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  1. #61
    Sorry, it's on page 20.

  2. #62
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    San Diego, California
    Quote Originally Posted by Jeffrey View Post
    "shouldn't be -- they have better things to do" is where we disagree. In my example, the person's gross earned income was $100,000 per year for a 35 year career. Having an additional $1,480,000 is almost 15 years (almost half their career) worth of earned income. I think it's time well spent!
    If it were a binary choice, I'd agree. Fortunately, it's not. They aren't always easy to find, but some very good planner-advisors exist who work on a retainer basis.

    Quote Originally Posted by Jeffrey View Post
    I'm not saying or implying you are advising anyone to pay close to 2% per year to a financial advisor. I am saying you and I both know many people do. Most of the financial advisors I know gross about 1.5% per year.
    I've seen much more fee compression than that.

  3. #63
    Quote Originally Posted by freshmanjs View Post
    You are assuming the rate of return is the same with and without advice. Obviously if that's true, you shouldn't pay anything. Kind of an obvious and not insightful conclusion though.
    I donít know if itís obvious, but it is insightful if you are paying higher fees and not getting higher returns.
    Carolina delenda est

  4. #64
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    Feb 2007
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    Princeton, NJ
    Quote Originally Posted by cato View Post
    I donít know if itís obvious, but it is insightful if you are paying higher fees and not getting higher returns.
    All he said was that if you get the same return with and without fees, itís better not to pay fees. What is the insight?

  5. #65
    Quote Originally Posted by freshmanjs View Post
    All he said was that if you get the same return with and without fees, it’s better not to pay fees. What is the insight?
    Those fees can add up to millions of lost dollars! Many, if not most, retail investors do not realize the total magnitude of a 2% advisory fee. Many, if not most, retail investors do not realize the total amount they pay in fees.

  6. #66
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    Quote Originally Posted by cato View Post
    I donít know if itís obvious, but it is insightful if you are paying higher fees and not getting higher returns.
    The problem is figuring out whether you're getting better outcomes. Getting similar returns with lower risk is a good thing, but defining risk is a problem and consumers are often blind to risk management or even disdainful of it when things are going well. Moreover, we like and are grateful for risk management when the markets are choppy (or worse), but regret the hedge when markets take off. Perhaps worse, we generally don't even know how our investments have performed in the past and often think we did better (and are better) than is supported by reality.

  7. #67
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    Feb 2007
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    Princeton, NJ
    Quote Originally Posted by Jeffrey View Post
    Those fees can add up to millions of lost dollars! Many, if not most, retail investors do not realize the total magnitude of a 2% advisory fee. Many, if not most, retail investors do not realize the total amount they pay in fees.
    Sure but the number you quoted as the magnitude of a 2 or 3% fee is not the fee number at all. Itís the fees plus the opportunity cost of lost returns. The millions of dollars point is entirely based on your assumption that there is no value in the advice. Assigning 0 Value to advice and then showing that advice is costly is a circular argument. If you make a different assumption on that issue, you get a very different cost number. I do agree that the interesting question is whether the advice has value and how much. Not straightforward to answer.

  8. #68
    Quote Originally Posted by freshmanjs View Post
    Sure but the number you quoted as the magnitude of a 2 or 3% fee is not the fee number at all. Itís the fees plus the opportunity cost of lost returns. The millions of dollars point is entirely based on your assumption that there is no value in the advice. Assigning 0 Value to advice and then showing that advice is costly is a circular argument. If you make a different assumption on that issue, you get a very different cost number. I do agree that the interesting question is whether the advice has value and how much. Not straightforward to answer.
    Yes, placing an appropriate value (plus or minus) on specific advice is difficult.

    I agree with what Mr. Buffett wrote, "Nevertheless, both individuals and institutions will constantly be urged to be active by those who profit from giving advice or effecting transactions. The resulting frictional costs can be huge and, for investors in aggregate, devoid of benefit. So ignore the chatter, keep your costs minimal, and invest in stocks as you would in a farm."

  9. #69
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    San Diego, California
    Quote Originally Posted by Jeffrey View Post
    Yes, placing an appropriate value (plus or minus) on specific advice is difficult.
    Especially when we're talking about different things (see below).

    Quote Originally Posted by Jeffrey View Post
    I agree with what Mr. Buffett wrote, "Nevertheless, both individuals and institutions will constantly be urged to be active by those who profit from giving advice or effecting transactions. The resulting frictional costs can be huge and, for investors in aggregate, devoid of benefit. So ignore the chatter, keep your costs minimal, and invest in stocks as you would in a farm."
    Vanguard says the potential value is huge. The Oracle of Omaha seems to be saying that few see any value. I suggest that both points of view can be correct.

    If you want your advisor to pick winning stocks and sectors above all else, you will almost certainly be disappointed. Beyond a bit of help "around the edges' (e.g., factor tilting), you shouldn't expect your financial advisor to improve your nominal investment performance.

    What a good advisor/financial planner can do is seek to lower your risk profile without lowering expected returns, more closely match your investment portfolio with your goals and life plan, suggest financial planning options to make your financial life more efficient and productive, and help you stick with your plan when the markets aren't being cooperative. It shouldn't be a surprise, then, that the Vanguard study I linked above (and link again here) is focused on precisely the sorts of things that can add real value for consumers and comes to the conclusion that such advice is worth (not "costs" or "should cost") roughly three percent per year.

    Snip20180116_3.jpg

    For example, are you aware that to help mitigate the combined income-and-estate-tax effect, the Internal Revenue Code allows for an ďIncome in Respect of a DecedentĒ deduction under Section 691(c)? Claimed by the beneficiary of an inherited IRA to the extent of any estate taxes that were caused by the account, the deduction can be material Ė as much as 40 percent of the value of the account. The IRD deduction applies not only to inherited IRA accounts, but also other employer retirement plans, inherited non-qualified annuities, employer non-qualified stock options, deferred compensation, employer NUA stock, and more. A good financial planner knows that and will advise you accordingly.

    Your mileage can and will vary, of course. Some of that "advisor" value is available to diligent DIYers. But professional expertise and experience matter too.

  10. #70
    Quote Originally Posted by freshmanjs View Post
    Sure but the number you quoted as the magnitude of a 2 or 3% fee is not the fee number at all. Itís the fees plus the opportunity cost of lost returns. The millions of dollars point is entirely based on your assumption that there is no value in the advice. Assigning 0 Value to advice and then showing that advice is costly is a circular argument. If you make a different assumption on that issue, you get a very different cost number. I do agree that the interesting question is whether the advice has value and how much. Not straightforward to answer.
    What opportunity cost of lost returns are you talking about?
    Carolina delenda est

  11. #71
    Join Date
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    Princeton, NJ
    Quote Originally Posted by cato View Post
    What opportunity cost of lost returns are you talking about?
    In Jeffrey's example, the net annual return was 7% instead of 10% because of the 3% fee. That reduced the end point value by $1-2M. That does not mean the person in the example paid $1-2M in fees. They paid 3% in fees and final valuation was also reduced because of the resulting compounding 7% return instead of 10% return. If, instead, we create an example where the advice that costs 3% yields an improvement in return of 3% points (net 0 value for the advice), then there would be 10% compounding return in each case with the same amount of fees paid.

  12. #72
    Quote Originally Posted by RPS View Post

    For example, are you aware that to help mitigate the combined income-and-estate-tax effect, the Internal Revenue Code allows for an “Income in Respect of a Decedent” deduction under Section 691(c)? Claimed by the beneficiary of an inherited IRA to the extent of any estate taxes that were caused by the account, the deduction can be material – as much as 40 percent of the value of the account. The IRD deduction applies not only to inherited IRA accounts, but also other employer retirement plans, inherited non-qualified annuities, employer non-qualified stock options, deferred compensation, employer NUA stock, and more. A good financial planner knows that and will advise you accordingly.
    Yes, I am aware. However, what percentage of the U.S. population does that currently affect? IIRC, 99.9% of estates do not pay federal estate taxes.

  13. #73
    Quote Originally Posted by freshmanjs View Post
    In Jeffrey's example, the net annual return was 7% instead of 10% because of the 3% fee. That reduced the end point value by $1-2M. That does not mean the person in the example paid $1-2M in fees. They paid 3% in fees and final valuation was also reduced because of the resulting compounding 7% return instead of 10% return. If, instead, we create an example where the advice that costs 3% yields an improvement in return of 3% points (net 0 value for the advice), then there would be 10% compounding return in each case with the same amount of fees paid.
    Your quibble with Jeffrey is that he assumed returns would be the same, and you counter by assuming that returns would be greater with the advice of a paid financial advisor.

    The problem, of course, is that you have no way of knowing whether returns will be higher with paid financial advice.
    Carolina delenda est

  14. #74
    Quote Originally Posted by freshmanjs View Post
    In Jeffrey's example, the net annual return was 7% instead of 10% because of the 3% fee. That reduced the end point value by $1-2M. That does not mean the person in the example paid $1-2M in fees. They paid 3% in fees and final valuation was also reduced because of the resulting compounding 7% return instead of 10% return. If, instead, we create an example where the advice that costs 3% yields an improvement in return of 3% points (net 0 value for the advice), then there would be 10% compounding return in each case with the same amount of fees paid.
    Let's be, IMO, generous and say "the advice that costs 3% yields an improvement in return of 3% points (net 0 value for the advice)". FWIW, IMO, the odds of that are low.

    How much more would the investor have in their retirement funds after 35 years? $0.00

    How much more would the advisor have in their personal retirement funds after 35 years? ~$2,000,000.00?

    Of course, I am assuming the advisor would invest their 3% fee income in the same index fund.

  15. #75
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    Feb 2007
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    San Diego, California
    Quote Originally Posted by Jeffrey View Post
    Yes, I am aware. However, what percentage of the U.S. population does that currently affect? IIRC, 99.9% of estates do not pay federal estate taxes.
    That is the point.

    There is a very long list of important financial planning issues that apply to relatively few investors. Knowing about them -- as a good financial planner does -- can be crucial for those impacted but almost impossibly arcane to even a dedicated DIYer. Moreover, not all apply strictly to the wealthy. For instance, with respect to Social Security alone, an unmarried person over the age of 62 with a prior marriage that lasted at least ten years may be eligible for divorced spouse benefits, retirees over the age of 62 who have any children under the age of 18 should know about extra retirement benefits for such children, and those who have (or had) a job where s/he did not participate in the Social Security system need to know about future retirement benefits potentially being reduced under the Windfall Elimination Provision.

    If my experience is at all normative, the percentage of DIYers who understand these provisions (and others like them) is roughly 0.1 percent. You may not benefit from such knowledge. But if you don't check with an expert, you won't know and will potentially miss out.

  16. #76
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    Feb 2007
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    San Diego, California
    Quote Originally Posted by Jeffrey View Post
    How much more would the investor have in their retirement funds after 35 years? $0.00

    How much more would the advisor have in their personal retirement funds after 35 years? ~$2,000,000.00?
    Why do you assume that a DIYer will stick to his or her plan when the going gets tough? The research suggests that few do. In fact, I recall even many dedicated Bogleheads bailing in 2008.

  17. #77
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    Feb 2007
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    San Diego, California
    Quote Originally Posted by cato View Post
    The problem, of course, is that you have no way of knowing whether returns will be higher with paid financial advice.
    I have no way of knowing whether my net health outcome will improve by going to the doctor regularly. But I like my odds.

  18. #78
    Quote Originally Posted by RPS View Post
    If my experience is at all normative, the percentage of DIYers who understand these provisions (and others like them) is roughly 0.1 percent.
    Which is my point. People should not spend all of their work hours working for money. They need to spend time learning how to make money work for them. Otherwise, they're making other people wealthy!

  19. #79
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    Feb 2007
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    San Diego, California
    Quote Originally Posted by Jeffrey View Post
    Which is my point. People should not spend all of their work hours working for money. They need to spend time learning how to make money work for them. Otherwise, they're making other people wealthy!
    Personally, I think a CFP designation is a minimum requirement for adequate expertise. The CFP Board estimates that it takes, on average, a minimum of 1,000 hours of study over the requisite period (usually two years) to earn the designation and then significant CE thereafter to maintain it. I'd rather rely on an expert than to do all that work (and I do). I don't think I'm making somebody else rich. I'm merely allocating my time and resources in the way I think best for me and my family. Your mileage may vary.

  20. #80
    Quote Originally Posted by RPS View Post
    Why do you assume that a DIYer will stick to his or her plan when the going gets tough? The research suggests that few do. In fact, I recall even many dedicated Bogleheads bailing in 2008.
    Frequently, the investor departs from their buy & hold strategy because of something an "expert" says.

    IMO, Mr. Thomas had a sound buy & hold strategy in his first post on this thread...

    http://forums.dukebasketballreport.c...34#post1029934

    After your reply, Mr. Thomas next post showed him thinking about trying to time the market....

    http://forums.dukebasketballreport.c...59#post1029959

    Of course, that was not your fault and you immediately told him that was a bad idea. However, I think you're much more ethical and capable than most advisors. Do you disagree?

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