Sorry, it's on page 20.
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.
Sure but the number you quoted as the magnitude of a 2 or 3% fee is not the fee number at all. It’s 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."
Especially when we're talking about different things (see below).
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.
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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.
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.
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
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.
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.
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.
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?