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sschullo

Prediction: half of financial advisers will be gone in the next 10-15 years

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I love reading articles about the financial advisory industry expecially when they predict $68 trillion transfer from parents of baby boomers to baby boomers. The industry predicts that Baby Boomers want an adviser who charges lower fees than what they charged their parents, (well DUH!) something in the order of .50% as written in this article (50 basis points) and is digitally engaged such as part of their services envolves Robo advisers. 

So many of our teacher colleagues who have a 403(b) or 457(b) seek an adviser, and have little idea how to choose one that looks out for their best interests. Fiduciary requirements help but everybody has been calling themselves fiduciaries for over a decade. 

The average return from the total stock market since the 1920s is around 9.5%. By the time you pay income taxes on an IRA (or the lower long term capital gains in after-tax accounts), feel the effects of inflation, pay investment costs, and pay a financial adviser who charges either a retainer, hourly fee and assets under management, you would be lucky to realize 4% growth. This assumes the adviser only charges 1.0% (some charge a lot more) and uses all vanguard funds at minuscule costs.

My definition of an adviser who looks out for their client's best interest is when they use Vanguard extremely low costs and only charges .50% AUM to manage their client's portfolio. Anything above that is too expensive because the capitalist growth from the index and mutual fund industry is limited because of the broad diversification and the stock-bond split. This strategy lowers risks and are required for us normal investors. The worldwide economic engines cannot grow much more because of expenses.

Anything above 9.5% over long periods of time is speculation as suggested by John Bogle. Of course, some years return 30 and 40% and others lose up to 50%, I am talking about long term expectations. 9.5% is a reasonable expectation for a working career. 

That's one reason the FI and FIRE community are opting for real estate. I agree. My late hubby and I made most of our money in real estate. 

https://www.cnbc.com/2019/10/21/what-the-68-trillion-great-wealth-transfer-means-for-advisors.html

Excerpt: 

I predict that half of financial advisors will be gone in the next 10 to 15 years.
Ric Edelman
FOUNDER OF EDELMAN FINANCIAL ENGINES

 

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I may not know what I am talking about because my only stake in real estate is my house. I sold my parent's house after their death.    But it seems to me real estate is much harder than simply saving long term in low cost index funds. Real estate requires maintenance, and more ground level work than simply dropping a check in the mail or having it taken out of your paycheck.  I live in a university town  ( one large and three smaller)so we have plenty of folks investing in real estate here and I know some neighbors who have done well with real estate. Still If you understand the truths of investing wouldn't it be easier to invest in stocks with similar results minus all the extra legwork?  

I'm sure millennials will want lower fees with advisors if they understand finances, otherwise they will repeat the mistakes of the baby boomers and other generations. My father in law  who is 83 has no clue how much he is paying-giving away to his advisor. He trusts him and that is all that matters to him. Are millennials really smarter or just as ignorant about finances?

I did have a thought though. california real estate is very high  cost and probably very lucrative so renting is going to make big bucks.

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I think that we will see a decline in the AUM model of financial advice and a move to more "fee only" type financial advice.  New investors just need someone to explain what's available at their place of work and motivate them to get started.  They don't need someone to handle their 403B contributions for 1-2% per year.  Coworkers should help with this, or at the most maybe a one hour consultation with an honest fiduciary advisor.  On the other end of the financial spectrum, your multi-millionaire investor doesn't want to shell out 10's of thousands in AUM fees when they just need a couple hours of consultation.  The active manager model is bad, not just because of their AUM fees, but also because of the transaction fees and taxes that come along with the active management that they feel they must do to justify their fees.  A double whammy against the uninformed investor!

 

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On 10/23/2019 at 4:22 PM, MNGopher said:

I think that we will see a decline in the AUM model of financial advice and a move to more "fee only" type financial advice.  New investors just need someone to explain what's available at their place of work and motivate them to get started.  They don't need someone to handle their 403B contributions for 1-2% per year.  Coworkers should help with this, or at the most maybe a one hour consultation with an honest fiduciary advisor.  On the other end of the financial spectrum, your multi-millionaire investor doesn't want to shell out 10's of thousands in AUM fees when they just need a couple hours of consultation.  The active manager model is bad, not just because of their AUM fees, but also because of the transaction fees and taxes that come along with the active management that they feel they must do to justify their fees.  A double whammy against the uninformed investor!

 

Yeah! Teachers do not need an adviser to manage Target Date Funds and balanced funds such as Vanguard Wellington and Wellesley. There is nothing to "manage." And then there is an entire decades-old literature of the failure to manage because managed funds underperform index funds.  

Per hour fee or "fee-only" just like we pay for all other professions: attorneys, plumbers, electricians, painters, tax-professional, landscaper, pool service, handyman, house cleaning, interior decorators, etc is the future. Robo advisers will be a part of perhaps a major part of this process. The financial advisors' costs are the only profession in which their costs goes on and on whether he or she is managing your money or not. No one pays a retainer or AUM for any of the other professions, only financial advisers. The only exception might be a company or organization hires an attorney or law firm on retainer. 

The emotion part of investing is where an adviser might help--to keep people from panicking when the markets get crazy from time to time, as it did a year ago last December 2018 when it lost almost 18%. So when one gets nervous, all you have to do is call your advisor and he or she will charge by the hour to remind you that you have a diversified portfolio and that the markets will bounce back. This type of professional service should be paid like attorneys, plumbers, electricians, painters, landscaper, pool service, handyman, tax professional, house cleaning, interior decorators.

I paid my tax guy $485.00 for last year.  I just got through paying an attorney $450.00 an hour for updating my trust. Last I heard these two gentlemen are doing very well without AUMs. AUMs are the killer of our retirement nest eggs. 

None is this is complicated from a consumer's point of view. 

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2 hours ago, sschullo said:

Per hour fee or "fee-only" just like we pay for all other professions... No one pays a retainer or AUM for any of the other professions, only financial advisers. ... None is this is complicated from a consumer's point of view. 

You're right that fee for service makes much better sense, but I gather that many (a majority of?) folks are more comfortable when they don't have to write a check, or they buy the Ken Fisher line about "we do better when you do better" as a reasonable basis for hefty AUM fees.  So they'll pick the ultimately far more costly option, because they don't see the cost they are paying.

As to the future: I think what Ric Edelman is talking about in that article is that professional financial advice needs to be comprehensive, not just about investment.  I would add that it should be completely decoupled from brokers.  The good news is that on the investment side, I think we'll soon see robo advisers that will manage a perfectly sound portfolio for near-zero cost.  (I read that Vanguard is going to introduce a robo advice service at .15% aum fee, and it is easy to imagine that cost driven down further amid competition from Schwab, Fidelity and others.)

The word needs to get out that financial planning is not about buying or managing the right stocks or funds: it is about managing your whole financial life: family and work situation, health issues, insurance, tax planning, estate planning, decisions about when to retire and how much to withdraw in retirement, etc.  And maybe includes some "stay the course" counselling in rough markets.  But portfolio building should be a very small (and low or no cost) part of that process.

As to teachers—and all workers, really—I hope future politics will allow for development of a universal, transportable tax-privileged retirement account with strong, ultra-low-cost, easy to understand investment options, something like "TSP for all."   Seems fair and practical to me, though the brokerage and insurance industry would fight it to the death.  

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Before I started working for the schools I looked for a FEE ONLY advisor that I could pay for 1-2 hours of time to get me started on the right course.  They are almost impossible to find.  Even ones that advertise as fee only want you to move all of your money under them, etc.  I honestly never found someone experienced that I could pay for 1-2 hours of advise.  I just wanted to know if my plans for my vanguard funds was reasonable and if there was anything I was missing.

Hopefully someone will start doing this more.

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10 hours ago, Ottakee said:

Before I started working for the schools I looked for a FEE ONLY advisor that I could pay for 1-2 hours of time to get me started on the right course.  They are almost impossible to find.  Even ones that advertise as fee only want you to move all of your money under them, etc.  I honestly never found someone experienced that I could pay for 1-2 hours of advise.  I just wanted to know if my plans for my vanguard funds was reasonable and if there was anything I was missing.

Hopefully someone will start doing this more.

Hi Ottakee,

You are not alone! I know two friends who tried to find a fee-only adviser, and they experienced the same as you. All of the advisers they contacted said "no" to looking and advising their portfolio and charging their hourly fee. My friends were willing to pay their hourly fee up to $200 or $300 or more per hour! 

This is not recent. About 4 years ago, I wrote this blog post about one of my teacher friend's experiences. Read what happened when I called this adviser and subsequently reported her to Garrett Planning Network: http://latebloomerwealth.com/did-garrett-planning-network-pass-the-smell-test/ Garrett was not happy about one of their advisers, and already knew who she was. She is no longer on Garrett's list. But this is still a huge issue.

I read much of the legislation going on in DC about this. AUM is a big problem as advisers know they can say that they sell no commission-based products now, but the AUM is lucrative, probably more lucrative than commissions. 

The profession doesn't see to think they have to clarify what they mean by Fee-Only, because it is not Fee-Only, it is primarily AUM or a retainer. Everybody calls themselves a fiduciary these days. 

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Ottakee

The financial industry is pretty much self serving and purposely complex and basically dishonest. Your best move in my amateurish  opinion is to self educate yourself and be your own fee-free  only advisor. With the internet and plenty of good books out there you can do it all on your own. Steve S  has written a few himself.And YOU will always be there for you!!  It's like anything else, the more you learn about something the more you realize you can usually  have done it yourself and you  come to realize the experts don't know as much as you might have thought. Just do it.

I've learned to do more and more things regardless of the task on my own. I was so tired of dishonest advisors, repairmen, etc etc who are either incompetent, dishonest or unreliable. We come to rely too much on  so called experts thinking they know something. You would be surprised how many doctors even use Dr. Google these days.

Just my 2.5 cents

Tony

 

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