Evaluating Financial Advisers - What tools are publicly available?
August 16, 2018 6:11 AM Subscribe
I have a friend who's done some investing in stocks and mutual funds and after middling performance returns believes that the best way forward is to use a well-regarded commercial investor, actually this one: Fisher Investments.
I'm skeptical. But I want to respond with as much 'hard' evidence as possible.
What I'm finding is that what I thought were basic questions about investor performance are really hard to find good data on.
- What are the annualized returns for their portfolio?
- What is client retention, not just in terms of head count, but assets
- What is the long term mix of asset classes this investor has used?
- What was the portfolio performance during the period 2007-2010 and 2000-2003 and what were there allocation changes?
I have an econ background, so I'm more inclined to look at macro things: housing starts, wage growth, global market growth, etc.
My friend is recently retired and has decent savings, so this is a crucial time for her to not only seek growth opportunities, but also maintain the wealth she's created.
I'm not anti-market, but I may be anti-financial investor. I'm trying to assess the value that's really on offer for that 1.25% fee.
- Are they advising on short/long term tax consequences?
- Is their plan really customized to her point in the investment/earnings lifecycle?
- Do they have a track record of navigating recessionary markets (since IMO we're heading for one)?
(1) Is my stance needlessly skeptical or am I right that there needs to be more proof of value add here?
(2) Am I looking at the right metrics / asking the right questions in terms of evaluating a prospective adviser for her?
(3) What public tools are available to compare Fisher vs a host of other options?
What I'm finding is that what I thought were basic questions about investor performance are really hard to find good data on.
- What are the annualized returns for their portfolio?
- What is client retention, not just in terms of head count, but assets
- What is the long term mix of asset classes this investor has used?
- What was the portfolio performance during the period 2007-2010 and 2000-2003 and what were there allocation changes?
I have an econ background, so I'm more inclined to look at macro things: housing starts, wage growth, global market growth, etc.
My friend is recently retired and has decent savings, so this is a crucial time for her to not only seek growth opportunities, but also maintain the wealth she's created.
I'm not anti-market, but I may be anti-financial investor. I'm trying to assess the value that's really on offer for that 1.25% fee.
- Are they advising on short/long term tax consequences?
- Is their plan really customized to her point in the investment/earnings lifecycle?
- Do they have a track record of navigating recessionary markets (since IMO we're heading for one)?
(1) Is my stance needlessly skeptical or am I right that there needs to be more proof of value add here?
(2) Am I looking at the right metrics / asking the right questions in terms of evaluating a prospective adviser for her?
(3) What public tools are available to compare Fisher vs a host of other options?
You're asking good questions - I would also want to know how their recommended products/holdings have done over the past 5, 10, 15 years compared to an appropriately-balanced basket of index funds (this would be after-tax, after-fee performance - it's hard to get this information for a lot of reasons).
I think professional financial advisors generally add value in two ways: they can help minimize tax consequences (though many are bad at this) and they can talk you down when you want to pull all of your money out of the market during a recession (some are bad at this, too, even contributing to your panic!).
It's really unlikely that the actual investment advice would be worth 1.25% a year. But if that's the only thing that will get your friend to trust the market enough to keep her money in it, it might be worth it for her?
posted by mskyle at 6:44 AM on August 16, 2018
I think professional financial advisors generally add value in two ways: they can help minimize tax consequences (though many are bad at this) and they can talk you down when you want to pull all of your money out of the market during a recession (some are bad at this, too, even contributing to your panic!).
It's really unlikely that the actual investment advice would be worth 1.25% a year. But if that's the only thing that will get your friend to trust the market enough to keep her money in it, it might be worth it for her?
posted by mskyle at 6:44 AM on August 16, 2018
Best answer: There are a zillion studies that have proven time and again that active money managers have worse performance than passive index investing. This dismal result is true even before fees and taxes, and worse after. Here's the point where I'm supposed to link the one definitive article for you but I don't have my hands on a good one. Here's a couple of mediocre articles: 95% of professionals don't beat the market, Indexes Beat Stockpickers 92% of the Time.
Advisory companies like Fisher know how bad their product is, of course, and yet still try to convince customers that somehow they are going to be the 5% or 8% that will beat the market. When interviewed, they will show numbers that look good. Invariably these numbers are either cherry-picked successful portfolios, or an average only of clients that are still with the firm, or in some other way aren't a fair sample.
And that's all just looking at performance. Higher fees are an inevitable drag on performance: Fisher's -1.25% return is inescapable. Their website also talks all about how they maintain "dynamic strategies". That almost definitely means "high tax load strategies", frequent trading usually results in higher taxes.
One alternative your friend should consider is simply buying Vanguard mutual funds. They have aggregate funds tailor-made for people in her situation, wanting to protect and live off a retirement nest egg. If she needs more help and advice than that, Vanguard offers advisory services that are particularly useful when starting out with them.
posted by Nelson at 7:39 AM on August 16, 2018 [3 favorites]
Advisory companies like Fisher know how bad their product is, of course, and yet still try to convince customers that somehow they are going to be the 5% or 8% that will beat the market. When interviewed, they will show numbers that look good. Invariably these numbers are either cherry-picked successful portfolios, or an average only of clients that are still with the firm, or in some other way aren't a fair sample.
And that's all just looking at performance. Higher fees are an inevitable drag on performance: Fisher's -1.25% return is inescapable. Their website also talks all about how they maintain "dynamic strategies". That almost definitely means "high tax load strategies", frequent trading usually results in higher taxes.
One alternative your friend should consider is simply buying Vanguard mutual funds. They have aggregate funds tailor-made for people in her situation, wanting to protect and live off a retirement nest egg. If she needs more help and advice than that, Vanguard offers advisory services that are particularly useful when starting out with them.
posted by Nelson at 7:39 AM on August 16, 2018 [3 favorites]
If she really feels she needs professional advice, she should look for a fee-based, financial adviser who will act as a fiduciary - the last bit is critical, as it means they will give her advice that is in her best interest, and not with an eye to what the adviser might make in commission or fees. The best historical returns come from Index funds, and to spread out risk, consider investing in a few different funds that track different indices - Dow, S&P, NASDQ, etc.
posted by dbmcd at 8:08 AM on August 16, 2018
posted by dbmcd at 8:08 AM on August 16, 2018
Best answer: A word about those fees. Remember that's year in, year out, every year, no matter whether the portfolio grows or shrinks.
I've been retired a few years now and use the bogleheads' 3-fund portfolio. Very simple, highly diversified and cheap. Right now, my annual fees amount to about $700 at Vanguard using Admiral Shares. Under the Fisher schedule, I'd be paying more like $17,000 each year. In a slow market, that can make the difference between shrinking your portfolio and a little bit of growth. And consider the total paid out over, say, a 10-year retirement or longer.
Hence the old joke about paying a financial advisor to put the kids through college... his kids, not yours.
The bogleheads forums are a good place to get a handle on an allocation (weighting of stock versus bond funds) that's right for your friend's risk tolerance, best re-balancing practices and encouragement to stay the course when things get rocky if she needs that.
posted by Short Attention Sp at 8:27 AM on August 16, 2018 [4 favorites]
I've been retired a few years now and use the bogleheads' 3-fund portfolio. Very simple, highly diversified and cheap. Right now, my annual fees amount to about $700 at Vanguard using Admiral Shares. Under the Fisher schedule, I'd be paying more like $17,000 each year. In a slow market, that can make the difference between shrinking your portfolio and a little bit of growth. And consider the total paid out over, say, a 10-year retirement or longer.
Hence the old joke about paying a financial advisor to put the kids through college... his kids, not yours.
The bogleheads forums are a good place to get a handle on an allocation (weighting of stock versus bond funds) that's right for your friend's risk tolerance, best re-balancing practices and encouragement to stay the course when things get rocky if she needs that.
posted by Short Attention Sp at 8:27 AM on August 16, 2018 [4 favorites]
Best answer: Canadian Financial Planner here. These guys appear to be a financial planning firm, but they make their money mostly from asset management. This is a common conflict of interest in the business.
The best evidence we have is that good investment performance in the past is very weakly correlated with future success. (See the SPIVA Persistence Scorecard) Having great success over a few years means that lots more people will give you money to invest just in time to see the successful idea you had stop working. Knowing what they've done isn't a good indication of whether they will continue to succeed.
In addition, the investment management business is very well paid, and has drawn an enormous influx of highly educated and brilliant people all competing with one another. This has made the financial markets quite efficient. The result of this is that it has become more and more difficult to outperform. Information about everything is so much more available than it used to be, so it is difficult for any one firm to have an advantage over others. So paying fees to someone who will attempt to outperform for you is unlikely to succeed.
The investment advice business used to revolve around the sale of investment products. The client paid for the recommendation from the advisor, who often was being paid a commission to recommend one product over another. The outcomes for clients were often poor.
The new business model has financial planning as the real value add for the client. Success in your financial life involves a number of complex and high stakes decisions around employment, pensions, retirement, tax, estate planning and insurance. Everyone's situation is different, and everyone's goals are different, so a personalized plan that addresses these issues is important to the client. The thing worth paying for is for someone to get to know you really well, help you decide on realistic financial goals, and then help you work through the steps you need to take to succeed. An ongoing relationship can be important because life events happen, and goals change. There are financial planners who do this sort of work, either on an hourly rate, or on a retainer who never touch your investments. There are others who will recommend investments, but aren't associated with, or paid by investment firms. This is what you want to look for.
A breeze through the website you've linked looks like this firm is still working through this transition. The financial planning they do may be good, but it will always be conflicted. The planning for clients is in service of the investment management business. (From their website: "Why Might a Fisher Investments Financial Plan Be Right For You? We provide an asset management strategy..." Nope! The plan starts with the client, their goals, and the steps they need to take, not the investment strategy.)
Your friend is near the life event where getting a plan done is really important. Clients often come to me wanting to know about investments, but once we start talking, their more important concerns are about sustainable retirement income, government pensions, taxes, estate issues, considering the sale of a home etc. (In the US, I'd imagine health care is pretty high on the list, too.) In my first meeting with clients I hear "I hadn't thought of that" at least once. Help your friend find a fiduciary financial planner to do a plan for them. It's likely they will also recommend some sort of low cost index fund portfolio, and be able to describe why they are recommending it over others. There are many ways to create a portfolio like this, and the long term performance of all of them tend to be quite similar. Trying to find the optimal portfolio is just an exercise in overfitting. Success in investing involves 2 steps:
1. Invest in a low cost, index portfolio that has the amount of risk you're willing to take long term.
2. Do nothing for a long time.
The second step is really hard. There is a bias towards action. If you have made a reasonable choice for #1 (it does not have to be optimal), then doing nothing is almost always the right thing.
You're doing a good thing for your friend by helping her do due diligence. It may even be helpful for you and her to go visit one of the firms she's thinking of. I'm a bit biased here, but I think you should limit your involvement to helping her find the right professional(s) rather than doing any of this yourself. Managing money for friends is pretty fraught.
posted by thenormshow at 8:35 AM on August 16, 2018 [3 favorites]
The best evidence we have is that good investment performance in the past is very weakly correlated with future success. (See the SPIVA Persistence Scorecard) Having great success over a few years means that lots more people will give you money to invest just in time to see the successful idea you had stop working. Knowing what they've done isn't a good indication of whether they will continue to succeed.
In addition, the investment management business is very well paid, and has drawn an enormous influx of highly educated and brilliant people all competing with one another. This has made the financial markets quite efficient. The result of this is that it has become more and more difficult to outperform. Information about everything is so much more available than it used to be, so it is difficult for any one firm to have an advantage over others. So paying fees to someone who will attempt to outperform for you is unlikely to succeed.
The investment advice business used to revolve around the sale of investment products. The client paid for the recommendation from the advisor, who often was being paid a commission to recommend one product over another. The outcomes for clients were often poor.
The new business model has financial planning as the real value add for the client. Success in your financial life involves a number of complex and high stakes decisions around employment, pensions, retirement, tax, estate planning and insurance. Everyone's situation is different, and everyone's goals are different, so a personalized plan that addresses these issues is important to the client. The thing worth paying for is for someone to get to know you really well, help you decide on realistic financial goals, and then help you work through the steps you need to take to succeed. An ongoing relationship can be important because life events happen, and goals change. There are financial planners who do this sort of work, either on an hourly rate, or on a retainer who never touch your investments. There are others who will recommend investments, but aren't associated with, or paid by investment firms. This is what you want to look for.
A breeze through the website you've linked looks like this firm is still working through this transition. The financial planning they do may be good, but it will always be conflicted. The planning for clients is in service of the investment management business. (From their website: "Why Might a Fisher Investments Financial Plan Be Right For You? We provide an asset management strategy..." Nope! The plan starts with the client, their goals, and the steps they need to take, not the investment strategy.)
Your friend is near the life event where getting a plan done is really important. Clients often come to me wanting to know about investments, but once we start talking, their more important concerns are about sustainable retirement income, government pensions, taxes, estate issues, considering the sale of a home etc. (In the US, I'd imagine health care is pretty high on the list, too.) In my first meeting with clients I hear "I hadn't thought of that" at least once. Help your friend find a fiduciary financial planner to do a plan for them. It's likely they will also recommend some sort of low cost index fund portfolio, and be able to describe why they are recommending it over others. There are many ways to create a portfolio like this, and the long term performance of all of them tend to be quite similar. Trying to find the optimal portfolio is just an exercise in overfitting. Success in investing involves 2 steps:
1. Invest in a low cost, index portfolio that has the amount of risk you're willing to take long term.
2. Do nothing for a long time.
The second step is really hard. There is a bias towards action. If you have made a reasonable choice for #1 (it does not have to be optimal), then doing nothing is almost always the right thing.
You're doing a good thing for your friend by helping her do due diligence. It may even be helpful for you and her to go visit one of the firms she's thinking of. I'm a bit biased here, but I think you should limit your involvement to helping her find the right professional(s) rather than doing any of this yourself. Managing money for friends is pretty fraught.
posted by thenormshow at 8:35 AM on August 16, 2018 [3 favorites]
Try this as a hard evidence demonstration: do a quick Excel spreadsheet showing the effect in absolute dollars on return over time of a 1.25% fee of a portfolio about her size, picking some moderate rate of return. Seeing a cold, hard cash figure may help her feel the weight of the arguments being made above re: the inadvisability of doing this versus seeing a fee-only financial planner, which I agree with.
posted by praemunire at 9:41 AM on August 16, 2018
posted by praemunire at 9:41 AM on August 16, 2018
Best answer: Coming in late, and a lot of the posters upthread have made good points, so I'll just add a few things. I'm not familiar with Fisher, but do have experience using a "big box" financial advisor, and now manage my mom's stuff, which is with a different big box financial advisor.
#1 Re: all of those returns metrics you are looking for. Is isn't like a mutual fund or something where everyone gets the same return. Part of what you are paying for here is customized advice, and clients are in different parts of their life and have different goals, so the portfolios will all look different. What they might have is some generalized models for different risk profiles/goals and an overall asset allocation model that gets updated regularly. I don't think you are going to get a client retention stat out of anybody.
#2 Re: 1.25%. That is on the expensive side, even for the "affluent client" type services. I would expect something more like 0.75% of funds invested, maybe a little higher. There is some pressure on services like this from the robovisors coming out over the last few years that operate on almost no fee. The way you might view it is this. Let's say your friend has $1M in investable assets. Is the advice worth $12,500 a year? Because that is what they'll be paying. If your friend has a complicated tax situation and is concerned with wealth transfer to children/relatives, a lot of assets, there are more options/tools and the advice might be worth that. If the situation is simple, like a pension plus a retirement account, then she'll be paying for a lot of active management that won't be necessary.
#3 Re: your friend's disappointment with returns. I'm keying on "just retired." At that stage of your life, you are looking at wealth preservation and maybe generating income, not total returns. A 30 year old who has many decades to recover from losses and downturns will have a very different portfolio than a 70 year old with an actuarial expectation of living until 85. Comparing annual returns is apples and oranges.
#4 Re: overall retirement planning. I'm sure Fisher provides this as a service, but you can also buy it ala carte. But echoing what "thenormshow" said up thread, just as important the investment returns is a rigorous analysis of expenditures and planning for things like health emergencies. Has your friend done any of that yet? That would probably have an impact on their approach to using Fisher or not.
posted by kovacs at 4:32 AM on August 17, 2018
#1 Re: all of those returns metrics you are looking for. Is isn't like a mutual fund or something where everyone gets the same return. Part of what you are paying for here is customized advice, and clients are in different parts of their life and have different goals, so the portfolios will all look different. What they might have is some generalized models for different risk profiles/goals and an overall asset allocation model that gets updated regularly. I don't think you are going to get a client retention stat out of anybody.
#2 Re: 1.25%. That is on the expensive side, even for the "affluent client" type services. I would expect something more like 0.75% of funds invested, maybe a little higher. There is some pressure on services like this from the robovisors coming out over the last few years that operate on almost no fee. The way you might view it is this. Let's say your friend has $1M in investable assets. Is the advice worth $12,500 a year? Because that is what they'll be paying. If your friend has a complicated tax situation and is concerned with wealth transfer to children/relatives, a lot of assets, there are more options/tools and the advice might be worth that. If the situation is simple, like a pension plus a retirement account, then she'll be paying for a lot of active management that won't be necessary.
#3 Re: your friend's disappointment with returns. I'm keying on "just retired." At that stage of your life, you are looking at wealth preservation and maybe generating income, not total returns. A 30 year old who has many decades to recover from losses and downturns will have a very different portfolio than a 70 year old with an actuarial expectation of living until 85. Comparing annual returns is apples and oranges.
#4 Re: overall retirement planning. I'm sure Fisher provides this as a service, but you can also buy it ala carte. But echoing what "thenormshow" said up thread, just as important the investment returns is a rigorous analysis of expenditures and planning for things like health emergencies. Has your friend done any of that yet? That would probably have an impact on their approach to using Fisher or not.
posted by kovacs at 4:32 AM on August 17, 2018
This thread is closed to new comments.
-Are they advising on short/long term tax consequences?
Almost certainly
- Is their plan really customized to her point in the investment/earnings lifecycle? It should be and I would be very surprised if it isn't
- Do they have a track record of navigating recessionary markets (since IMO we're heading for one)?
The value of this should be embedded in your prior question - its really just a matter of do you have the asset mix correct for a given risk tolerance.
Fisher is a legit shop, i.e. while they might not deliver value for money, their reputation is that they are professional money managers. Without knowing your friends personal situation its basically impossible to opine on the value of having a professional money manager, and what the optimal fee situation for that relationship should be.
posted by JPD at 6:36 AM on August 16, 2018 [2 favorites]