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gerryborn

Advisor Or Salesman

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Chad,

 

I agree common sense is needed, but this issue does need to be discussed and pounded into the heads of teachers. The term "advisor" lulls many teachers into a false sense of security. Sure, there probably are some good “advisors” out there, but I am yet to see one where I work. The best advisor I have come across wants me to buy an S&P 500 Index fund with a 1.4% expense ratio. This advisor’s institution has equivalents to Vanguard’s Target Retirement funds. Their Target Retirement funds have expense ratios of 2.4% while Vanguard charges .2%. The sad thing is that I am being completely serious; this is the best deal in my district. At least it was, until I got TIAA-CREF offered. Thank God for at least one decent choice. I bet I am more likely to see Bigfoot pass through the faculty lounge before I encounter a good “advisor.”

 

My friend’s details: $50k in an annuity, began about 15 years ago, about 6 years ago was agreed to switch to a new contract. Did not realize that new surrender charge window would kick in. Now will have to give up some of his money to move his money. Granted, he should have known better, but he didn’t. While most people will say that it is all his fault, I cannot bring myself to say that. I can’t blame him for not understanding the scam that is the 403b / TSA annuity. To my buddy’s credit he has educated himself about his 403b options and now wants to move his money.

 

For my own financial protection I will continue to consider "financial advisors" as potential thieves. I realize that my words are inflammatory, but the state of the 403b / 457 world is that bad.

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Guest TR1982

gerryborn,

 

"Expensive" investment choices by your standard do not qualify as theft. While the price may not be what you want to pay, that does not make it a bad choice nor does it make it theft. Harvard costs considerably more than the University of Virginia but that does not mean if you enroll there you are being taken. Neither does it mean that the less expensive choice is better. If an advisor recommended a hedge fund that costs 10%, but has an outstanding track record, is that bad advice? Each person has to make their own judgement about the value of the investments recommended which, of course, includes cost.

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Each person has to make their own judgement about the value of the investments recommended which, of course, includes cost.

 

The more I read this site, the more I think that the problem does NOT lie with the investor who makes a considered, reasoned choice to pay more believing (s)he is getting more. The problems that appear to be far more common are twofold:

 

1.) the investors who, like gerryborn (pre-TIAA), don't HAVE low-cost options...frankly, there's no excuse for that;

 

2.) the investors who, through their own fault and the fault of those who are pretending to advise them, are not getting their money's worth, and don't even realize it.

 

Admittedly, I have less sympathy for the second group; while their awareness level needs to be raised, it's ultimately their own money being spent, so surely they should accept responsibility for whether they are getting their money's worth for what they are paying.

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Gerry;

 

My practice is organized as a Registered Investment Adviser. We do not ever accept comissions and for every situation, fees are established as an hourly fee or set as an annual budget for a well-defined scope of work. We tend to avoid hourly billing arrangements as this creates a barrier to communication between us and clients; neither party wants to track and bill (or receive bills) for fractions of hours. We do not work for free, we earn a reasonable living, and clients receive a bill for services. Although fees expressed as a percentage of assets is a widely accepted convention in the investment advisory industry, we tend to avoid such arrangements as they de-couple compensation from the actual work we have to do (we do not want to get a raise for nothing or suffer a paycut just because the markets fall) Nothing is hidden; compensation is an on-going part of good client relationship management.

 

You are right on target that teachers (and all consumers) need to understand the details of what distinguishes an investment adviser from a financial salesperson. There is nothing inherently wrong with selling financial products and receiving compensation for such actiivities. But such activities are going to produce vastly different outcomes than what comes from our firm (and others that have similar business practices).

 

(Example: I recently met with a couple that has a net worth exceeding $3 Million, much if that comprised of long-term real estate holdings. My preliminary work indicated such holdings should be maintained to avoid capital gains, provide capital appreciation and potential retirement income. Although diversification into other asset classes is prudent, we have no motivation to get the client moving assets in order to generate commissions.)

 

We do find fault in a system that allows such blurring of the lines between those selling investment products (and receiving compensation directly from such activity) and those providing advice for a fee (paid for by the recipient of such advice).

 

The answer for the consumer (teacher) is simple: REQUIRE 4 ITEMS BEFORE YOU SIGN ANY AGREEMENT:

1. Understand what the fees are before you agree to anything.

2. Understand how your "Adviser" is compensated.

3. Understand what goverment agency or self-regulatory organization has jurisdiction over the entity you are working with. Just in case something goes wrong, its a good idea to know who you are going to turn to for recourse.

4. Get it (1, 2 & 3 above) in writing on Company Letterhead.

 

I cannot tell you how many situations I have encountered where these four items would have helped identify "advice" as a "product sales process". Again, no problem with the sales profession, but deep concerns about finnancial and investment advice being used to disguise product sales.

 

Thanks for starting this thread!

 

Cheers,

 

Danc

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tr,

 

"Expensive" investment choices by your standard do not qualify as theft. While the price may not be what you want to pay, that does not make it a bad choice nor does it make it theft. Harvard costs considerably more than the University of Virginia but that does not mean if you enroll there you are being taken."

 

Expenses does matter in the success of a fund, the more a fund cost the less successful it will be, so the person buying a fund with high expenses from a saleman will be less likely to afford to go to Harvard, a school that costs considerably more, while the fund advisor will be more likely to afford the more expensive school.

 

Ira

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Guest TR1982

danc,

Your missive was excellent and provides a good example of a how a fee practice works and how the advice is paid for by the client. In a perfect world, this is the most transparent method and probably yields the best results.

 

Unfortunately, we do not live in a perfect world. Most people would probably never walk into the office of an advisor operating in this framework for 2 reasons:

 

1) They don't think they have enough financial concerns to justify the use of such an advisor.

 

2) They are generally unwilling to pay for the services using the fee basis. In other words, they have difficulty seeing the value in spending $2500 for a financial plan that they still have to execute. This is not the fault of the advisor, it's just the reality of most Americans with less than 2-3 million dollars in net worth.

 

Ira,

 

You said "Expenses does matter in the success of a fund, the more a fund cost the less successful it will be"

 

Please show me any source that can provide real research to verify this statement. Anecdotal quotes from Bogle, Swedroe, Bernstein, and God do not count.

 

Regards,

 

 

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Ira,

 

You said "Expenses does matter in the success of a fund, the more a fund cost the less successful it will be"

 

Please show me any source that can provide real research to verify this statement. Anecdotal quotes from Bogle, Swedroe, Bernstein, and God do not count.

 

 

That was the quote that jumped out at me, too...I'm assuming you meant "All other things being equal, the more a fund costs the less successful it would be." Yes?

 

By the way, I have several persuasive quotes from God on the subject of fees. It seems He is fine with up-front sales charges that are clearly disclosed, but the 12b-1 fees really piss Him off.

 

:-)

 

 

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Guest TR1982

He didn't say all other things being equal so I did not assume that is what he meant. The only chance that all other things would be equal are if the fund is an index fund. I have already acknowledged that in those cases, expenses would be the determining factor since the funds own exactly the same securities.

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Guest Sierra

There are Registered Investment Advisory firms that take on clients with far less than $2-3 million in dedicated assets.

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tr,

 

"Please show me any source that can provide real research to verify this statement. Anecdotal quotes from Bogle, Swedroe, Bernstein, and God do not count."

 

I haven't heard the names of your sources.

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Guest TR1982

Sierra,

I'm sure any RIA firm is happy to take on any client no matter what their net worth is as long as they are willing to pay their fees. That's the point. I know I am as well. Most of these people are not willing to pay the fees, since they are way out of their price range.

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Guest TR1982

Ira,

I am not the making the outlandish claim that you are. I simply ask that you provide a verifiable source for the information. If you can't or won't, that's fine. Don't be surprised when others make statements they can't back up either and refuse to provide their source.

 

BTW, did you know that that gold has been the best investment over the last 20 years? I heard it on a radio show at 2 am.

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Guest Sierra

I'm sure any RIA firm is happy to take on any client no matter what their net worth is as long as they are willing to pay their fees.

--------------------------------------------------------------------------------------

What will the ria manage if they have little or no net worth?

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Guest TR1982

Did you read danc's post? Their firm doesn't even manage assets on a percentage basis. A lot of clients in these kind of firms need financial planning and firms often charge $1000-$5000 just to create a plan. In other words, they will create a sophisticated plan that will tell them they need to save money in their 403b plan for retirement. Wouldn't that $1000-$5000 be better used invested in the plan which we know they probably need anyway?

 

This is the whole problem with the how products and services are delivered. If you have money, you will get the attention because you have the resources to pay. If you don't have much in the way of resources, nobody in a fee based firm will give you the time of day, even though you might well need the planning and advice.

 

This is why I have often scoffed at the fee based planners who come here and throw rocks at other advisors who work using commission based products. THEY KNOW the realities of what I am talking about. THEY KNOW that few, if any, fee based advisors work with these types of clients simply because they cannot afford to pay them and would not chose to pay them for their services on a fee basis. Most of the discussions here about this ignore this basic reality because it's convenient to do so.

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Guest Sierra

I don't dispute that many people in the financial services industry are only salespeople and do not give any advice. ++++++++++++++++++++++++++++++++++++++++++++++++

So if they don't give advice what do they do that entitles them to a commission?

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