I need help please

I dont have much going on and I'm 22 years old I know I need financial help but is it in my best interest to hire a financial advisor? I want to be rich so I want to start saving and investing now but I don't have a clue as to how to get started. Thanks for any advice

You have 3 options:

1) Invest blindly (hey, it worked for a chimp with some darts for quite awhile)
2) Do your own research and invest using that knowledge
3) Hire a financial adviser

Option 1 is almost always a bad choice, unless you have a chimp with some darts available.

nette, in the interest of full disclosure ... i am in the financial services industry. so, while my advice may be somewhat biased ... you cannot work with me specifically. and so even though biased, my advice to you cannot be construed as self-serving as i have no personal interest in your situation.

you really have three choices insofar as making smart decisions about money. lets look at each.

1. educate yourself, on your own. personally, while i think you need to be educated, doing it on your own is usually either ineffective or takes a phenomenal period of time. i have several people who work for me that have degrees in finance. their "knowledge" of financial planning is both limited and warped (on the whole). they know esoteric financial topics that in the end have very little to do with living a successful life financially ... yet we can all agree they have put more study into finances than 99% of the population. and even so, they are wholly unprepared for making smart decisions with their money.

2. hire an advisor. your advisor should bring options and education to the table for you. an advisor is just that ... an advisor. they may think they know what is best for you but they should provide you the opportunity to learn competing strategies and products and educate you on their pro's and con's sufficiently that you can make a wise and informed decision. as for costs, commission based advisors are usually the "cheapest" form of support you can get. people may disagree with this but when you run the numbers i am confident it is true. the drawback to this is that some commission based advisors may tend to be newer to the business and not have PhD level knowledge on financial matters. but for someone in your situation, they should be in a good position to help (cause your situation doesnt sound complicated).

3. poll a bunch of people on the internet and on forums like these. sure, they are anonymous and you dont know if they know what they are talking about, but they are always too happy to tell you what to do with your money.

good luck ... and dont let my comments vapor-lock you! you are ready to start taking action so do so! oh how i wish i had started my financial journey when i was 22.

1MO,

Are the terms "advisor" and "adviser" interchangeable for those who are in that field? I used to strictly use the term "advisor," but recently a financial magazine (I cannot remember which, to be honest) gave the list of "The Top 100 Financial Advisers" and used that term exclusively.

Thanks!

I'm not a botanist, but I think the terms are interchangeable, but it seems that the SEC exclusively uses "adviser", while most of the rest of the world uses "advisor".

Thanks for clearing that up.

I'm not a botanist either, as all my plants seem to die. A linguist might know the difference. An etymologist can tell you that the words are interchangeable, derived rom the Old French "aviser".

To the OP:

It's not that difficult to get started. You sound determined, so I suggest the first thing you do is start parking money in a savings account. While you're parking money there, read the magazine that sponsors this board, and start getting some ideas. When you feel the ideas you're getting jive with you and your ideas, take your savings and plunge it into a vehicle you're interested in (hopefully, within an IRA or ROTH IRA). Learn about loads, no-loads, growth, interest and dividends.

If you find your savings account growing, but your confusion growing as well, or if you find yourself paralyzed and unable to act, that's when you should consult a financial adviser.

In short, I think a lot of people can at least get started on their own, if they are willing to put a little effort into it. Meanwhile, the growing savings account will get you in the habit of setting aside money, and will help you start your emergency account as well.

dingo, just to chime in that blank is right (aint he always). unless there is some dictionary of financial terms of which i am unawares, "advisor" and "adviser" are synonymous.

i obviously stated largely in contradiction with puck. i do not feel this is something that someone can do effectively and certainly not in short order.

forgive me for referencing my own post but lets use the professional student of finance. if we extrapolate that you do all the work required to understand financial matters as a college student does in order to graduate, we have about three years of specific and ancillary study. this is full time (minus partying). it doesnt include the obligatory cultural studies and basketweaving courses taken in the freshman year.

ok, so lets say you at least give your study the "ol' college try". at the end of three years you now take the money from your savings account you parked it in whilst you learned. now you do something with it.

you have lost three years of growth. i submit that the cost you would pay to an advisor of any ilk (as long as it is a competent advisor) would be less than that three years of growth.

if you went with the advisor you get to start almost immediately. and during the three years you could continue to study the subject matter while your money is working.

professionals are CHEAP and EFFECTIVE and TAX DEDUCTIBLE.

ok, so lets say you at least give your study the "ol' college try". at the end of three years you now take the money from your savings account you parked it in whilst you learned. now you do something with it.

you have lost three years of growth.

The OP is 22 years old. He or she can afford to lose three years while learning about investing. It's not like he or she is 40, and needs to act quickly.

I will concede that a financial adviser at this stage of game is certainly a cheap alternative. But as many other posts on this board have shown, SOME financial advisers steer the uneducated and uninitiated into financial vehicles which are not proper for them to be in (for their income, their life stage, whatever). If the OP can't even choose a basic financial vehicle for herself (for example, there's no shame in starting out in a retirement-targeted fund at a no-load place like Vanguard), she doesn't have the skills necessary to adequately choose a financial adviser either.

You pronounce and expound on financial advisers as if they are the cure-all. And a good one is. But a bad one is a nightmare of epic proportions, and if the number of posts on this board about bad advisers is any indication, it's a greater fear than losing three years' worth of growth.

If the OP chooses to follow your advice, I have no problem with that -- except that she should educate herself on how to choose a good financial adviser before talking to one.

i agree with your post in that a poor (or worse yet: crooked) financial advisor is worse than the ebola virus. but, at his age, waiting three years is potentially HORRENDOUS. that said, crooked advisors are kinda like child molesters. there really aint all that many of them but the one caught by the police gets LOTS of attention and makes it "appear" that they are behind every corner ... even though we all know intellectually that is not the case.

my example:

invest (today) 2007: 333.33 per month into a Roth IRA making 12% yearly (below market returns (but not by much) until age 62.

have (at age 62): $3,264,301

invest (in three years) 2010: same amount, same return, until same age.

have: $2,313,310

(i only compounded once per year which makes both numbers lower than actual).
(in reality at OP's age i would hope for higher returns now and designe a portfolio for lower returns later. averaging 12% is pretty realistic (in my opinion) but the spread would clearly still be phenomenal no matter how you slice the equation.

start now and have an extra 950 THOUSAND DOLLARS all because you started a measely three years early. one of the principal roles of an advisor is to teach and to motivate clients to do what they want to do anyway. DIY'ers have major motivational and proceedural problems (up DALBAR). so on this account perhaps the OP paid an advisor $200 this year.

$200 or $950K???

I'm going to agree with Puck. Educate yourself. Go to the library, find books on investing and pick out a few that you find readable. Just avoid gurus who use "always" and "never" a lot. You can't evaluate the course of action someone is advising you to take unless you have a basic knowledge of financial products. If you're math-friendly, learn how to do compound interest calculations. It will help you answer questions like, "If inflation is 3% per year and I save $5,000 this year and increase that by 5% per year and my investment returns are 8% per year, what will I have 20 years from now in 2007 dollars?" "What's the result if I make only 6% on investments?" "If my mortgage rate is 4% now and it adjusts to 8%, what does that do to the payments?" (Believe me, most of the people in ARMs would not have been there if they knew how to to this.)

I also enjoy financial podcasts- there are many good ones, including Kiplinger's.

Saving early, though, is the key. It is very hard to make up for a late start. A few years of relatively low returns till you get comfortable (and accumulate enough money that you can be aggressive with some of it) shouldn't slow you down too much. Save early, save often.

One of my clients was telling me that she went to a mechanic who charged her for fixing something that she swears was not broken. Also there was a show on TV about mechanics who, rather than fix the fan belts, just spray paint them black and charge someone for a new one. Anyone else have horror stories from your mechanic? Recently I had my tires rotated and all of a sudden I have a flat tire. Coincidence? Maybe, but I don't like a coincidence like that. Perhaps they wanted me to come back and purchase tires from them so they punched a hole in it. I don't know; I can't prove it, but coupled with impersonal service, I do not intend on going back.

My point is this, when I need something done on my car, I am going to pay someone who has spent time learning mechanics and let him fix it. Yes, there are bad mechanics out there who are out to get you and I could take a few years and learn how to fix my car's ailments on my own, but I won't. Why? Because my time is better served in learning more about my career (which is finance). You, nette, COULD be spending time learning all about investments, mutual funds, stocks, calls and puts, life insurance, tax consequences of various actions, present value-future value computations, saving for children's educations in the most tax-effective manner while accumulating monies for your retirement, OR you could just hire a financial advisor that has spent years educating himself and has the expertise and the experience to do what a 22 year old needs done.

One more thing, let's be totally honest, do you have lots of assets or are you just starting out? More than likely you just want to start saving and investing; the chances of you getting with an advisor that is going to take you for everything you've got (which probably isn't a lot) are slim to none. Basically he will probably put you in a mutual fund and get you started on a track. In a few years when you have more assets, then reassess and if you need someone else, good, if not, even better.

In conclusion, if I were you I would do this: speak with a financial advisor. 1MO is correct, commission based advisors are your best bet. Even talk to a few of them and see what they recommend; you don't have to invest with the first person you meet (unless you want to). Most likely he will steer you towards something simple.

Let us know what you ultimately do,

-Joe

I’ll have to go with Puck on this one as well. First of all it doesn’t take the kind of education and learning that 1MO and josephdgroff are referring to to do this yourself. If you choose to pursue that kind of education than so much the better but it’s not needed. 1MO states that he has a couple of employees who are well schooled but have a long ways to go in their financial education. He only hires the cream of the crop. What kind of advisor do you think you will likely be paired with in your position? Will you be able to evaluate if he is doing a good job for you?, and if you can how long will it take for you to figure that out? What is most important in the accumulation phase particularly when you are only 22 is discipline. It matters far more that you learn to save and invest on a consistent basis than where you actually invest the funds. It’s often said that the strength of an advisor is that they will help you stay the course. If you wish to pay someone to help you with that than that is fine, but discipline and delayed gratification ultimately will have to come from within.

I made some mistakes when I first started managing my money 20 years ago. Those mistakes have made me a far better manager of my money today when the amounts are more significant. For me the important thing is the lessons were my own not an advisors. And make no mistake about it, when you are actually making the moves yourself you will learn better than if you had someone else doing it for you.

1MO, I don’t think anyone is actually suggesting the poster wait three years to start investing and/or saving. The point is if the poster gets sub par returns while he learns in the first three years then that it will not be that big a deal. So instead of comparing 333.33 a month for the first 3 years at 12% maybe he only gets 8%, but not nothing. The biggest factor in the first 3 years is the actual contribution no the rate of return. You don’t need an advisor to just stick your money in a 2050-retirement fund while you figure things out.

Joe, If the only thing your car needed was an air filter would you take it to a mechanic? My mechanic whom I know and trust gets $90 and hour and the minimum charge is a quarter hour. He also marks up his parts 30 to 50 percent over his cost. So I can replace my air filter in 2 minutes for $10 or I can pay him $37.50( $22.50 labor, $15.00 parts) for the same thing. I’m more than happy to pay him the $90 an hour for the stuff I can’t handle but I’ll take care of the air filters myself.

(from the fence)

Nette84 is going to have to make a big decision here. Luckily, he/she has made positive move forward and has not only decided to plan for retirement, but has also put some thought into it.

That being said, at 22 and just starting, paying $150-250 per hour for an advisor without really even getting started is more of a step sideways than going in the right/wrong direction.

Get into your company's 401(k) if they offer a match and use any financial tools they provide to get started in the right direction and get your first feel for the markets in general. Two words, index funds. Set aside an emergency savings and IRA contributions(remember, you have until April 15th, 2008 to make contributions toward your 2005 IRA (Roth and/or traditional)).

If you feel too overwhelmed after a few months (not by the markets, but by the entire investing concept), then by all means, find an expert.

You have the rest of your life to make the right (or wrong) decisions. Make them count for you.

P.S.: Wanting to get rich is a good goal, but shoot toward a comfortable retirement first, then tackle the bigger items afterward.

Jim's Money,

No, you're correct, I do not hire my mechanic to change the oil filter and would not for the reasons you mentioned. However, with that said, I'm not recommending he find an advisor to tell him to stick money in a savings account.

I also said the same thing you said; now isn't a concern for him; the assets he has probably aren't worth losing sleep on whether or not the advisor is doing a bad job. Placing him in a mutual fund is simply going to get him started. This is why I said that after a few years, when he has some assets, review the situation and see whether the advisor is doing a good job for him. If not, find another.

Thank you for your response,

-Joe

In conclusion, if I were you I would do this: speak with a financial advisor. 1MO is correct, commission based advisors are your best bet. Even talk to a few of them and see what they recommend; you don't have to invest with the first person you meet (unless you want to). Most likely he will steer you towards something simple.

-Joe
You're right, Joe. Everything in my above post was aimed towards fee-only advisors, but a commission-based advisor would be a good choice for nette84, if she/he was hesitant to go solo.

crooked advisors are kinda like child molesters. there really aint all that many of them but the one caught by the police gets LOTS of attention and makes it "appear" that they are behind every corner ... even though we all know intellectually that is not the case.

(Veering off the subject) I don't know about that. It seems like every one of these weekly stings round up 20-50 of these scumbags in Anytown, U.S.A., whether or not they drive 100-plus miles to get to their destination, or not. I don't know the number (and don't want to), but it is close enough to an epidemic to me, considering I have a young daughter and the fact that you can log onto public criminal records in your area and find dozens of offenders in a few square miles in most populated areas (granted, some of these are statutory offences and not young children).

I've been wondering the same thing, whether or not I should seek the advice of an advisor. You all mention re-assessing your situation and meeting with an advisor after accumulating more assets. My question is, how much is considered 'more assets', or at least enough to justify hiring an advisor?

I currently have a paltry $2,000 to play around with - (I imagine that must seem a palty amount in the financial industry).

My friend is trying to convince me to put a portion of that into a Roth IRA and a Legg Mason Aggressive Growth Fund (SHRAX). Good ol' Richie Freeman charges quite a hefty front-load fee for the honor too - to the tune of 5.7%.

There are so many choices, it's easy to feel overwhelmed even when I -know- the most important thing right now is just to get started.

"Overwhelmed" could very well be the indicator that you need to see an advisor.

I personally don't see the need in an advisor. I manage my money on my own (with a lot of help from the basic finance websites and Fidelity's website), and when I chat with friends who are successful brokers, I don't get the impression they have substantially more tricks up their sleeves than I do, especially those that would meet the needs of a 25 year old. So I vote against the advisor route.

But then, I'm not considering investing blinding in a 5.7% front-loaded fund, either. :)

"Overwhelmed" can also be an indicator that she's feeling stressed to have it all set right now, hurry up and set it, get it going, or for god's sake you're going to lose sooo much money!

There's no harm in parking her $2k (halfway to the cap for the year in an IRA!) in a targeted retirement fund at Vanguard or T-Rowe price. Or in a fund that mimics the performance of the S&P 500 (like the Vanguard 500). Those are fairly "safe" ventures. And the sum is small enough that there's no use in even worrying about diversifying just yet -- and she can take time to educate herself as her nest egg grows.

Cassie -- I'm not a shill for Vanguard -- it's just where I have my money, and so I know a tiny bit more about their offerings than what other companies offer. But many companies, like Fidelity and T-Rowe, have similar offerings. And in the case of Fidelity and Vanguard especially, they have so many offerings that later, when you DO decide to diversity, you can probably choose from their family of funds, rather than go outside.

Whichever way, posts # 2 & #3 (above) provide 4 routes to go, and this thread has shown an excellent example of 1MO's 3rd option (post #3).

dingo; that is high praise, partner (texas talk). i thank ya for it.

in reading to and fro i am also struck by the fact that many say "invest this and invest that" while knowing virtually NOTHING of the poster.

this = index fund
that = target retirement fund

mein gott people, we ALL agree on education. why in the world you assume that a book written by James A Podunk or a website of some heap-big mutual fund conglomorate is the be all and tell all of unbiased financial advice is truly astounding to me.

i am recommending college education in the classroom. most of the other posters are recommending an online university. in fact, the posters who are recommending the online university are also recommending it be done without a syllabus.

a little story to illustrate a point: i was meeting with a CFO at a small business today and they want to start up an employer sponsored retirement plan. to his credit he printed out these pages and pages of stuff off of one of the fund company websites about different retirement plans. he was apologetic that he hadnt read them all yet. "no problemo ... that is what we are here for!"

so i ask a couple of questions that have nothing to do with money or retirement planning, a couple of questions about his business, and ask him if i can write on his papers he printed out. he said yes so i cross off all but two of the options.

"these are your two best bets," said i. "lets compare and contrast each."

this guy is the freaking CFO of a manufacturing company! sure, he is not the CFO of Boeing, but still the company's C"Financial"O. he is a normal human being who loves what he does and does it well. they employ 75 folks and are the truest engine of the American Dream in our country. and yet, he doesnt want to drill down in the nit-noids on this stuff. that is also typical. super smart guy and the old "read the stuff on the website" is not an effective route for him to pursue!!

folks, surveying shows that few (i think its like 12% of) people with less than 10K to invest search out professional assistance. the same survey shows over 90% of folks with over 100K to invest search out professional advice. my personal top client has a personal net worth of over one-half billion dollars.

that client knows how to run a business!
that client relys on me for advice on portfolio management and estate planning and charitable planning and taxation and of course insurance.

all of you amatures are to be congratulated in much the same way a professional singer should be congratulated. you have a "talent" and you have a "passion" for this financial stuff. with all due respect i think you are a little naive in that you think that just cause you can hit a D two octaves above your normal range, that you think everyone else can too.

a couple of final points for jim's money (you know i love ya man!) ...

first, i hate sports and i hate working on my car. i dont even know (without looking) how to open my hood. i would not change my own air filter and i most certainly, under no circumstances, would change my own oil! that is my choice and based on my personal likes and dislikes. because i use a professional does not make me feel "inadequate" in some way nor does me not getting my hands dirty make me superior in some way.

second, that meeting with the CFO i spoke about. i was out WITH that recent finance major grad ... it was her appointment. i was "technical assistance". so, i can most certainly assure you that if you are a client of a brand new shiny financial advisor (at least with reputable firms) you are getting top notch financial advice ON THE CHEAP.

wow, that was kinda wordy!

1MO No worries. If we all had the same opinion there wouldn’t be much use for this site.

I did not bring up the mechanic analogy, I was simply responding to it. If you don’t care to pop your hood then you have to get someone else to do it for you. I would submit that because you are financially successful you do not mind paying the $37.50 to get it done. Without the means however you would be looking at other options.

I would also submit to you (with admittedly nothing to back it up) that if you took a look at people with over 100k to invest, that far more of them have a lawn service than those with less than 10k to invest. Does that mean that they care more about their lawns? I don’t think so. People with more money are more inclined to pay for services of any type. 20 years ago when I moved I did everything myself and helped countless friends move also. Now I hire movers. Is that because I am smarter now? Again the answer is no. I have the means to pay for it now so I enjoy that luxury.

I think that is great that you did the ride along with your protégé. I can’t help but wonder if you would have done the same thing if the 22-year-old poster was the client. I think that you have managed to surround yourself with the best of the best, much to your credit, but your experiences do not reflect what I too often see in my admittedly small world.

I stick by my comments that one does not need a college education to make this work. A noble goal if that is what you want to pursue but to imply that it is needed is to imply to most people that doing your own finances is out of reach.

I did not recommend a target fund but in rereading my response I did imply that that would be a good place to start. I don’t care for them myself but for generic advice I also stick by my comment that it’s an ok place to park some money while you get started. It certainly requires less of a leap of faith than to say that $200 with an advisor today will equate to 950k at retirement.

I feel a little like you professionals’ probably did when you had to let GS know that annuities were not the solution to every problem. Even though you liked them in the correct situation, you had to admonish them over and over to get your point across to GS. Same here. I am not anti professional help. 20 percent of my portfolio is with a pro. My sister could not tell you what an index fund is or the difference between a stock and a bond, and that will never change. She has to have help with this stuff. You will be far better off to learn the basics of finance yourself. In most cases knowing the basics will be sufficient. If you can’t or don’t want to learn the basics then by all means get some help.

A couple of points from this angle:

- no one in this thread will disagree that education is key to understanding your financial situation, and is further a key component of "handling" your finances
- furthermore (this may be a stretch), I'd bet that no one in this thread would disagree that an individual could benefit from a financial advisor - leaving cost out of the equation. Who among the posters and readers of this thread hasn't benefited from asking questions and/or reading answers from the advisors (yes, even him!) that frequent the forum?

The question comes down to cost/benefit, right? This is the same issue that comes into play with the story about the mechanic (staying with the analogy from earlier) who takes five minutes to adjust a screw that suddenly, miraculously, makes the car run properly - and then charges you $150 for the repair. Obviously, you could have adjusted a screw on your own - why pay $150 for it? The answer is that knowing which screw to adjust and how to adjust it is where the value comes in. Much the same as the mechanic situation, it's difficult to put a number on the benefit of the advisor's advice (Would you have known how to properly roll over the IRA without disqualifying it? Are you paying more income tax than is necessary?), so it takes a leap of faith for folks of modest means to decide if an advisor is worth the costs.

So - should a person, for example the OP, work with a financial advisor? It depends on what he's trying to accomplish, how quickly he's hoping to accomplish it, and how complicated his situation is. In other words, since we don't know enough about the situation and can't learn enough in this forum, don't expect that the answers are going to fit the situation completely or can be applied to seemingly similar circumstances.

Lastly, following up on the analogies from earlier - there's a big difference between the analogy of cutting your own grass or using a moving company and choosing to work with a financial advisor. If you screw up cutting your grass at worst you'll have a dead lawn or one that looks like crap. If you screw up moving your household goods from one home to another, at worst you might ruin a major appliance or damage a wall. If you screw up on do-it-yourself finances, you could be tossing away significant sums of money, or at best, missing out on opportunities.

So my answer is - working with a financial advisor is not the end-all, be-all. Could the OP benefit from working with an advisor? Absolutely. Is it worth the costs? In my biased opinion, absolutely - but that's up to the OP to determine, given his own unique situation.

I am neutral on the subject, although I used to believe that anyone who has enough time and comprehension can research and invest wisely. Most points in this thread are valid, but I do not see paying $150 for a tune-up when you don't even have the car yet (cars can equal capital in this analogy). Alas, this also is not a constant variable, because someone who has yet to amass any capital could very well benefit greatly from a few hours with an advisor for some foward planning.

As it has been said dozens of times in these boards, it depends both on the individual as well as the situation. What works for you might work for me, but might not work for the guy sitting next to us.

On a side note, my friend in the biz left me a new voicemail. Although he would never be my financial planner (I'm waaay too hands-on to be worth his valuable time), he was more than willing to sell me some insurance (from our discussion regarding Infinite Banking). Nice! :rolleyes:

i am ok if we all have the same opinion ... as long as it derives from my opinion. ahhh: harmony in the cosmos.

i will defer to blank's comments about my metaphor and simile. but i think he captured my intention in that FAILING to have a complete understanding or an advisor in the early years is more likely to result in lessened comprehension, more "rookie" mistakes, and less accumulation over time. which comes first, the chicken or the egg? i prefer not to worry about such trivial matters but to take action NOW on the best information available at the time. to me, that errs on the side of having a professional (a fundamentally biased position on my part).

hey, that reminds me. i admit, i started with a financial advisor. great guy but limited product range and knowledge. it spurred me to become more knowledgeable about investing and financial planning. 10 years after i started investing i thought i was pretty smart. heck! i have a strict catholic education so i kinda think i am 'learnable'.

then i transfer into this new profession and the simple matter is i didnt know squat. as in, "OMG, what was i thinking!!!"

i keep that in mind as i mentor those around me. and for the record, i sat with another young lady today who is also new to our business. she; however, does not have a finance degree as my earlier example. her client was an unemployed recent retiree from the military who was upside down in her monthly expenses. she has good prospects for employment but was still in the red each month (so she aint getting no high-load mutual funds from us nor is she getting any nasty ol CV insurance either). we (her, i, and my newbie) still sat there for two hours to discuss structuring of her finances to protect her credit rating while she transitioned. TWO HOURS to make nothing but perhaps help a little ... and to give her a little less anxiety. sure, sure ... my new advisor may make something later but it was still TWO HOURS today!

my point is that i would HOPE that this is more common than your experience would indicate to you. you have your "experience" and i have my "hope". i am sure that it is somewhere between our two viewpoints. that said, in the end i think it is more common that someone would still help out the OP even if there wasnt a payday involved. generally, i have found that most folks in my industry enjoy giving something back.

in all fairness i didnt really say, "$200 with an advisor today will equate to 950k at retirement." what i stated (or at least meant) is that if the OP started a Roth today and maxed it out for the year the MAXIMUM commission charge would be $200. but the money (4000 for this and the next two years) in my example would mean an EXTRA $950K in the OP's account. that is the intended power of an advisor. no one can argue that 200 dollars is too high a price to pay for $950K. as for whether it is believable, it is math. try it out on your calculator.

that said, you and i still see eye to eye on the fundamentals of getting educated. and not far apart on the professional or the DIY options.

Well, I've mauled some things over repeatedly in my head (as tends to be my nature) and ...

... I love finances - I'm passionate about researching and becoming educated whilst trying to make wise, well-informed decisions. For instance, a year ago I was clueless about personal finances. Now I've scrimped and sacrificed in order to save at least enough to max out my Roth for the first time ever (Admittedly, I never even had a clue what a Roth was at this time last year, nor would I have ever been concerned with retirement in the slightest.) But I now know better, and with that knowledge comes responsibility. There are simply no more excuses not to take action.

And through diligently saving, I finally managed to accumulate funds to begin setting my newfound financial know-how into motion.

Except what I hadn't anticipated was finding myself suddenly overwhelmed and feeling absolutely paralyzed.

My final conclusion?

The fee associated with hiring a financial advisor (approx. $150-$250/hr) is certainly an investment and, at this stage of the game, quite a hefty one for me. But I yearn for a professional mentor and if I can discover competent wisdom through my endeavors, there is simply no concrete value I can place on that.

I do not expect to have wealth suddenly falling out of the sky at me. But knowing a professional is helping my tiny financial seedlings be planted into fertile soil (and adequately preparing me to better weather the storms which surely await) is worth - to me - the cost of hiring an advisor/mentor. But it is a personal choice for everyone.

For the OP, it never hurts to stop by your local library and read until your eyes bleed. The 'Personal Finance' section is an excellent starting point. Then slowly sprinkle in some 'Investing' material for some spicy seasoning.

I am so shocked at the amount of feed back I got! I know exactly what I am going to do now. You guys are awesome thanks for so much good information. I love the analogies you guys used, that defiantly helped.

Best of luck to you both.

whooooooaaaa netteeeee!

each of us is happy you have made a decision so you know exactly what you are going to do. and thanks (on behalf of us all) for your appreciation of our combined comments on your situation. but we can't let you off without paying.

your "bill" is to let us know what you decided. we need some closure too!

----------------

very nice post Cassie.

Well, I've mauled some things over repeatedly in my head
Watch out for that! Most doctors still have not agreed on the proper technique to stop that type of bleeding.

nette84, my friends and I just started a new financial news website geared for young adults/professionals called - fmpopp.com and we have a licensed financial adviser on the team who will be more than happy to answer questions you may have when you are first starting off. good luck!

Just have your licensed fa post here. It would be much easier and then everyone could benefit. It might build some much needed credibility.

I'm glad TSD resurrected this thread, even if it was just to plug a website.

I know the OP hasn't been on this for a while, but this is more directed to those who were giving the advice anyway. This argument has been beaten nearly to death, I know, but I think I can add one more thing.

There are two clear sides. One says educate yourself, and the other says let a professional advise you. I say the best source of education IS a professional. I am a commission-based FA. I spend much more time educating my clients than I do advising them.

And this education is PERSONALIZED. Just tell your advisor your story, and you will learn more in an hour than in a month of trying to digest info from a book or class, not knowing which statements apply to you in the first place.

I know you all enjoy the mechanic analogy (sarcasm, tough to express in writing).

How cool would it be if you could take your car in to your mechanic, and instead of just fixing the problem, he decides to teach you how to fix your car's specific problem yourself? He'll even help you fix it. And he only charges you for the parts!!!

Hooray for commission-based advisors!

How cool would it be if you could take your car in to your mechanic, and instead of just fixing the problem, he decides to teach you how to fix your car's specific problem yourself? He'll even help you fix it. And he only charges you for the parts!!!
Geez. I just couldn't let this one pass by without comment.

Yeah, that would be cool, but the mechanic wouldn't stay in business very long, unless he worked out a deal with the supplier of the parts to raise the cost of the part by, oh, say 4.5% or more (which he pockets for his education session), and then he makes sure that those are the only brand of parts that he ever recommends... Oh, and for as long as you own the car you are required to return to that same mechanic (or at least his garage) to have any work done on the auto - even airing up the tires.

Fin, it's good to see you taking part on the forum again, it's been a little while, hasn't it?

I think most commissioned advisors are fine individuals and most likely have excellent intentions in mind for their clients. However, I want it to be clear that whatever activity an advisor takes on, whether he's commissioned or fee-only, he's being compensated for it. In the fee-only model, the client writes a check directly to the advisor for the advice/education/implementation - while in the commission model the cost is not as readily apparent to the client, as it's lumped in with the cost of the investment or product (parts, in the analogy above).

So, when the commissioned advisor spends an hour or two (or ten) educating the client - the client doesn't know how much that education is costing him. If he's got $100k to place with the commissioned advisor, the ten hours spent cost him about $450 an hour at a 4.5% commish. And I'm guessing that it is pretty unusual to spend ten hours with a single client with a $100k account. Makes an hourly rate of $150 to $200 seem pretty reasonable, in my humble opinion...

Back to the mechanic analogy - wouldn't it be cool (if you wanted to fix your car yourself) if you could pay a mechanic to explain and educate you on how to fix your specific model and problem, and then you just pay him for his time? And if you wanted the mechanic to help you fix the car, he could be right there with you, pointing out which bolt to tighten - again, only charging you for his time? And when you're done, if you never want to see the mechanic again, you don't need to - you're not beholden to him in any way.

Or, (if you wanted him to just make the problem go away) if the mechanic could buy your parts at wholesale for you and fix the problem - and all you pay for is the parts and his time? And he tells you up front how much of the bill is for parts, and how much is for labor - so that you can make a decision about doing it yourself or paying the mechanic to do it? (hey, wait a second, that IS how they do it!)

Jim,

Yes, it's been awhile. I changed companies and have spent the last year trying to build the book back up. I realize that when I'm on here, I can spend hours at a time. Just had to quit cold turkey.

I want to beat this horse a little more.

So let's talk about the fee for a second. Everyone that calls themselves a "fee-only advisor" seems to derive the fee using different methods. Some are based on percentage of assets, some are hourly, some charge a flat annual planning fee.

I was with Amex (don't laugh) and they called it fee-only, but I made commissions too. I got AUM trailers as well.

My question is twofold. First, do you not get paid a dime from the companies in which you choose to put your clients' money? No trailers? Nothing?

The second question is about the "parts." Assuming you answered "no" to the first, how are your products different? If your client invests in an annuity, are the costs lower to them? What about mutual funds? Are they getting institutional shares? Do you only recommend index funds? I just don't understand how you would be able to save the client on costs any more than I could.

So I guess in a nutshell, the question is even if you didn't get paid any more for the products, how is it that the client is relieved of any costs?


By the way, 4.5% is a bit of an unfair estimate on your part. I'd say on average, a 100k client would make us half that. We don't all sell annuities exclusively. (and 4.5 is still high for those) Just be fair in your cost comparisons.

uh oh, me thinks fin is gonna get a little spanking.

I want to beat this horse a little more.
This doesn't surprise me - I'd heard that you commission-types were cruel, but I guess I didn't realize it extended to animals... I'm KIDDING!! Geez, calm down... :D

So let's talk about the fee for a second. Everyone that calls themselves a "fee-only advisor" seems to derive the fee using different methods. Some are based on percentage of assets, some are hourly, some charge a flat annual planning fee.
Yes, there are those three primary methods of charging a fee for financial advice. It depends primarily on the focus of the advisory - different strokes for different folks. In my opinion, it doesn't take twice as much effort to manage $200k as it does to manage $100k, so that's why I operate on an hourly or retainer basis, rather than AUM.

I was with Amex (don't laugh) and they called it fee-only, but I made commissions too. I got AUM trailers as well.
Are you sure they weren't calling it "fee-based"? That particular method is about as slimy as it comes, in my opinion... you're lumping in the f-word to describe your service, only to smack 'em with commissions as well. So is the use of the word "fee" simply a marketing ploy? And what do you say to a client when they discover the whole ruse? Thanks for the memories?

My question is twofold. First, do you not get paid a dime from the companies in which you choose to put your clients' money? No trailers? Nothing?
Nada. I make recommendations based upon the merit of the recommendation, not on what will make money for ME. This is because I am being paid by the client, to provide advice to the client. I'm not being paid by a mutual fund company to sell things to the client. For some it's a minor distinction, but I think an important one to understand...

Oh, wait a second, I take that back. They (the brokerage that I work with for most of my clients) did send me some cookies around Christmastime - I'm diabetic, so I didn't count those as compensation.

The second question is about the "parts." Assuming you answered "no" to the first, how are your products different? If your client invests in an annuity, are the costs lower to them? What about mutual funds? Are they getting institutional shares? Do you only recommend index funds? I just don't understand how you would be able to save the client on costs any more than I could.
I primarily recommend index funds. In my philosophy, the primary benefit that I bring to the table is overall strategy development, asset allocation, and discipline to maintain the strategy. I don't profess to be a stock- or mutual fund-picker - I don't believe that the effort expended is worth it. And I rarely - make that so far never - recommend annuities. I can see the purpose of the tool, but have yet to come across the right client.

So I guess in a nutshell, the question is even if you didn't get paid any more for the products, how is it that the client is relieved of any costs?
Even if the client has me perform the trades for them, my hourly rate of $150 per hour is far less than any commission I've ever run across, and the internal expense ratios of the investments that I choose for them save them money each and every year.


By the way, 4.5% is a bit of an unfair estimate on your part. I'd say on average, a 100k client would make us half that. We don't all sell annuities exclusively. (and 4.5 is still high for those) Just be fair in your cost comparisons.
Sorry if I mischaracterized that - but since I've never purchased A-class mutual funds, all I have to go by is the Morningstar report that says "Front Load%: 4.5%". Since many of these are higher than 4.5%, I thought I was being generous by just quoting that smaller figure (see AMCPX as an example - 5.75%) If you're telling me that that number is a lie, then I reckon someone needs to take Morningstar to the woodshed...

First off, thank you answering each question in turn. I appreciate the time and thought you put into that response.

That being said, I have to say more questions just came popping up in my head that I can't help but ask.

Let me first start by saying that you are an asset to this forum, and you clearly have the best interests of your clients and the readers in mind. What follows might come off as combattive or (though it is not the intention) insulting. Please do not take it as such. I want to have a productive debate with you on this issue.


Why would you say that about A-shares?

Your final statement floored me about Morningstar. You are a CFP. We were talking about a 100k client and you mentioned a 5.75% load. Yes, that is the maximum load. But you KNOW about breakpoints. YOU HAVE TO. The Amcap fund is 3.5% at the 100k breakpoint (maybe breakpoints should be on Morningstar). Subtract the .75% that American Funds takes and I get 2.75% credited to my grid (off of which I will get just under 40%). I make (at best) $1100 on the deal. Less than the $1,500 you would have made charging them for 10 hours.

Why have you never sold an annuity?

I will absolutely agree that they are for a fairly specific group of people, and I personally don't recommend them very often...but never? Annuities are extremely helpful, especially for clients who can't bear the thought of a fluctuating market, and NEED some form of guarantee. I'm sure that since I'm in a bank, I get more conservative people in front of me than you might...but never? Help me understand why.

Your answer to my question about getting commissions:

"Nada. I make recommendations based upon the merit of the recommendation, not on what will make money for ME. This is because I am being paid by the client, to provide advice to the client. I'm not being paid by a mutual fund company to sell things to the client. For some it's a minor distinction, but I think an important one to understand..."

Two things. First, I take offense. That first statement implies that commission based advisors do not make recommendations based on merit, only on what they get paid. Whether you meant to be or not, that was insulting. The amount of commission we get paid is NOT a factor in choosing the clients investment vehicle. That bears repeating.

THE AMOUNT OF COMMISSION WE GET PAID IS NOT A FACTOR IN CHOOSING THE CLIENT'S INVESTMENT VEHICLE.

Second, your statement is actually false (based on the rest of your post). You do get paid based on the product that you put them in. You just choose to put them into the product that pays you the least (index funds). Your philosophy on investments is what leads you to only make money on your time, not your job description. I recommend index funds all the time. And I literally don't make a dime for that (not even for the trade). Yes. That means I might not make anything off that client. Yes, I am ok with that.

This all ties back in with the "argument" regarding fee-only vs commissioned advisors.

The difference between us is philosophical.

Your payment option suits you, because you believe that index funds are the way to go. You have yet to find a client for whom you think an annuity is suitable. I know from other posts of yours that you don't do insurance.

My clientele is generally older, conservative people, who want to pay for fund managers to (hopefully) lower their volatility and reduce their chance for loss. They occasionally require things, like guarantees, to get them to do anything other than a CD. And insurance (life or LTC) plays a big part in some of my clients' solutions. I make money off of the solutions (most of the time). Again, I am ok with that.

I am not ok with you saying that the clients' costs are somehow lower because you are fee-only. They are lower because you choose to invest their money in index funds. If you felt that full-service mutual funds, annuities, or insurance were appropriate, you could NOT save them on the costs, correct?

Based on what you have described to me, if we each had a client for whom we recommended the same "parts," the client is guaranteed to have less (or even zero) costs, if they go through me.

Obviously, based on our beliefs regarding investment vehicles I tend to recommend the more "expensive" parts, which means that I could be more costly. The question is whether the client sees the value in these parts.


The bottom line is we care deeply for our clients' welfare. We are from different schools of thought with regards to how our clients' money should be invested. We have chosen the payment method that is most properly aligned with our beliefs.

If I hit some buttons, I'm sorry. Funny, the more I write, the more ticked off I get. Not entirely at you, Jim. I just feel like there has been a halo placed atop the heads of fee-only advisors, and horns atop ours. I guess I'm more mad at the guys who came before me, who did "sell" stock and mutual funds and annuities, and did not "advise."

Times have changed. If those guys aren't dead yet, they are a dying breed. They can't survive in today's world, and will be extinct very soon.

Wow. I have to apologize further. That was way longer than I thought it would be. I know I have a problem. I am seeking help.

actually, i liked the passion and the points. i also think jim is a big enough boy not to lose sleep over it.

that rite thar is good advice.

A couple of thoughts I would add.

1) The auto-draft is a beautiful thing. Set them up at will to accounts - probably in this order:

401k to extent matching is present
Savings (fill up that bucket - use a high yield account identified at www.bankrate.com (http://www.bankrate.com))
Roth IRA (get consistently to where you're maxing out those contributions).
Taxable investments like Vanguard's total market index.
Permanent insurance
2) Get as much home as you can and rent rooms to all your buddies. (Let 'em pay or share your mortgage payment!).

3) Get a couple credit cards and use them only for necessary items and pay them off completely every month. NEVER carry a balance. It can lead to bad things.

After you get your total investments to about $25-$50k (exclusive of the home), it'll be time to start a relationship with an advisor.

This all assumes that you're not married, not making more than $75K or so, and able to take some initiative and sustain some consistent patterns. If not, you should meet with an advisor once a year or every six months. You can find something suitable for your needs at about $100/hour. You'll get your money's worth. Go to the Garrett Planning Network (I'm not a member, but they're a good resource for what you'll need right now).

Good luck!


I'm not a botanist either, as all my plants seem to die. A linguist might know the difference. An etymologist can tell you that the words are interchangeable, derived rom the Old French "aviser".

To the OP:

It's not that difficult to get started. You sound determined, so I suggest the first thing you do is start parking money in a savings account. While you're parking money there, read the magazine that sponsors this board, and start getting some ideas. When you feel the ideas you're getting jive with you and your ideas, take your savings and plunge it into a vehicle you're interested in (hopefully, within an IRA or ROTH IRA). Learn about loads, no-loads, growth, interest and dividends.

If you find your savings account growing, but your confusion growing as well, or if you find yourself paralyzed and unable to act, that's when you should consult a financial adviser.

In short, I think a lot of people can at least get started on their own, if they are willing to put a little effort into it. Meanwhile, the growing savings account will get you in the habit of setting aside money, and will help you start your emergency account as well.

I take it back - probably good to go get with a commission-based advisor at your stage. It might be a young guy with whom you can grow over time. He'll know more than you, and what's more, he'll be making a little something everytime you send money towards the investments he recommends. That's a win-win, especially if you need any sort of encouragement to steadily plug away.

Using C-share mutual funds will give you more liquidity if you want to make a move to someone else within 5 years or so, or if you feel you want to take over the reigns and do more things on your own. Mind you that the C-shares will cost you more if you own them longer than 7 years or so. I think it's a good idea to keep things loose because odds are you're not going to have the same advisor in 5 years - the good ones move "up-market" pretty quickly. The bad ones don't stay in the business.

Good luck. I'd love to hear what you do, as well.

I just feel like there has been a halo placed atop the heads of fee-only advisors, and horns atop ours. I guess I'm more mad at the guys who came before me, who did "sell" stock and mutual funds and annuities, and did not "advise."

Times have changed. If those guys aren't dead yet, they are a dying breed. They can't survive in today's world, and will be extinct very soon.I agree. I am fee-based (as opposed to fee-only) and I work with lower-net worth clients. I charge small fees in the order of $600-$5,000. I couldn't do it profitably without the help of the commissionable revenue from the products that pay commissions to someone, regardless of where they are bought. Things like term life, P&C, and other life & health products.

I tell my clients up front that I need their help making the relationship a profitable one, and I ask them to both pay my planning/advisory fee, and to give me an opportunity to implement commissionable business whenever possible, when it is in their best interest to do so.

This takes trust on both sides of the equation. I charge fees that are lower than what I need to be profitable. I'm trusting the client to let the "rain" from his financial decisions/actions fall on my fields whenever possible. He trusts me to tell him when he can acquire products (such as no load cash value life insurance) more effectively without me, or another advisor, in the picture.

I loath the whole "halo" thing created by NAPFA and self-righteous fee-only advisors, the majority of which are compensated on AUM anyway. (Forgive me, but ain't that a lot like a C-share mutual fund, when all is said and done?) And who says that just because one is hourly, they're somehow unable to take advantage of the client. The guys at Despairmake the case (http://www.despair.com/consulting.html) more humorously than I could. (Be careful, you can burn a LOT of time at that site!)

At the end of the day, if anyone says that his/her compensation structure has somehow made himself/herself impervious to self-interested dealings, that person is dangerous. Either they're running a scam . . . or worse, they really believe in their own altruism. It's like the person who says, "I've never told a lie." GONG! You just did!

Compensation structures can facilitate trust - and fee-only advisors draw the Thomas's of the world who need to be able to "stick their finger in there" when they're questioning you or doubting your advice. It's easier for them to do that without asking if all they have to do is look at the bill or the advice of debits from their investment account.

I think there are two maxims of advisor compensation that need to be held in tension in any professional relationship where money is exchanged:

First: There is no compensation structure in the world that creates character. Period.

Second: Money influences people. It may not be the ONLY motivator or influence (usually isn't). Often, it's not the primary motivator. But it's always a consideration. Anyone who says otherwise is either a big fat liar or has a lack of self-awareness that makes them dangerous both to themselves and to those to whom they are providing their services.

These maxims are equally true, and often at odds with each other. When one is believed to the exclusion of the other, the door is open for bad things to happen for both the advisor and the client.

noah, well thought out and well written.

This is a great discussion. There are lots of bullets I would like to speak to but the one I can’t just let pass by is FinAdvisors last statement.

“Times have changed. If those guys aren't dead yet, they are a dying breed. They can't survive in today's world, and will be extinct very soon.”

That is just so wrong, and misguided I have to interrupt this great dialog to throw my 2 cents in. There have been unscrupulous advisors since advisors have been around and there will continue to be unscrupulous advisors around as long as we have advisors. In fact I would say there are more today than there ever have been. I don’t see this as being unique to advisors in any way. I also think your lawyer, doctor, mechanic, contractor, or anyone else providing a service is more likely to swindle you today than in yesteryear. We could have a whole discussion on the state of moral ethics in today’s “I want it now” world, but that is not my intent. My point is simply that advisor abuse aint going away.


BTW
If I need a lawyer, doctor, mechanic, contractor, or advisor I still go out and get one. Most of them are excellent. As a great man once said, “Trust, but Verify”

more likely to swindle you today than in yesteryear

Most of them are excellent

jims, i think i got your sentiment but i think these two statements of yours are contradictory.

i agree with your larger point, i think, in that there will always be charlatans in any industry. in that regard, financial folks are no different. there will always be some who are playing the edges and on the lookout for every available opportunity to swindle (whats in their best interest and not the clients).

i also agree with finadvisors INTENT. in that MOST who are predisposed to swindle, even a little bit, are on a downward path to self-destruction. MOST that are unethical will be swept from the scene in fairly short order. however, we saw in the annuities thread where a person has been in this business for almost 20 years and is consistently working against the best interest of his clients. and though not gone, he is held in pretty low repute by many and i am supremely confident that it has impacted on his ability to place faulty products to some unsuspecting clients.

to that end, i think we can all agree that bad advisors who manipulate clients should be hung by the neck in the city square. i wonder if you would agree that the professionals in our industry would be the ones leading the charge and tying the noose?

What follows might come off as combattive or (though it is not the intention) insulting. Please do not take it as such. I want to have a productive debate with you on this issue.I agree - no benefit comes from a rasslin' match.

Why would you say that about A-shares? Because I really have never bought any.

Your final statement floored me about Morningstar. You are a CFP. We were talking about a 100k client and you mentioned a 5.75% load. Yes, that is the maximum load. But you KNOW about breakpoints. YOU HAVE TO.I have heard of them. But I have no experience with them - I don't buy or sell loaded funds. When what I read about a fund indicates its load is 5.75%, who am I to argue?

... I make (at best) $1100 on the deal. Less than the $1,500 you would have made charging them for 10 hours.
I'm (once again) not a botanist, but I am willing to bet that you don't spend 10 hours with each $100k client...

Why have you never sold an annuity? Are you from Florida by any chance?? I've never sold an annuity because I don't sell insurance!

Your payment option suits you, because you believe that index funds are the way to go.Actually, my compensation model suits me because it suits my clients. Index funds happen to be the investment option I choose when the field is wide open - but that's only a very small piece of the pie. I guess on balance I like the fact that I am compensated specifically for the advice I give, and my compensation is not in any way tied to a purchase.

I am not ok with you saying that the clients' costs are somehow lower because you are fee-only. They are lower because you choose to invest their money in index funds. If you felt that full-service mutual funds, annuities, or insurance were appropriate, you could NOT save them on the costs, correct? I didn't say that. I said that even if I perform the trades for them, my hourly rate is much less than the commission, and the investments I direct them toward have lower internal expense ratios, saving them money every year.

Based on what you have described to me, if we each had a client for whom we recommended the same "parts," the client is guaranteed to have less (or even zero) costs, if they go through me. But if that's the case, you're not telling the whole story... either you're also getting a salary, or you're causing some of your client-base to compensate you for providing lower-cost investments to others in your client-base. Back to what I said before - no matter what, the advisor is being compensated "somehow" for what they do.

The bottom line is we care deeply for our clients' welfare. We are from different schools of thought with regards to how our clients' money should be invested. We have chosen the payment method that is most properly aligned with our beliefs. I couldn't agree more. It's obvious to me that you care a great deal about your craft, and your clients. I'm sure they are well-served.

I just feel like there has been a halo placed atop the heads of fee-only advisors, and horns atop ours. I guess I'm more mad at the guys who came before me, who did "sell" stock and mutual funds and annuities, and did not "advise." "If the halo fits, wear it!" Seriously, though, echoing a post from someone else here - there are scoundrels in all compensation models. As you might have discovered from other posts of mine here, I don't hold myself out as the standard-bearer for all hourly, fee-only advisors - just for this one (typing this). I've said it before and I'll say it again: I think most advisors, however compensated, have the clients' best interests at heart.

And from the post by Noah, where he says something about how no compensation model creates character - couldn't agree more. However, some compensation models leave room to call character into question strictly by their mechanics. It doesn't mean that one model is more or less scrupulous than another, it only means that the model itself can cause questions.

Is this really real? I don't know this is real. All I know is that you have to worked hard to get rich. ;)

some compensation models leave room to call character into question strictly by their mechanics. It doesn't mean that one model is more or less scrupulous than another, it only means that the model itself can cause questions.
I'd like you to post that on your web-site under you Q&A and see how it flies with your prospects and clients.

Q: Why are you a "fee-only" advisor?

A: "I've chosen this compensation model in order to leave you with with as little room as possible to call my character into question."

God help the person and the advisor to whom that sort of working relationship (or any relationship, for that matter) appeals.

Blankenship, I'm picking on you a little to make a point. I think I know what you're saying, and I don't think we're saying things that are all that different. But we all need to be careful with our language on these matters, lest we stir up and polarize an already confused marketplace for consumers. (There are enough radio-heads out there doing enough of that already, aren't there?)

And perhaps we also, for personal reasons, need to pay attention to what our words betray about our beliefs about ourselves and others.

I am preaching the choir, to be sure. OPAI will attest to my hypocrisy in these matters as well as anyone . . . :)

This is really healthy dialogue, my friends. I thank you for it.

Oh, I think I follow you, Noah, but you're putting words in my mouth...

You brought up character - I only gave you my take on your quote.

Let's go back to your earlier post where you said something about how you loathe the "halo" thing created by NAPFA. It seems that you believe that the only differentiating factor between NAPFA-Registered Financial Advisors and every other guy or gal who hangs out an "advisor" shingle is method of compensation... Among other things, NAPFA advisors are subject to peer review (a financial plan must be submitted for review prior to joining), a more strict ethics clause and double the CE requirements of CFP certificants. Does this make NAPFA-Registered Financial Advisors "better" than every other advisor? Certainly not. Does this help consumers? You bet - especially if they're consumers looking for advisors held to a higher ethical and educational standard - notwithstanding compensation method. See www.NAPFA.org for more information. Also, I noted that earlier you recommended the OP see a Garrett planner - most Garrett planners are NAPFA members, I believe.

But regarding compensation models, I hear it all the time - "I want to work with a fee-only advisor because I don't want to worry about why he's making a particular recommendation. I'm willing to pay directly for the advice in order to have the comfort of knowing that he's on my side." It is from these comments that I gleaned the message that I put forth before: that, while compensation models can not create character, they can by default call character into question. As stated before, this doesn't make one method better than the others, it just opens the door to questions.

Your final statement floored me about Morningstar. You are a CFP. We were talking about a 100k client and you mentioned a 5.75% load. Yes, that is the maximum load. But you KNOW about breakpoints. YOU HAVE TO. The Amcap fund is 3.5% at the 100k breakpoint (maybe breakpoints should be on Morningstar). Subtract the .75% that American Funds takes and I get 2.75% credited to my grid (off of which I will get just under 40%). I make (at best) $1100 on the deal. Less than the $1,500 you would have made charging them for 10 hours.
I knew I had left something incomplete...

You've missed the point, Fin, when you indicate that you make only $1,100 off this $100k client... the point is that the client PAYS $3,500 for the benefit of working with you and your company and that mutual fund. Which is not less than the $1,500 example, in case you're keeping score.

testing....just learning the quote function here. want to see how this looks.

I have heard of them. But I have no experience with them - I don't buy or sell loaded funds. When what I read about a fund indicates its load is 5.75%, who am I to argue?

I have heard of them. But I have no experience with them - I don't buy or sell loaded funds. When what I read about a fund indicates its load is 5.75%, who am I to argue?

You are a CFP. That's who. It's one thing to recommend no-loads because you've done your homework, and you believe it's the right thing. It's another thing entirely to have never considered the alternative. This is important because at $1million, the load is zero. ZERO!!! Your million dollar clients could be in full-service funds and not pay a load. Should they? Maybe not all, maybe just a few, but it should at least be considered.

I'm (once again) not a botanist, but I am willing to bet that you don't spend 10 hours with each $100k client...


Probably in the first year alone. I'd be surprised if if the time you spent meeting with the client, preparing recommendations, presenting, reviewing the portfolio didn't net you 10 billable hours.

Are you from Florida by any chance?? I've never sold an annuity because I don't sell insurance!

That's your answer? I don't sell an insurance product because I don't sell insurance? It's a legitimate question. You are licensed to sell insurance and annuities. You have completed the necessary requirements to become a CFP, which means you have been exposed to these products and should be aware of the many benefits they can provide. I'm asking you why you don't sell them. Saying "Because" doesn't answer the question. I would like to know why you choose not to offer insurance products. And no, not from Florida.

Actually, my compensation model suits me because it suits my clients. Index funds happen to be the investment option I choose when the field is wide open - but that's only a very small piece of the pie. I guess on balance I like the fact that I am compensated specifically for the advice I give, and my compensation is not in any way tied to a purchase.
But it is tied to a purchase!!! The fact that you have labled yourself as a fee-only (not fee-based) advisor means that you have no choice but to recommend products that don't pay you a commission. I think I may have just answered my previous question.

But if that's the case, you're not telling the whole story... either you're also getting a salary, or you're causing some of your client-base to compensate you for providing lower-cost investments to others in your client-base. Back to what I said before - no matter what, the advisor is being compensated "somehow" for what they do.

Absolutely I should be compensated. Not always with $$$ (and certainly not a salary) Maybe I'm compensated with referrals, maybe with karma, who knows? I work with clients who have more than 100k with the bank. Those clients have friends. Have you never done a client appreciation event? Do you charge them by the hour when you take them to a baseball game?

But regarding compensation models, I hear it all the time - "I want to work with a fee-only advisor because I don't want to worry about why he's making a particular recommendation. I'm willing to pay directly for the advice in order to have the comfort of knowing that he's on my side." It is from these comments that I gleaned the message that I put forth before: that, while compensation models can not create character, they can by default call character into question. As stated before, this doesn't make one method better than the others, it just opens the door to questions.

I can honestly say that if the typical fee-only advisor recommends only no-load funds, doesn't consider annuities, doesn't sell insurance, more questions would arise, not less. Your fee structure is that of a lawyer or an acountant. People question their integrity and ethics all the time. Your comp structure does not save you from the question of whether or not you have the best interests of your clients in mind. The way you handle your clients will ultimately answer that question.

However, as a potential client, I would worry that a fee-only advisor could not offer me a comprehensive solution, because they are limited to those products that do not pay them a commission.

You've missed the point, Fin, when you indicate that you make only $1,100 off this $100k client... the point is that the client PAYS $3,500 for the benefit of working with you and your company and that mutual fund. Which is not less than the $1,500 example, in case you're keeping score.

Apples to apples, Jim. If you want to go by what the client "pays," and not what we make for our time, then compare fair. Break it down. The client "pays" me about $1,000 for my advice (indirectly), and the other $2,500 for the entrance fee into the managed fund themepark. They pay you $1000 bucks (bringing it down to a more reasonable level) for your advice, and get free entrance to the index fund themepark. Maybe one has more rides than the other, maybe there is less of a chance of the ride breaking down. Some will find it worth the cost of entrance, others will not. (on the fly analogy, by the way)

Apples to apples, if my client goes with no-loads or index (either by my recommendation or their own choice), then there is no question that they pay more through you than through me.

The "point" of my statement was regarding our motivation, and not the client's outlay. Load v no-load is a separate debate.



I have said a number of things in this post that have called your compensation structure into question. Until this discussion, I never had reason to. Please understand that I only do so because I feel it is beneficial to the readers, and is germaine to the issue in this thread. Since the readers have access to your site, they can become clients of yours.

I continue to hold you in high regard, because you have shared a wealth of knowledge with the people of this forum, and have helped many, including me.

You are a CFP. That's who. It's one thing to recommend no-loads because you've done your homework, and you believe it's the right thing. It's another thing entirely to have never considered the alternative. This is important because at $1million, the load is zero. ZERO!!! Your million dollar clients could be in full-service funds and not pay a load. Should they? Maybe not all, maybe just a few, but it should at least be considered. Okay - I hope you're not implying that I choose to work primarily with index funds willy-nilly, because that would be disengenuous. Here's my philosophy in a nutshell:

Managed funds are for folks that believe that markets don't work on their own. These fund managers put a lot of effort into beating the market by selection of securities and timing the market. As a result, the turnover, transaction costs, and taxes of these speculative activities increase the internal costs of the fund, driving down the overall end result.

Indexed funds are for folks that believe the markets do work on their own. Proper allocation of indexes, held for the long term, generate little internal costs, allowing the result to reflect what the market is capable of providing.

With those two factors in mind, assuming that you believe in the system, there is never a reason to consider any* managed fund - loaded or no-load. As a result, I have never had a reason to consider loaded funds, since I don't believe that the investor achieves benefit from them, since all loaded funds are managed funds.

*the exception here is DFA funds, which are not the typical index, nor the typical managed fund.

Probably in the first year alone. I'd be surprised if if the time you spent meeting with the client, preparing recommendations, presenting, reviewing the portfolio didn't net you 10 billable hours.
I won't argue with you - I have no idea how your engagements work. I made an assumption and it must have been incorrect.

That's your answer? I don't sell an insurance product because I don't sell insurance? It's a legitimate question. You are licensed to sell insurance and annuities. You have completed the necessary requirements to become a CFP, which means you have been exposed to these products and should be aware of the many benefits they can provide. I'm asking you why you don't sell them. Saying "Because" doesn't answer the question. I would like to know why you choose not to offer insurance products. And no, not from Florida.
Calm down... I answered your question very literally. You asked why I never sold an annuity. Beyond the obvious fact that I have never sold any insurance products, the reason that I have never recommended an annuity (to date) is because I have not yet come across the situation where I felt an annuity would add value for the cost involved.


But it is tied to a purchase!!! The fact that you have labled yourself as a fee-only (not fee-based) advisor means that you have no choice but to recommend products that don't pay you a commission. I think I may have just answered my previous question. Not really sure what you're driving at here - maybe my statement would be clearer if I said "... my compensation is not in any way tied to the purchase of a financial product (beyond advice)." For example, I just had a client in the office today who is quite happy with the financial advice I have provided - even though they have only implemented a fraction of it over the past year. When they do, they will not be paying anyone a commission for their choices of funds, because they have chosen to use no-load funds (on their own). My recommendations for them were for specific allocation changes, and they have chosen the funds on their own. (Mind you, this is not the typical client, but they are also not an anomaly. Many of my clients ask me to work with them through the implementation, thus assuring that it does get accomplished, and through that process, most often, I do recommend specific investments.)


Absolutely I should be compensated. Not always with $$$ (and certainly not a salary) Maybe I'm compensated with referrals, maybe with karma, who knows? I work with clients who have more than 100k with the bank. Those clients have friends. Have you never done a client appreciation event? Do you charge them by the hour when you take them to a baseball game?
I don't think I ever said that you shouldn't be compensated. And no I don't charge by the hour, I charge them a commission when we go to the ballgame - sheesh.

I can honestly say that if the typical fee-only advisor recommends only no-load funds, doesn't consider annuities, doesn't sell insurance, more questions would arise, not less. Your fee structure is that of a lawyer or an acountant. People question their integrity and ethics all the time. Your comp structure does not save you from the question of whether or not you have the best interests of your clients in mind. The way you handle your clients will ultimately answer that question.

However, as a potential client, I would worry that a fee-only advisor could not offer me a comprehensive solution, because they are limited to those products that do not pay them a commission.
The typical fee only advisor... hmmmm... well, I don't know everyone, so I'll just have to wing it on this one. I'd say that the typical fee-only advisor recommends no-load funds, be they managed or indexes. Much the same as my own practice, I'm sure that the typical fee-only advisor considers annuities - but most likely doesn't recommend them often, if ever. And I know that the typical fee-only advisor doesn't sell insurance - they couldn't be called fee-only advisors if they did. But all (or most) quite often recommend insurance, where appropriate (hence the licenses).

Now, to your points about compensation structure: I never once said that the fee-only structure is above reproach. As you've pointed out, there are many other professions compensated in this manner that have integrity issues, and it is certainly within the realm of possibility to call a fee only advisor's integrity into question - but not with regard to the recommendation of specific investment choices for which the advisor has no (real or perceived) motive to recommend.

And then the last point - "those products that do not pay them a commission" - is equal to every possible investment choice in the world, for the fee-only advisor. How could the possibilities be more comprehensive than that?

Apples to apples, Jim. If you want to go by what the client "pays," and not what we make for our time, then compare fair. Break it down. The client "pays" me about $1,000 for my advice (indirectly), and the other $2,500 for the entrance fee into the managed fund themepark. They pay you $1000 bucks (bringing it down to a more reasonable level) for your advice, and get free entrance to the index fund themepark. Maybe one has more rides than the other, maybe there is less of a chance of the ride breaking down. Some will find it worth the cost of entrance, others will not. (on the fly analogy, by the way) I'll take your on-the-fly analogy, it seems to fit pretty well. I don't argue your assessment at all. But if you'll recall, my philosophy is that the rides in your park are not worth the extra entry fee - especially since they're more likely to break down.

Apples to apples, if my client goes with no-loads or index (either by my recommendation or their own choice), then there is no question that they pay more through you than through me.

The "point" of my statement was regarding our motivation, and not the client's outlay. Load v no-load is a separate debate.
Okay, I'll buy that. I think we're on the same page... I think you'll also agree that this zero cost client is not your "norm".


I have said a number of things in this post that have called your compensation structure into question. Until this discussion, I never had reason to. Please understand that I only do so because I feel it is beneficial to the readers, and is germaine to the issue in this thread. Since the readers have access to your site, they can become clients of yours.

I continue to hold you in high regard, because you have shared a wealth of knowledge with the people of this forum, and have helped many, including me.As stated previously, I don't ever think for a moment that any compensation structure is above reproach. There are nuances about the different structures that are appealing to different clients - but a compensation structure, while it might help to attract a client's attention, can never take the place of a positive relationship and good, sound advice.

I think this is healthy discourse, as you say, beneficial to the readers as well - and I welcome the opportunity to discuss it with you in this forum... I also hold you in high regard - if you didn't care about your clients and your profession, you wouldn't spend the time discussing it. I wholeheartedly believe that your clients are well-served.

I feel so much better!

I stopped coming to this site for about a year, because I found myself spending far too much time on it, and became less productive. But this conversation makes me realize that it is worth the time (sometimes).

There are some minor points in your last post that I could debate, but I can put them aside for now.

Your mention of not selling insurance, but possibly recommending insurance made it all clear to me. Basically, you can recommend anything under the sun, but if it means making a commission if you implement it, then you refer them elsewhere to get it done. Totally makes sense now.

I assume, then, that you would refer out your annuity recommendation as well. Admittedly, I don't recommend annuities very often either. But ever? I guess that's just another debate for another thread.

Clearly we are on different sides of the managed/indexed debate. But I would encourage you to look further into managed funds, especially with regard to high net worth clients. And especially in qualified accounts (where the turnover issue doesn't come into play). Since it doesn't benefit you to hold their accounts, it shouldn't be a problem to refer them directly to the mutual fund family.

Great talk!

Clearly we are on different sides of the managed/indexed debate. But I would encourage you to look further into managed funds, especially with regard to high net worth clients. And especially in qualified accounts (where the turnover issue doesn't come into play). Since it doesn't benefit you to hold their accounts, it shouldn't be a problem to refer them directly to the mutual fund family.
Why would I change my philosophy for clients who happen to have more zeroes on the bottom line? The reason I have this investing philosophy is because it works. I don't believe that managed funds add value - period, regardless of load. In a larger account, different vehicles can (or must) be utilized, but the overall philosophy doesn't change...

In qualified accounts, most often the choice is limited, and so very often I am in the position of making portfolio recommendations on a multitude of share classes. This is an area where, quite often, I am able to add value where a commissioned guy might wave the client off - since he is not compensated for his work (in making recommendations for qualified accounts), if the qualified account is the only holding.

Going backwards...

"In qualified accounts, most often the choice is limited"

Why would you be limited? A brokerage account is a brokerage account. Now you wouldn't be buying munis in there, and an annuity would be less commonly found in a qualified account, but the options are the same.

One of the big arguments for index funds is that there is less turnover, and therefore more tax implications. I'm just saying that in a qualified account, that doesn't matter.


Why would I change my philosophy for clients who happen to have more zeroes on the bottom line? The reason I have this investing philosophy is because it works. I don't believe that managed funds add value - period, regardless of load. In a larger account, different vehicles can (or must) be utilized, but the overall philosophy doesn't change...
I figured since you weren't familiar with breakpoints at the beginning of this conversation, that you might want to re-evaluate your philosophy. If you had been thinking that a millionaire is going to spend $57,000 to get into an A-share, and now you know that he/she pays nothing to get in, maybe that changes things.

More zeroes on the bottom line quite frankly means more options. The more they have, the less percentage they have to pay. Not just in mutual funds, either. In fact, if their zeroes bring them to the 8 figure range, they start qualifying for institutional shares, which will end up costing them fractions of a percent, and at that point, no load funds would be outright wrong.

I'm not asking you to change your philosophy because of the number. I'm asking you to re-evaluate whether your philosophy still holds true when more money is involved, now that you know more about breakpoints.

Qualified = 401(k), 403(b), other CODA to me. Qualified plans are almost always limited in the choices of investment options. In these cases, we do our best to utilize the choices in the plan to emulate the indexes (all the while holding our noses, much of the time).

Is there another kind of qualified account that you're referring to?


With regard to the question about breakpoints and other hocus pocus - you're making the assumption that cost is the only factor. Go back and look at my philosophy from earlier: I place no value on the effort of an active portfolio manager, in a loaded or no-load category. Breakpoint, no breakpoint, institutional share, jumbo account - I don't care. My philosophy is the same no matter what - and recent changes in the marketplace have had no impact on it. If anything, the advent of ETFs has helped to push even farther down the track away from managed funds, since their structure allows for even more tax-efficient holdings than garden-variety index mutual funds.

Jim, you’ve always been clear about your philosophy regarding actively vs. passively managed funds. Your value to these forums is certainly not in question. I do have one area I’d like your thoughts on, however.

A couple years back, American Funds put together a piece on sequence of returns and active management. If I’m not mistaken, it’s available on their website. It was basically about how active management can limit the effects of a down market during the distribution phase. The way this was presented was by showing the S&P 500 index’s actual returns (Portfolio A) over a 40 year period, ending with 2005, side by side with the same returns, but inverted chronologically (Portfolio B). At the end, the average annual returns were, of course, the same for each, as was the standard deviation. However, when the scenario was altered to show a hypothetical 5% withdrawal rate, with an annual inflation adjustment, Portfolio B actually held up substantially better than Portfolio A.

The point of the piece was, despite having the same avg. annual returns, the 2 portfolios results weren’t symmetric. What does that mean to the average investor? Basically, the average investor who is in the distribution phase of the game is more vulnerable to inopportune timing of their withdrawals. If they just happen to retire and begin withdrawals in a year where the market is tumbling, this drastically affects the longevity of their portfolio. Ultimately, the thinking here is, even though we can’t control the sequence of the market’s returns, we can choose a money manager whose goal is to limit risk on the downside. This is where the value of active management can shine. I think sometimes the average investor gets almost pays too much attention to the whole “accumulation” concept, and forgets that at some point, they may need to actually “use” their money. By relying too heavily on management that has limited flexibility (i.e. index funds) during the period of time where distributions are being made, investors may unknowingly risk outliving their savings if they just happen to begin those distributions at a crappy time.

Again, I’m not saying active is better than passive. This is just another concept that I feel makes sense.

I'm not sure I follow your point, Sadale - a distribution portfolio looks dramatically different from an accumulation portfolio... if you had the exact same holdings throughout your lifetime, then I could follow what you're saying. I'm going to look for the article you're referring to. Found it - http://www.americanfunds.com/resources/news/fund-measure-up.htm - in case anyone's interested.

Okay, yes, I follow the point, assuming that you would use the S&P 500 index as a portfolio for distribution. But I don't think that makes sense at all - as indicated in the article, the index is better suited to accumulation (low dividend rate) than to distribution. So, since you're practicing appropriate allocation strategies, you've gradually moved into a "distribution" portfolio by the time you're ready to start taking money out, and your portfolio is (by then) throwing off dividends and performing with less volatility (like AMF was).

I think probably the end result is that either method will come out as a wash - and American was pretty gutsy to put together such a piece, since essentially they are admitting that their fund is inferior to the index in accumulation, in order to make the point that their fund is better than the index in distribution.

The real lesson here is that even a buy and hold strategy needs to be adjusted for lifecycle changes, no matter how you choose your allocation. Thanks for pointing out that article, Sadale!

Okay, so, just for grins, I took the end result of the accumulation table and then applied the distribution parameters to that... in other words, instead of starting with 100k in each account, I took the 1999 figures for the AmFunds account and the index, and ran the distribution plan from that point (which is closer to reality, right? Folks accumulate for 30 years and then distribute based on their results)

The distribution amount began at $20,581 for the first year (1999) and increases 5% each subsequent year. The end result is - S&P 500 index comes out with a higher balance - just by the last year, though, as the American entry was leading from about the fifth year forward. This points up part of the problem with using static dates, versus looking at the outcomes over many different starting periods... Obviously someone who started saving 30 years ago will not see exactly the same results in their account for the second 30 years of experience... I'll probably do that work next.

Here's the table for anyone that's interested:

I'm interested in your results, but I get an error message when I try to download the pdf.

The piece you linked is not actually the piece I was referring to. If I could figure out how to get is posted, I'd do so. It's titled "The Sequence of Returns Matters".

In actuality, this piece, in addition to demonstrating the theory simply using the index's returns, it also tests the theory using 3 American Funds that were around back in '66. Each one actually has beaten the S&P (including dividends) over that time frame, so the inferior fund concept isn't an issue. In addition, when the distribution plan is applied, each fund with the distributions also beats the S&P (including divies), with the distributions. In fact, the S&P portion of the funds would have run out early, and not made it to the end of the illustration.

Now, I'm not going to look, but I'll just assume that there were years that 1 or all of those American Funds didn't beat the index. However, over the 40 year period of the illustration, they did. More to the point, if we factor in withdrawals, it's the active management of those funds, and their ability to minimize the hurt in the bad years, that allowed them to simply last longer.

Geez. Looks like a problem with the board, as I can't pull up the pdf either... but I bet if I wanted to post a porn picture I'd get away with it!

Another good reading suggestion that illustrates American mitigating downside while capturing upside (capture index) against the 500 is "The New Math of Retirement".

Another good reading suggestion that illustrates American mitigating downside while capturing upside (capture index) against the 500 is "The New Math of Retirement".
Author? :confused:

Sorry, it's on the American Funds website as a concept paper.

Qualified = 401(k), 403(b), other CODA to me. Qualified plans are almost always limited in the choices of investment options.

Is there another kind of qualified account that you're referring to?

Seriously? IRAs, Rollover IRAs, Roth IRAs, any other qualified brokerage account. When someone rolls over a 401k (with those limited options) to a financial institution, they now have just as many options as they would if they opened a taxable brokerage. I feel like I'm in the twilight zone here.


With regard to the question about breakpoints and other hocus pocus - you're making the assumption that cost is the only factor.

I'm sorry, but yes, I absolutely am making the assumption that cost is the only factor...for your side. Everything discussed in the index funds camp is derived from cost. Are you saying that if managed funds were free, then they would still be inferior to index funds? Maybe you are...


I place no value on the effort of an active portfolio manager, in a loaded or no-load category.

Dude. Come on. You're throwing me for a loop here. All philosophies aside, how can you as a professional not think that there is at least some (just a little) value to a professional money manager? Why do they still have jobs? You simply can't be that far to that extreme. I still can't believe you said "hocus-pocus."

im totally lovin this thread. i only posted to be a part of it!

Fin, an IRA is an IRA, not a qualified plan. I reckon you could call an IRA whatever you like, but you've got to understand that other folks in the conversation are likely to use the real definitions. I'm shocked that a professional such as you doesn't know about 401(k) plans! But as I mentioned, since a commissioned guy can't benefit from them (unless he sells the plan) they're likely to wave them off. And yes, I'm familiar with the openness of an IRA account - no twilight zone here...

It's all hocus pocus to me, because I don't work with those kinds of funds, therefore it doesn't mean anything to me. I said it before, I don't place value on the benefit of a fund manager. Why do they keep their jobs? Not because I send them money... How much more clear can I be? And regarding costs, no, that isn't the only factor, although it is a factor. I'm surprised you don't know about no-load managed funds - there are lots out there (from what I read, although maybe you're going to tell me that Morningstar has THAT wrong as well)...

Here's the deal - I believe the markets work on their own. If I'm wrong about that, then I have only benefited to the extent that the market is capable of providing returns over a long holding period. If I'm right, then I "win" - and my market return is as good as it gets. If I believed otherwise (that the markets do not work on their own and therefore I choose a managed fund), and I was wrong, I could likely seriously underperform the market or lose money. If I happened to be right, I might shake loose a little more return above the index, or I might just match it - at an additional cost (there's that word again!). The benefit of choosing a speculative manager's expertise is an educated guess, and if you're wrong you not only underperform the market, you paid someone to do it! In my philosophy I'm willing to forgo the "home run" for an assured long-term steady gain. It's not sexy, it's not exciting, and it doesn't pay commissions - but it works.

Other things that work: living within your means, eliminating consumer debt, saving aggressively, taking additional risks (in terms of allocation tilt) earlier in life and ratcheting that risk back as you get closer to the "need" date, dollar-cost averaging from your paycheck, paying yourself first, and considering the tax consequences of each and every financial decision. Again, nothing sexy here, but it works.

1MO

I’m with you. It’s killing me not to comment but I don’t want to screw up a great conversation. Thanks for the time you guys are putting into this. It’s great reading.

Sorry, it's on the American Funds website as a concept paper.

It must be on the site that requires the secret handshake as I couldn't find it on the regular site for us peons. Fortunately, google to the rescue and I got it elsewhere.

Have to say hearing "new math" used in conjunction with retirement from massive mutual fund company raised a red flag. In interest of full disclosure, we own American Funds in our 403b.

At first blush, this is clearly a great sales tool. And the disclaimer at the bottom of the article does indicate that the information is "Intended for financial/investment advisers, bank trust companies, consultants and institutional clients of American Funds." Looking at the results one could see the apparent potential of using a healthy dose of Cap World Growth and Income during accumulation and Cap Income Builder during distribution.

Of course as with all such studies, one considers that the data was massaged and mined to produce the best results. Without the raw data for a much longer time period than that used, what conclusions can we draw (playing Devil's advocate here)? Don't know if sales loads were included in the capture rate chart (although a 3.5% load was used for the graphed data).

What I do know is that Am Funds are hard to benchmark validly. For example, the S&P 500 is used for both the Growth Fund of Amer and Cap Income Builder. But those funds carry an international component of 18.6% and 42.6% respectively. Likewise, they hold a hefty cash component of 11.4% and 10.4% resps. and Cap Inc Bldr holds 20% in bonds. So what part of the capture rate is from poor benchmarking and what is actual managerial skill?

Annualized returns of the benchmarks to compare with the fund returns are missing; how can we know how actual results for any particular time periods would have really turned out? Again, the selling point is peace of mind in down markets and lots out people will find comfort in that thought. But it is cold comfort to a more dispassionate investor.

Frankly, a person could have done worse than holding CWGIX for accumulation and CAIBX for distribution. And the charts and graphs are clearly useful to sell the products. But from an analytical viewpoint, they paint less than the full picture and don't adequately prove the value of managerial skill in down markets. Not to say it doesn't exist. As I said, just playing Devil's advocate.

Blixet,

Everything you say is true about proper benchmarking, time periods and raw data, etc.

Yours is also the case against ANY investing methodology. Indexing studies hardly even existed prior to the advent of the index fund and the launch of Vanguard. It is all marketing!

But for the sake of simplicity, the piece shows SIX managed funds from only ONE fund family that spanked the index they are primarily tied to (S&P) over the past decade. Forget for a moment that during another period it may not have been that way. For the period illustrated (10 years) the index holder would have been the big loser.

My point was not to flaunt the superiority of managed funds because I don't necessarily find them superior. My point was only that it is extremely easy to find examples where managed funds DO perform better than the index. A ten year holding period is substantial. It is also important to notice that the results were tracked over the course of one full market cycle of ascension, peak, decline and recovery. With hindsight, where would you rather have your money during this same period? Not that hindsight matters in the market.

In my example year to year returns are irrellevent because it simply tracks a dollar amount and says this is how much your portfolio would be worth. I can rightfully assume, that is all the typical investor cares about.

I agree that it is easy to find examples where managed funds spanked indexes. (Especially when the managed funds hold large amounts of asset classes that outperformed the S&P). Persistance of performance into the future is of course the key. Personally, I have mostly managed funds (although I do index a part of my domestic large cap) and I have managed to outperform my benchmark (which is far more accurately constructed) for a long time. I am not necessarily convinced that the Bogleheads have it right.

Sorry, I was on vacation.

Fin, an IRA is an IRA, not a qualified plan

Jim, an IRA is a qualified account. I didn't use the word "plan." If one is limited in their 401k selection from an old job they can roll it over into a rollover IRA, which keeps the money qualified, and gives you all the options available of any brokerage account, qualified, or non.

I know you know this. I just don't get why you're playing dumb.

I'm shocked that a professional such as you doesn't know about 401(k) plans! But as I mentioned, since a commissioned guy can't benefit from them (unless he sells the plan) they're likely to wave them off.

Now was that necessary?


It's all hocus pocus to me, because I don't work with those kinds of funds, therefore it doesn't mean anything to me.

This to me is a key problem at the heart of the entire debate on load v no load funds.

I think it's safe to say that there will always be opposing sides to this issue. People are always going to have strong feelings about paying for management, and it comes down (for the most part) to personal preference. I have yet to see either side crush it's opponent, but plenty of people on both sides seem to think they have done just that. It won't end.

But my issue with that comment is this:

If you haven't familliarized yourself with BOTH sides of the issue, then you should not be trying to affect other people's opinion on EITHER side!!!

This goes for all debates, be it fee v commission, pro-life v pro choice, Jesus v Buddha, whatever. If all you know is one side, how can you possibly know that you are in the right? Moreover, if your job is to recommend one way or another, how are your clients' best interests met, if you really don't know the benefits of other options?

I am fine with people offering opinions. If you are familliar with index and no-loads, and you want to give your testimonial, great. That helps. But someone in a position to actually affect the decisions of others should be fully aware of all the angles.

Jim, I have never seen a post in which you recommended something to someone without disclosing all that needs to be disclosed. You are very careful with your words. That above rant was directed more at the general public than at you. It was just your comment that set me off. You actually came off as proud of yourself.

I still stand by what I said before in that you should look into the other side more. I think your personal conviction is causing you to block out new information that may contradict what has been a staple to your business. There is no reason whatsoever not to want to learn more about your own industry.

By the way...

My concern here is for the greater good. I am not trying to get into an "I'm a better advisor than you debate." I just want readers of these forums to get the straight dope from good sources.

Sorry, I was on vacation.That was *some* vacation - hope you had an enjoyable time...

Let me start by saying that it was probably a good thing that we had some time off from this thread - and I apologize if my comments were unnecessarily terse.

If you haven't familliarized yourself with BOTH sides of the issue, then you should not be trying to affect other people's opinion on EITHER side!!! I think the problem here is that we're not clear about which "sides" we're talking about. I am specifically on the indexing side, versus the active management side. I think (but I'm not going to put words in your mouth/post) that you're referring specifically to load versus no-load. They are not the same debate. The reason that I don't familiarize myself with loaded funds is that I am squarely in the indexing camp, and it would be profound silliness of the highest order to pay a load for an index fund. Therefore I have no use whatsoever for loads, loaded funds, breakpoints, or any of the additional mumbo jumbo (is that better than hocus pocus?) that is inherent with the load fund world. That is not to say that I can't decipher those details for a client that is open to changing course, however, as I've stated in the past, I have never worked with these funds (from an ownership/advisor perspective) and so the minutia might escape me.

It's a little like saying - I know you're a vegetarian and all, but you really shouldn't make your choice "final" until you've learned all you can about meat. Sometimes when you buy enough meat, it can be cheaper than vegetables! Obviously the primary issue is not cost, although a side benefit is cost reduction.

For anyone who would like to see an article which provides a good starting point for the investment philosophy of which I have written, please see the following link - http://www.stanford.edu/~wfsharpe/art/active/active.htm - for Bill Sharpe's seminal article "The Arithmetic of Active Management", from 1991.