearly defined and low. My underlying fees range from 0.05% to 0.12%. If you have enough invested you can get the Admiral shares which have lower expense ratios.
The total stock market Admiral shares have an expense ratio of 0.04% while the lower minimum investment Investor shares cost 0.15%. The minimums for Admiral shares aren’t very high, $10,000 on the ones I’m in.
I like Vanguard but my reasons are pretty in the weeds and require some pretty good understanding of how the industry is structured and what makes Vanguard different. The short story is that Fidelity Management and Research is a for-profit company that wants to make as much money as possible. It is designed to extract as much money from investors as it can. In some cases, that means trying to make good returns for investors (great!). In other cases, it means charging as much in fees as competition will let them get away with and selling as many products as they can to their funds’ investors regardless of whether its worth it to their investors (bad!). I don’t own shares in Fidelity Management and Research, so I don’t benefit when they make money off me.
The Vanguard Group is a mutual company, owned by the shareholders in the mutual funds that it advises. As a result, it doesn’t have an incentive to extract as much profit from its customers as it can. It reduces the potential conflicts of interest with its clients and it increases my faith in their actions. They do things like automatically move investors to lower cost share classes as soon as those investors are eligible. I feel more comfortable trusting Vanguard than I would a for-profit company. I don’t have to think as deeply about whether their changes to funds or policies are designed to benefit them or me. They almost always make changes to benefit me.
That said, if you are vigilant and watch your costs, you can also do well investing at Fidelity.
Well if the relative status of these companies as “for profit” or “mutual” makes a difference it would be in the fees. But fidelity has no fees for money not under management. And I think you can move money at will. I haven’t started doing this yet so I can’t see what the diff is. But the numbers you get from these two companies are not out of line with each other competitively.
Vanguard doesn’t charge fees for money not under management either. You can also move your Vanguard money at will - they don’t generally charge redemption fees. Fidelity and Vanguard are basically the same that way.
I happen to invest in index mutual funds. Fidelity generally has slightly cheaper index fund fees by 0.005 to 0.01% per year. Over 30 years of investing, this difference would theoretically amount to less than 0.3% of assets. Interestingly, over the last five and ten years, Vanguard Total Stock Market has had better performance than Fidelity’s comparable fund notwithstanding the Vanguard’s higher fees. I’m not sure if that’s because Vanguard’s fees used to be lower (or Fidelity’s higher) or if it’s because Vanguard just runs its funds better.
If you look at the fees Fidelity and Vanguard investors actually pay, Fidelity probably loses because more of their investors are in higher-cost actively-managed funds. I believe Fidelity subtly or otherwise steers investors into those more-profitable funds. Vanguard doesn’t have the same incentive to do that. I also know that Vanguard automatically moves investors into lower-cost share classes as they become eligible for them. I’m not sure if Fidelity does the same thing.
I perceive that difference in incentives in everything the two companies do. If Fidelity offers a profitable new advisory service, they have an incentive to recommend it to you even if it doesn’t benefit you. If certain actively-managed sector funds did great last quarter, they have an incentive to feature those funds in their mailings as a form of promotion. Do Fidelity’s execution venues and dealers really offer the offer the best execution, or do they give benefits, like free research, that go into Fidelity’s pocket? I don’t know. That might explain part of the difference between Fidelity and Vanguard’s historical performance. If I read enough disclosures and those disclosures are clear and good, I can probably find out if Fidelity benefits from its clients’ trading in ways that hurt the funds it manages. With Vanguard, I’m simply less concerned because their incentives are not as opposed to my interests. I simply trust Vanguard more because of their corporate structure.
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).
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.
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.
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.
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.
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.
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.
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.
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.