How much is reasonable for a financial advisor?
I guy I have worked with on a number of things is probably going to take up my stock portfolio (i.e. retirement accounts).
I pretty much trust him. I knew his brother in med school. I've known him now for several years. With my small retirement fund, he had recommended I mainly invest in index funds. But now he says my little pot of money is large enough to manage. He says that historically he beats the S&P 500 by 2-3%. He would charge 1% per year for him and his employees to manage my accounts. Is 1% a reasonable charge for a relatively high-maintenance management? |
anyone have an opinion on this?
|
[QUOTE=MikeWaters;249147]I guy I have worked with on a number of things is probably going to take up my stock portfolio (i.e. retirement accounts).
I pretty much trust him. I knew his brother in med school. I've known him now for several years. With my small retirement fund, he had recommended I mainly invest in index funds. But now he says my little pot of money is large enough to manage. He says that historically he beats the S&P 500 by 2-3%. He would charge 1% per year for him and his employees to manage my accounts.: If he historically beats the S&P by 2-3%, I assume per year, and that is net of his 1% charge, you are getting a very good deal. You could find some who are even better than 2-3% net of fees, but they will charge more than 1%. One of the money managers I use for my clients has beaten the S&P the last 5 years, through June 30th, by 2% a year and and over the last 10 years by 5% a year. That is net of a 1 1/2% management fee. |
of course he could have been lying about the 2-3%.
|
Quote:
He should be able to tell you how much risk he is taking to get those returns Ask him for instance what his beta is. For instance, Growth fund of America over the last 3 years has average 8%. That is 3.64% higher than the market. However, their beta is .94. They are beating the market that badly with 94% of market risk. |
I guess there's a reason why Growth Fund of America is the biggest mutual fund in the nation, with almost 200B in assets under management. That's insane.
I actually work for CRMC's IT group as a business systems analyst, and the company seems to be doing things right. The fundamental philosophy is conservative long term investment results and we're always reminded to remember that it's shareholder's money we're managing. It's not as cheesy as remember this is Billy's college fund, or Dorothy's retirement money, but that's the culture I work in. Of course, there's no guarantee that mutual funds such as GFA or EUPAC will continue to do as well, especially with the size of the funds, but the company certainly has the right focus. |
Quote:
1. I don't think a financial advisor is EVER worth 1% of your return, unless you're into the $10M+ range of assets. 2. <$10M, don't even think about it--use Vanguard index funds and modern portfolio theory and balanced asset allocation. here are a couple places to learn. http://www.moneychimp.com/articles/risk/riskintro.htm http://www.indexfundeducator.com/allocation.htm 3. >$10M you may think about additional diversification or the use of funds like Dimensional Fund Advisors. http://www.dfaus.com/ 4. Any financial advisor who is telling you he beats S&P by 2-3% is probably dishonest or incompetent and I would run away as fast as you can. |
Quote:
|
Quote:
|
Quote:
By the way, the dimension system you suggested. What is their 5 year track record on their core value equity fund. |
Quote:
|
Quote:
My point is you can't say "any" investment advisor. If you want to say most or the majority, that is a debatable question, which I wouldn't argue with. "Any" means all. There are investment advisors who have track records that beat the S&P by 2-3%. |
Quote:
"Investment advisors" are the biggest group of con-men in America still yet to be exposed. |
Quote:
So are you standing by your claim "any" investment advisor................ By the way, the recommendation you gave, what are the 5 years returns on the core equity portfolios. I would also like the 10 year, but you seem to be having difficulty with the 5 year so lets start there. |
Quote:
|
Quote:
I agree why argue. Here is one investment advisors track record over the last 5 years. 10.53 vs the S&P of 7.58 net of fees, through June 30th of this year. Therefor no argument, this an investment advisor who can make the 2-3% claim. Oh, the 10 yr is 9.4% vs 2.88% and the fifteen year is 12.5 vs 9.22%. I don't think that someone can be that dumb lucky over that long a time period. If you have a grudge against "some" or even "most" so called investment advisors, you might be justified. However, just because you don't know any good honest ones, you shouldn't be painting them all with such a broad brush, IMHO. |
I'm afraid this is getting silly:
BYU71: ex post outperformance JAY: ex ante outperformance Jay, unfortunately didn't make that distinction clear at the beginning but the by the middle of the thread he is clearly is making an argument about ex ante performance and not ex post. A charitable reading of Jay's argument requires that you respond in terms of the ex ante probability of overpeformance. |
Quote:
|
Quote:
50% Domestic (break out by large value, large growth, small value, small growth if you have enough to make it worth it) 30% International (ditto) 10% Real Estate/Commodities 10% Bonds And I don't believe it's possible to beat it long term after costs. Long term = 30 - 50 years since that's the investment horizon for most on this board (should be time to death not time to retirement which is a big mistake some make). I should say it's probably possible to beat this strategy long term after costs BUT the risk and probability of choosing the wrong portfolio manager is far greater than the reward you'll get above the index fund approach. P.S. Five year returns mean ABSOLUTELY nothing to me. And ten year returns don't mean much to me at all. |
Quote:
|
Quote:
|
Quote:
I have discussed the modern portfolio theory with someone in the investment world I have learned to respect a great deal. He showed me all sorts of facts and figures that indicated the modern portfolio thoery is bogus and meant for intellects to mentally masterbate with. However, to each his own and if someone wants to use that method, I would say go ahead. I have found a lot of methods will work if they are stuck too. Emotion is the one element that comes in and messes with returns. It is a proven fact investors in mutual funds do far worse than the funds they invest in. Why, it would be my contention they get in and out at the wrong times, because of emotion. I call it the "I can't take it any longer theory". I can't take seeing my investments go down in value any longer and therefor get out. Or, I can't take seeing the market go up any longer without me in and so they get in. One thing I will agree with you on. I suspect you are saying don't put all your eggs in one basket. I would agree with you there. |
Quote:
P.S. I would not got around condemming portfolio theory ... address a specific weakness but don't engage in some silly characterization based on meeting a smart guy who didn't like it. |
Quote:
I wouldn'tnecessarily think badly of Waters friend. I am not privy to the whole conversation. Its possible he had a very nuanced discussion of risk and expected returns and Water's summary leaves something to be desired. I don't know ... more information would be required before I made the inference the Waters should avoid investing with him. |
Quote:
I was suggesting, maybe not clearly enough diversification. Diversification could mean a portfolio of large cap value, large cap growth, small cap value, small cap growth and an international blend. You wouldn't have to have bonds, real estate, commodities, etc. to be diversified as you probably would have to have those in order to be following the portfolio theory. Anyway, I find diversification is enough of a mental oil change without moving onto diversification on steroids in order to get a mentally chanllenging oil change. To each his own though. I personally would not condemn someone if the chose the "theory" as their discipline to invest by. My advice would be stick to it and don't switch with every new theory you here. As for "genius investors". Those folks give us long term capital, over the counter bubbles and sub-prime. The first genius I encountered was Michael Milliken (sp) who gave us Junk bonds. |
Quote:
Quote:
Quote:
|
Quote:
I'm being overly aggressive in this thread but it's to balance what I perceive the vast majority of being way too far on the trusting side of "investment advisors". |
Quote:
A "swipe" is not a condemnation, let alone a "bit of a swipe". LTCM was a swipe at supposed "smart guys" and their investing. It was meant to show "smart" and good investing do not necessarily go hand in hand. Too many let their intellect get in the way of using common sense. Of course greed takes over which is a malady of smart, dumb and average alike. I am not arguing against "modern portfolio theory". I am saying it is one discipline that can be followed, but not necessarily "the" discipline to be followed. Just as a closer. My favorite manager I use and showed the numbers for wouldn't be for everyone. He has some year or years in a cylce of 5 to 10 year period where he will underperform the S&P. If my client is one who gets more upset about a year of underperformance than appreciates outperformances over a longer period, I won't suggest this manager to that client. The marriage won't work. |
Quote:
You have most of the ex ante implications right. It is, of course, easy to find a strategy that from an ex ante perspective that will on average outperferform the market by over 2-3%: buy a double the market ETF. Of course, its pretty risky. Controlling for risk it is very difficult to find persistence in performance particularly at that level. This is not to suggest that fund managers don't have skill but on average they charge you for that skill and after costs on average they do worse than the market. Yes, there are always some managers that outperform the market in a given period, but there is almost no persistence in the performance. Some characteristics seems to matter but only ones that are difficult to observe. For example SAT score actually matter. Managers with higher SAT scores actually outperform (relative to some risk adjustments). |
Quote:
|
Quote:
There are problems with portfolio theory, but nobody has brought any of them up in this discussion. |
Quote:
|
Quote:
The strongest assumption of stylized portfolio theory is that an investor knows the expected returns, variances, and covariances of the securities she is invests in. However, this is far from the truth. Estimating these things using historical data is very difficult and imprecise (expected returns more so than covarances). A non-stylized version would incorporate this source of uncertainty. One implication of this uncertainty is that you won't have precise weights as an implication and a range of weights on different securities are all potentially optimal given an investor preferences and parameter uncertainty. This is one reason why BYU71's statements are entirely consistent as opposed to inconsistent with portfolio theory (on the other hand I can write down a form of portfolio theory that was consistent with BYU71s statement and relied on parameter certainty). The other option is to move beyond portfolio theory to equilibrium models such as the CAPM or APT type models. This is essentially what Jay has done. You get precise implications and solve the estimation issue in terms of portfolio holdings but at the expense of stronger assumptions. |
Quote:
|
Quote:
Really, the primary implication of portfolio theory is that optimal portfolios can be described as follows: an optimal portfolio has the highest expected return given the desired standard deviation of an investor. If someone believes that the risk of their portfolio is captured by standard deviation then portfolio theory is the right framework (yes, one can argue that standard deviation is not a good measure of risk and that is another potential shortcoming of portfolio theory). Portfolio theory provides a framework for thinking about what optimal portfolios look like. An optimal portfolio doesn't necessarily have 1000s of securities in it (although under certain assumptions it always does). An optimal portfolio can have only one stock in it. Warren Buffet, for example, often says he doesn't follow the implications of portfolio theory. This is true in the sense that he doesn't follow the implications of portfolio theory as often presented to undergraduate students or MBAs. However, I have seen nothing from Buffet that is inconsistent with the idea that he his creating a portfolio that for a given level of standard deviation has the highest expected return possible. He just believes that the expected returns, variances, and covariances that he observes are different than and superior to other people's estimates (note, this implies that his optimal portfolio may look very different than mine even if we have the same preferences for risk and both may be consistent with portfolio theory). Portfolio theory allows for such differences (complete agreement and market efficiency are imposed in models like the CAPM that build on portfolio theory). Buffet's portfolio may be optimal or statistically indistinguishable from optimal (in the full sense of modern portfolio theory) given his estimates and taking into account parameter uncertainty, transaction costs, price impact, etc. P.S. These issues aside I generally think that Jay gives pretty good advice when it comes to portfolio allocation ... he may not always be diplomatic ... but his advice is pretty sensible. |
Quote:
What would be interesting would be to take Jay's breakdown, 50% domestic, 30% international, 10% RE and commodities and 10% bonds. Take randomly 3 10 year periods and 20 year periods and compare the return to a good equity manager who claims to beat the S&P by 2-3 percent. My guess would be the numbers wouldn't be that much different, especially over the 20 year period. Either method is fine as long as the results are good. Go through the mental girations and follow the formula or find someone who is getting results and just let them manage the money for a fee. |
Just for kicks I took the last 10 years and applied the formula.
50% S&P 500 index (2,88%) 30% World International Index (4.65%) 10% Gov't Bond Index (5.70%) 5% Commodity Index (15.5%) 5% Reit Index (10.64%) Yield for portfolio over last 10 years through June 30th is 4.71%, beats S&P by around 2% During same period good ole well managed Mutual fund like Growth Fund of America did 9.18%. Take even 2% a year out for fees and net of 7.18% is pretty good. I am in no way here giving or suggesting anyone make any type of investment in anything. My main point is that Jay's contention that "any" financial advisor who claims to beat the S&P by 2-3% is probably incompetent or dishonest is pure bull crap. Invest your money in whatever way you feel comfortable whether it be the efficient portfolio or researching for good advisors to do it for you. There is no "only the right way" to do it. |
Quote:
Second Jay's breakdown, while sensible, is not necessarily an implication of portfolio theory. Its consistent with portfolio theory, but active management can be consistent with portfolio theory. Jay's view essentially adds an assumption called complete agreement and an assumption about market efficiency to get to a portfolio allocation recomendation. |
Quote:
Finance literature probably written by academians (sp). Anyway, it has been a fun discussion. May everyone make a lot of money using their favorite method. |
Quote:
Second, I have no problem with active management. Its fine ... its not going to make a huge difference on average. On average passive will beat active by a little not a lot and active has more chance for upside (someone may get very lucky and choose funds that happens to do fantastic). Of course, it also has a greater chance of a worse downside relative to the benchmarks since passive by definition is basically the benchmark. In fact in aggregate we can prove passive beats active under the following two assumptions: (1) Passive in aggregate holds approximately the market portfolio (2) Active is higher costs then passive If passive holds the market (which seems to be true empirically in aggregate) then by definition active also must be holding the market in aggregate because by definition passive plus active adds up to the market. If active is higher costs then by definition they must do worse because in aggregate the holding are the same portfolio: the market. Of course, in any given period some active managers do way better than passive even controlling for risk. I have always agreed with that. However, that really good performance in a given period is not usually a good predictor of future performance. |
All times are GMT. The time now is 11:18 PM. |
Powered by vBulletin® Version 3.8.2
Copyright ©2000 - 2024, Jelsoft Enterprises Ltd.