Pros Vs Joes

Since this debate seems to come up in so many random threads, I thought I'd just start one specifically dedicated to this subject.

I understand that there are a lot of people out there that believe they will be better off if they do their own investing. They believe that any costs incurred by paying an advisor's fees, or loads, or the like...will actually be a drag on their overall return, as these costs are avoidable if you only do a little homework.

Obviously I would tend to disagree with that, but I was wondering why there are such a large number out there who refuse to take advice from a professional, even when it costs them nothing.

I'd like to think I'm open-minded, and would love to hear any comments on this subject from either side of the fence.

My philosophy on investing. The first thing I need to do is throw my credentials out there. I don’t have any. I am not a professional advisor and when I sign my name there are no letters behind it. I am conservative by nature. I was raised by conservative parents who instilled a strong sense of moral character in me. My dad worked for the same company for 44 years. He retired 8 years ago at the age of 62. He has 7 figures in his retirement accounts and he has yet to touch them. His income was less then 65k when he retired. He did not retain a financial advisor until about a year before he retired. At that point he felt some big decisions needed to be made and he needed some help. He sees his advisor once a year now just to go over any changes. My point here is not to brag on my dad (which I am more than happy to do); it’s to show the foundation of where my ideas come from.

I have posted this a couple of times before but just for easy reference one more time: For the average American running their own financial life just isn't that tough. Live on less than you make, set up an emergency fund, set up a diversified portfolio of index funds, and if appropriate get some life insurance. You can make it as complicated as you want but just do these basics and you will be way ahead of your peers.

The average investor should be shooting for average returns. I would guess that statement makes more people, professional and novice alike roll their eyes than anything else I ever have to say. It sure doesn’t sound very American to just try and be average. So let me explain why I make that statement. An entire industry survives and thrives because so many people think they can beat the averages. Index funds level the field for ignorant investors. Yep I said that. Yes I am an ignorant investor. My extremely unscientific opinion is about 80 percent of the people in the market are ignorant investors. Why? Because only a handful of people truly know what is going on (meaning they have the full picture) in a specific individual company. Those few people in the know for legitimate business reasons are going to keep their cards pretty close to their chest. Unless your Warren Buffett you are not going to get access to these people. I am not talking about public conference calls. I am talking about real access. If picking winners were just a matter of reading a company’s filings or a prospectus then this would be pretty easy. Just load your parameters into a computer and let it sort through the numbers and pick your winners. But it isn’t that easy, and the numbers don’t always tell the whole story. The true condition of a company may not come out in the numbers for months or even years, and I am not talking about cooking the books. All this complexity just to find out the real deal with just one company and chances are your portfolio has hundreds of companies (funds) in it. That is why I say most people are ignorant investors professional and amateur alike. That is why I think it is unnecessary to pay someone by means of a load or a commission to choose investments for you. I don’t believe they have a true advantage. A diversified portfolio of index funds will level the playing field. Let me again say diversified. Many here always point to the S&P 500 but there are many index funds.

Without a doubt there are some professionals who seem to have a knack for reading the changing tides. Because investing is a marathon and not a sprint it may be years or decades before you find out if the expenses you are paying have had a return. The odds are against it and if you did choose the wrong advisor you don’t get that time back to start compounding again. Further, those that really have shown a prolonged proficiency at reading the tea leaves are already booked up with high dollar clients. Read the posts on this board. Many (I would even say most) of the professionals like to talk about how most of their clients are high dollar folks. The general feeling I get is that top-notch advisors are not really interested in working with the average family that makes less than 50k. In spite of all the chest thumping that goes on here not everyone makes 100k, I believe the average income for a family of 4 is 38k.

Phew. Ok, that is why I do not care to pay for investment advice. As is routinely pointed out here there are other reasons to get an advisor. I personally am very active in educating myself on the other aspects of creating a “life” plan. I believe most people should be able to handle those aspects on their own as well. I will concede however that not everyone will consider all of the individual areas of need. Life insurance for example. You can certainly get it on your own but you have to have considered it first. A professional may point this out to someone who otherwise may not have considered it. I do not believe for the average Joe however that a consultation and a “life” plan should cost the 2 to 4k that I have seen quoted here.

To sum up, the “average Joe” should be able to handle his own plan. If you have additional complexity or you just don’t get this stuff then get some help. But once again, if your only source of financial education is the person who handles your finances you will never know if they are doing you right or not.

I was kind of surprised that this thread never got any play. The subject seems to injecting itself into some recent threads so I thought I would resurrect it again. I fully admit that my opinion on advisors in general has changed since I started following this board. Both the simple and complicated questions that have been asked and answered here have aided in opening my eyes some more.

“75 percent of all funds do not beat their respective indexes”. While the percentage varies a little depending whom is saying it, you read and hear this statement frequently. What I don’t believe I have ever seen is “managed money out performs passive money by X percent”. It is possible that due to bias I have read this but tuned it out, but I don’t think so. The professionals live by numbers and have a tremendous command over them. Where are all the statistics supporting managed money? This isn’t intended to be a loaded question so I can rip apart the answer. I really want to know. Where are all the statistics supporting managed money?

Okay, I'll bite.

But I won't come out in favor of active management or active investing. Where I think the Pro brings value to table is in management of emotions.

Dalbar does a study every year, wherein they show the return for the average investor over the previous ten years, and compares that return to the market average as a whole. The results nearly always show that the average investor has a dismal return - sub 2% per year - while the market typically shows an average return in excess of 10%.

The primary reason for this anomaly is not poor choices of investment products or even allocation, but rather poor choices as to when to participate. The average Joe and/or Jane can choose good funds to invest in, but they lack the intestinal fortitude to get in to the market and stay there, in order to reap the benefits that the market is willing to provide. A Pro's guidance will help the average guy to stay the course, which is a primary component to success in investing.

i think jims and blank are right on the money!

jims, with all due respect, you are not an 'average joe' if for no other reason because you have a long term plan and you invest for the long term. even if you developed this yourself and then stick to it.

keep in mind that the vast majority of Americans are not like you. it is not because they are not as smart as you or as rich as you or as blessed as you ... it is just that they are different.

perhaps different because they don't enjoy this stuff. perhaps they just want to spend more time with the family and less time on this stuff. no matter how important financial matters are, it is just not something they grasp easily or something they enjoy doing. 100 years ago we had a lot of "out houses". digging one wasnt that complicated. managing it wasnt that complicated. but when it came time to dig a new one, i assume lots of people put it off as long as they could. when digging it, perhaps they quit a few feet more shallow than they intended.

the discipline needed to act on your decisions is one of the biggest benefits from an advisor. another (assuming a good advisor) is doing the research and then the paperwork and tracking to make everything happen that you wanted to happen. finally, a personal educator all for you!!! you can read a book that explains how dollar cost averaging works (a very simple concept) and it might take a half hour to read it then another to read it again and grasp the concept. i can show you in 5 minutes in a way that makes perfect sense. an advisor will save you over ten times your time. now the "average joe" may understand it enough to "believe" it is a good thing after the first read - but does he understand it well enough to explain it from his own research? there are tons of advanced concepts that will have a greater impact on a family's wealth accumulation and distribution than just good ol dollar cost averaging. however, most "average joes" dont know what they dont know and therefor can't do research on a topic they cant identify.

i recently read a book and watched a presentation on retirement distribution. the book was so complicated i couldnt read more than 6-8 pages before taking a break. however, the information was phenomenal. it will help me leverage some of my clients distribution issues to a far greater degree than i ever thought possible. it isnt applicable to most of my clients. but knowing which ones are which is my job ... as their advisor.

i also wholeheartedly agree with blank's reference of Dalbar (the preeminent research group on investing and investor behaviours). actually, i think last year's study showed the average investor making a whopping 3% return! their best showing EVER! but still lagging behind market returns.

finally, you have stated that you have learned things "from 'professionls'" who have posted on these boards. kudos to you for being here (you add value here as well) but imagine all the things you still may not know simply because you don't know to ask.

that said, seems like you are doing well enough on your own. and my most sincere wish is that you meet and exceed all your dreams (including the financial ones).

1MO

Thank you Blank and 1MO for taking the time to respond.

Jim I have reviewed your site and it appears to me that you are providing exactly the kind of service most Americans need. It appears to me that you have done everything you reasonably can to remove a clients concern of who’s best interest you really have in mind when you are taking care of their money.

1MO thank you for the kind words. I realize that my knowledge of finances (as limited as it may be) is above that of the average person. It’s actually been some of the more basic questions that have helped to open my eyes to the level of some peoples knowledge or lack there of of finances. That said I still don’t believe you have to know a whole lot about it to be successful at it. Since I believe in index funds I don’t believe the average Joe needs to spend time studying the market or paying someone to study it. If you are lucky enough to get past the ROTH income range your likelihood of needing more advanced methodologies increases. At that point (hopefully) it is far more likely that you have already utilized all your deferment options and among other things tax strategy comes into play.

You and Blank have both sited Dalbar’s research as support for employing an advisor. I accept that since I agree most people struggle with discipline issues. Heck, skip the investing I wish they would just learn to live on what they make! Still though you haven’t provided any backup to support actively managed money. (I know it’s no one’s responsibility to do that for me.) Why don’t you see statements like ”AG Edwards clients have outperformed their peers by x percent for the last 5 years”. Is there simply no way to measure performance as a whole? Or at least categorize segments of the whole?

BTW
I am not in sales so I don’t deal directly with the people that make our company possible, but I still refer to them as “my customers”. I had no trouble understanding your context.

Why don’t you see statements like ”AG Edwards clients have outperformed their peers by x percent for the last 5 years”. Is there simply no way to measure performance as a whole? Or at least categorize segments of the whole?

When I read that quote, I imagined a compliance officer's head actually exploding... :eek:

The reason you don't see statements like that is because it's not allowed by the SEC. For the same reason, you always see the statement "past performance doesn't guarantee future results" (or some variation) when showing historical returns. Testimonials of clients and investment results of those clients can not be used for advertisement.

yep, its a no-no with the SEC. to do so "implies" the company would do the same for a new client and can be construed as promissary.

now, that having been said, there is lots of data that supports that active management (both for portfolios and especially for investment companies) can handily beat the indexes. there is a lot of information on these boards that discusses that in anecdotal form. unfortunately, there is so many ways to slice this pie that you can make an argument for just about any position you take depending on which data you use. this is one of the weaknesses Americans have with making smart investment decisions.

here is a quick thought exercise: the guy on Law and Order who is the spokesman for TD Ameritrade. the only thing we know for sure is that he is not a client of TD Ameritrade. if he were, he could not advertise for them. so, this means he is a do it yourselfer using someone else (meaning he likes a competitor better than he does TD Ameritrade) or he is using an advisor himself (which is much more likely). if he is using an advisor, then isnt he "lying" by encouraging people to do something that he himself does not do (and in all likelihood can't do - or can't do as well)?

so, can you do it yourself? i think you are a good example of someone who can. but you are a rarity. look at how many OTC bulletin boards out there are flushing out stock picks. the VAST majority are being bamboozled and in being scammed, are creating short term profits for the bamboozeler.

here are two of my most basic pieces of advice, and they apply to roughly 60% of my new clients:

1. Get a will (or update your twenty year old one).
2. Have a real person listed as your designated beneficiary on your retirement accounts and life insurance policies.

i sincerely believe (though without adequate research i cant state definitively) that $100 Billion would be "saved" in the next 1-5 years if people just did this. yet more than half have not and will not do this until it is pointed out to them and then we professionals "pressure" them to take action.

with every life we touch our goal is to have a significant, and measurable, and profitable impact on the client. if we couldnt do this, we would be out of business no matter how slick our advertising is.

1MO

I'll add the following to 1MO's two basic pieces of advice:

3. Just like voting in Chicago, contributions to retirement plans should be done "early and often". An early start gives you lots of time to compound your results, and a regular, disciplined contribution strategy will pay off for you over your lifetime.

If you know what you are doing and have the correct temperament you don't need a "Pro" to help you.

Most people don't know what they're doing and/or have the wrong temperament(overtrade, hold on to losers etc etc)

BUT this doesn't mean that most people get ENOUGH value out of paying a "Pro" for financial advice or active management (vs. an index fund). How hard is it to tell someone to save, invest in a mix of index funds that suits their risk tolerance? Surely it shouldn't cost 1%+ of "Joes" money each year to hear that from a "Pro"?

In my experience most financial planners advice is based on a pretty average asset mix and their recommendations are pre-filtered on what investments will give THEM the best return (up-front fees and trailing commissions).

In terms of active fund managers - if they were really "Pros" then 99% would be beating the relevant index benchmarks, not the 30%-50% that can be explained by just dumb luck.

Regards
http://enoughwealth.blogspot.com

If a "pro" helps you to maintain your strategy in order to make up the difference between the market (~12%) and the average investor (~3%) over the last twenty years*, it seems like your 1% is well spent.

If you can maintain your strategy on your own, you're among a very small percentage of most investors, but you're right, you can do this by yourself. Since everyone is an above-average investor, we can see why this works so well...

*data taken from Dalbar study, 2005

Here's my 2 cents of this subject, although due to inflation it probably costs a dime by now. Since I've 'smartened up' and tried to make a better future for myself about a year ago, which coincidently coincides with the birth of my daughter, I've personally learned alot. When I think back at what I was planning on doing before I made an actual effort to learn what i should be doing, I laugh. I won't get into what that actually was since I would be laughed off the forum, but I've realized what I think the main reasons why 'regular people' aren't more proactive about their financial future. Since I'm only 30, most of my peers are roughly the same age and have the classic 'why think about retirement/future when I'm so young, I'll worry about that later,' syndrome. I try all the time to make them realize that this is actually the best time to plan, since they have the power of compounding to work for them for many years. Unfortunately, mostly all the want to do is talk about it, not act. They want to live for today. I've offered to help them all as best as I can but they are all content to wait, when in the future they will be behind the 8 ball. I explain all the benefits of IRAs and 401k's, which some actually have company matches but choose to throw away free money by not investing in them, because they are happy with regular old bank accounts. There is also this stigma that investing is 'gambling,' and that they'll lose all there money. My response always is that if they go simple and invest in a total market index, for them to lose all their money, every company in the country would have to go bankrupt. I tell them to look around at all the products in their homes, the car in their garage. I ask them how could they possibly believe every company would fold. I then explain to them that even though they may have X amount of dollars in a bank account earning 'interest', they are actually losing money. For some reason, they think that since their balances go up, they have more money. I explain to them that they may have more money, but they have less buying power. Do they think their homes cost $25K and their cars cost 1K like grampa's? Cost go up.
Another problem is bad advice. Granted a financial planner would help immensely, but average people who know nothing listen to their friends, they don't seek true professional help for financial matters. I'm not saying that is good but it's the truth in the vast majority of the time. I had to talk my sister out of some expensive whole life policy on her kids, ages 3 and 5. She doesn't have any retirement or savings to speak of at all, not to mention that her kids dont need life insurance anyway. But she heard it was a good thing to do for the kids by one of her friends, so she almost did it. She actually asked me about and after I got through calling her a moron, I made her realize that it was stupid and she agreed to open an IRA up instead, although I honestly dont think she will and just agreed to it to shut me up.
However the major problem is lack of knowledge. Most people don't even though about index funds or even mutual funds as a whole. Most of my peers think investing is picking individual stock and/or buying CD's. Since they have no idea how to pick or even buy stocks, they don't. The couple people I know who actuall invest in their 401k throw a minimal amount in every week, like 50 bucks(granted it's better than nothing), and invest in whichever fund has the highest recent performane recently. They don't even realize these are mutual funds, they think they're companies that they've never heard of. Feel free to laugh, I do. I know nobody who invest in an IRA, since that requires effort on their part.
I don't know if its just that the company I keep are just a bunch of dopes or if they are they typical 30 year olds, but that is my experience. I was just like them until my daughter was born and I got a kick in the butt to do something with myself and I feel as though I learned an unbelievable amount just by learning from forums like this, older people that i work with(I have no problem learning from others experiences, since my parents were horrible in this area as well),simple books like investing for dummies, and just taking an actual effort to learn. I also believe that if parents helped their children learn about financial matters, it would pay off big time. Again none of my peers parents taught them about money. I don't know any rich people, but I'm willing to bet they teach their children better than average joes do. I just decided that I didn't want to be like my parents, so I had to do something different, not make the same mistakes.
A little education would teach people to invest for the long term and not just chase hot funds, when thay had already peaked. Thats a problem which most people don't undertand. They see a fund has returned 18% for the year in August and invest in it. They buy after or close to, the peak of that fund. By the end of the year, the fund has returned 16%, but they lost money so they sell low. Meanwhile, others see a 16% return and then they invest, when it's still high. Too much chasing.
Patience, procrastination, and knowledge are the biggest obstacles to average people when it comes to investing.

Holy crap was that long. If anyone actually read it, I apologize for the length.

spritz, i read it and its pretty good. two suggestions.

FORMATTING MAN! Skip a line every now and then between paragraphs. Blank lines are FREE!

i dont want to enter the great debate on whole life here, but perhaps you inadvertently harmed your sister. while i am not saying life insurance on the kids should be her first move into the financial markets, she was thinking LONG TERM and using (ie. learning) about financial products. even you said she will likely not follow through on her getting an IRA after being called a moron by you. dont be mad - i am SURE you love your sister and only want the best for her.

however, i (and virtually every professional i know) carry "baby whole life policies" on their kids. they most certainly MAY need it in the future and if they do but can't get it, they are screwed. in fact i carry $2MM on each of my kids in guaranteed insurability. even if they end up not needing it later, i feel good for hedging my bets on their behalf. this is a VERY strong feeling for me - perhaps it was for your sister as well.

1MO

enough wealth, how many stupid posts can one person make in one day (i used to hold the record - but you surpassed me today).

when blankenship comes on to correct an ignorant statement you make, EVERYONE on the forum knows you are toast. might i suggest that you start up your own blog all about finances - you have impressed us all here!!! perhaps you could hawk books from amazon and romance with like minded souls. all of this while making the case for why people should hire financial professionals because of the ignorance they find below your marketing scheme.

1MO

Hey, spritz -

Not to criticize your efforts, I think you're right on target with most of your post (yes, I read it thoroughly!), but sometimes in our excitement to project our knowledge to those who don't understand, we turn them off. This has been a problem for religious zealots throughout the ages. Even though you think someone is a moron for taking one move or another, and even if that someone is your sister, it's not usually the best course of action to tell them so, especially if you expect them to change.

Notwithstanding 1MO's recommendation on whole life for kids, my concern is the same as yours: it's a matter of priority. If your sis doesn't have the basics in terms of savings (emergency fund, goal funds, etc.), ensuring future insurability of the children should be considerably lower on the priority scale, in my opinion...

All in all, though, spritz, keep the faith, and keep up the crusade. Just back it down a notch or two... ;)

1 Mo...

I understand the insurance on the kids as you see it, but in my sisters case, she was looking at it as an investment for her kids, as a gift for them later. I guarantee you she had no thought of guaranteeing insurance for them later, in case they couldn't get it. It was a total investment strategy on her part.

< insert space here >

As a secondary motive to get them to invest, I don't want them mooching off me. I want the best for them, but preferably not on my dime.

< insert space here >

By the way, her friends investment advice in the past included buying beanie babies. You may have driven by her having a yard sale before. She was holding the sign that read 'EVERYTHING MUST GO, BIG BLOWOUT SALE TODAY!!!'

< insert space here >

Don't think I'm a jerk for calling my sis an idiot, in actuality I probably called her worse, but I've been censored before, but that's the way we are. It sounds bad, but our greetings are usually insults, a la the TV show "Married With Children." We don't rip on each other to hurt their feelings, it's just good clean fun! I usually get the worst of it anyway.

gotcha. good post. thanks for the spaces.

1MO

I'll chime in re: in favor of the pro.

The reality is that you can cite emotional neutrality, cost-benefit and a host of other reasons to use the pro.

But truth be told: competencies in planning knowledge, product selection, taxation, asset protection, and hundreds of other financial complexities make the professional's value highy worthwhile. (No, I am not a FP.)

You never are 'wasteful' when you compensate others for professional direction.

Just another thought here...
I've seen the usual end-of-the-year "what happened to my mutual fund" questions in a few posts. This, of course, pertains to capital gain distributions.
This is just yet another piece of evidence that financial planning is not simply picking a mutual fund, throwing money at it, and watching it grow, as some DIY investors will argue. As we've already discussed here, "when to invest" is a concept professionals often have a little bit more objective grasp on, and what obviously goes with this, in this context, is taxation of certain securites; in this case, mutual funds. The lay person is generally not a tax expert, and capital gains are probably not at the forefront of the average investor's thinking when he invests in a fund. Unfortunately, when an investor buys no-loads over the internet, he doesn't have anyone looking out for him to offer a little bit of advice when it comes to not "buying dividends".

You make a good point but I’d be really curious to know how much DIY’ers invest in taxable accounts. In my admittedly small world, myself and the few folks I discuss finances with are working mostly in deferred accounts.

Taxes tend to be more of an issue for higher income folks. Higher income folks are more likely to have an adviser, actually they are more likely to employ people in any type of service industry, period.

I would also hope the taxman would only sting you once before you got some education or some help. Hopefully you’re not looking at your records at the end of each year and saying, “dang, I can’t believe that happened again”.

Regarding taxation, I'm speaking very generally, and I only gave one example, i.e. capital gain distributions. Taxation applies to an investor's whole investing career, in varying degrees throughout the contribution, accumulation, and distribution phases. Small errs in tactics can add up, and a little advice can prevent that.

Try to tell the average to middle income folks that taxes aren't an issue they should be concerned with - they will you a very different story. (example: look at who the AMT has been hitting in recent years)

I did not say, “taxes are not an issue”. What I said was they tend to be more of an issue for higher income folks. As I read it you were “generally” speaking about taxes as it pertains to investing, as was I.

“Try to tell the average to middle income folks that taxes aren't an issue they should be concerned with - they will you a very different story”. In that context try to tell anyone, low, middle, or high income that taxes are not and issue and of course they will tell you a different story.

DIY-er's should be able to find out whatever happened to their funds without having to post here, but you cannot learn without asking questions.

Also, one cannot predict high distributions years in advance. Some funds vary yearly due to turnovers and/or held stock performance.

Everyone had a right to freak out from time to time :).

Side note: Is anyone else having problems with fonts and smileys, or is it just my computer?

Side note: Is anyone else having problems with fonts and smileys, or is it just my computer?

I've noticed the same problem...

Like I've said elsewhere, it's all part of the learning process. An advisor facillitates that learning, while a DIY investor often has to stumble across it - and to that investor, one instance of bad timing or an err in strategy may be one too many.

Yes, the DIY guy absolutely can find out what happens regarding capital gains or taxation, but many investors just aren't that inclined to do their own research. Plus, they have to be looking for it, and as we've seen, some investors don't know to look.

And so, we come back to my orgininal point for posting on this particular thread - one way professionals are able to demonstrate their value is by offering advice on taxation, an area often overlooked by the average DIY investor.

So I guess I will restate my point as well. I believe the average DIY’er does not have the ability to max out his deferral options. As such, tax management is not a major concern until distribution comes into play.

I myself have not purchased a taxable mutual fund since 2004. With annual limitations, however, I could be easily forced to purchase another if I opted to sell another taxable account after maxing out my IRA. A deferred account is an option for me, but I am still in a low tax bracket, so it isn't a very feasable/useful option.

Like I've said elsewhere, it's all part of the learning process. An advisor facillitates that learning, while a DIY investor often has to stumble across it - and to that investor, one instance of bad timing or an err in strategy may be one too many.

I have never given any thought to taxes, I just go to H&R Block and they tell me how much I owe. I always thought that's just the way it is. I also never watched my funds (most statements were shredded without being opened) until a little over a year ago I wanted to see how much I had accumulated. Sense than I've been pulling my hair out every few weeks (10 May 06) when I see a big dip or a lower trend. In some ways it was better when I didn't know. I have the mind set to save, but don't think I have the guts to invest, it's hard when you see a $9,000 drop in a day and you want to get out before it drops any more. Anyway I was a dumb DIY investor with blinders on for many years. It's well pass time to get some help.