
Fiduciary Rule Fight Brews While Bad Financial Advisers Multiply - clumsysmurf
https://www.bloomberg.com/news/features/2017-06-07/fiduciary-rule-fight-brews-while-bad-financial-advisers-multiply
======
cko
Here's what bothers me. Ten years ago I was still in school and came across
Malkiel's 'A Random Walk' book. Then I started reading Graham's 'Intelligent
Investor' and was like "dude I'm not going to spend hours a day trying to
potentially beat the market by 2%. lol I'm not Peter Lynch". I concluded that
if I wanted to park my money somewhere, it would be all in Vanguard index
funds.

Now, it's 2017, and everyone has the hots for these products. Feels like a
bubble. I've always had this possibly irrational feeling that if everyone is
recommending something, I should probably look into alternatives. Since I
graduated and started working in 2010 all my dollars went into rental real
estate, but recently I get jealous of how low-maintenance (mentally) having
these shares of index funds is, and I dream about getting qualified dividend
income and capital gains.

Can anyone offer a viewpoint on this? Am I being irrational? All my life I've
been doing stuff differently from everyone and it's worked out pretty well.
Meanwhile had I started buying up these funds I'd probably have the same exact
networth as I do now. What other passive options are out there? Dividend
aristocrats? I also entertained buying AAPL and Wells Fargo and 3M and putting
the rest in a Vanguard small cap index. _shrugs_

~~~
exelius
My line of thought is this: inflation is ~3% a year (hasn't been that high in
a while, but just wait), and market returns average 5% (aka beta) a year with
some level of volatility. By definition, the alpha of an index fund is zero
minus fees. I'm willing to trade a guaranteed-small negative alpha for the
reduction in volatility in alpha that I would have across a portfolio across
years. I've still got overall market volatility to contend with, but my time
horizon is long so that gets pushed to the side.

Index funds are a perfect choice for _retail investors_ like yourself. But
retail investors are a small percentage of the market; institutional investors
make up the bulk of the transaction volume that provides liquidity for the
rest of the market. Because they trade stocks millions of times a day, you're
never going to beat them at the stock picking game. But their activity does
push prices up across the board -- because the assets the institutional
investors are trading are the basis of the index funds the retail investors
are buying.

So there's not really a bubble in an asset class if retail investors move to
index funds, because the retail investor is buying a little bit of everything.
If anything, there is a bubble on certain stocks that consumers are familiar
with (i.e. AAPL, AMZN, GOOG, FB, etc.) But by buying the index, you're buying
both the stocks that are overvalued and the ones that are undervalued.

Now, certain index funds may eventually become out of whack with respect to
overall market return: the S&P500 is generally considered to model the overall
economy well, but that might not always be the case. That's fine, if you feel
one index is becoming overvalued, weight your portfolio into another index. Or
if you feel equity in general is overvalued, shift your portfolio into
T-bills.

And yeah, for me, the decrease in anxiety is _totally_ worth it. The economy
is either doing well, or it's not, but in either case my money is along for
the ride.

~~~
iopq
Then you should just buy a long term bond fund along with an index. The longer
term bond funds tend to have a positive alpha along with a negative beta. That
means your returns will be lower than just having stocks, but your risk-
adjusted returns with be better.

------
pmiller2
The article mentions Wealthfront and Betterment as alternatives to traditional
advisors and their heavy fees. But, honestly, the vast majority people don't
even need to pay the 0.25% they charge. Just get yourself a Vanguard account
and follow the advice here:
[https://www.reddit.com/r/personalfinance/wiki/investing](https://www.reddit.com/r/personalfinance/wiki/investing)

The advice there, and in the rest of that wiki, will serve you very well, at
least until you have many millions of dollars.

~~~
frgtpsswrdlame
Worth mentioning that Charles Schwab also has some etfs with extremely low
expense ratios.

~~~
loeg
As does Fidelity, but at the end of the day, neither is structured in a way
that ensures that continues. Vanguard is mutually owned.

------
lettergram
So, I used to write on a blog called topfinancialadvisor.com (not for a couple
years).

It was kind of funny, when researching for the blog, we found countless
articles all copied from bloomberg.com, forbes.com, usanews, cbs, msnbc, etc.
They all had the same basic story, which barely told anyone anything, and at
the end had some sort of popup to "get your financial advice." It was clear
the whole things was just an add from the start, just trying to get high in
the google rankings.

And, that's pretty much how I feel about every financial adviser. It's a
gimmick to collect fees. It doesn't take a genius to make money on the stock
market, or invest in a property. The key is to diversify and invest in solid
teams / products. The same things Warren Buffet looks for in a company, is
literally almost the exact same thing YC looks for in a startup. It's a solid
team, good management, vision, and a solid product (preferably with solid
sales); and only trade what you know.

That being said, (a bit of a shameless plug here) that's part of the reason
I'm writing my own financial adviser
([https://projectpiglet.com/](https://projectpiglet.com/) currently being
alpha tested). The idea being, use what other people know, to help trade the
market.

I fully intend to just charge a flat monthly fee, and provide other services
as well, for your own research. Basically, explain the whole process of why
you should buy X, then let you make the decision. This (I felt) was much more
honest, and although it might cost me more money initial, building trust will
eventually benefit long term IMO. Plus, it has the added benefit of (if it
ever takes off) optimizing investment towards solid products / teams, as
opposed to shady financials as CFA do.

The CFA's I speak to about this, drive me absolutely nuts. They think I should
either (a) just look at the companies financials and that's it, or (b) try to
talk me down, then try to sell me their services (claiming they can do
better). The best part, is when I show them my portfolio -_-

~~~
pmiller2
How do you use Project Piglet to inform your investing decisions? The examples
don't seem very enlightening. I'm slightly confused that it's registering a
positive sentiment for Uber, too.

~~~
lettergram
Yeah, we are working on an improved demo (along with transitioning the stock
advisor from python to our web app).

I personally use it to identify how experts feel about a given product, then
compare to what the main stream media things + the stock market. One of the
most interesting examples of this, was I saw a spike of positive sentiment
regarding AMD in early 2016. I then invested some money because the experts
felt their new architecture could compete with Intel. That sentiment just
continued to build until release, at which point I held a ton of stock.

As for Uber, believe it or not, there actually is a ton of positive sentiment.
Even though there is a lot of negative discussion here on HN generally, it
targets "experts" i.e. people who appear to discuss uber in depth and/or have
insider knowledge. Those people believe uber is doing relatively well (at
least in 2016 - the demo data).

Now, it's a bit more mixed when looking at sentiment, with a solid negative
net promoter score[1].

[1] [http://www.medallia.com/net-promoter-score/](http://www.medallia.com/net-
promoter-score/)

------
pg_bot
Unless your principal is in the seven figures your best bet is likely an index
fund. More and more people are waking up to high fees and lackluster results
of these advisors. If I were to offer advice, go with vanguard. They have the
lowest fees in the industry and have an ownership structure that benefits the
shareholders of its funds.

~~~
readams
What changes when your principal is in the 7 figures?

~~~
pyoung
I am nowhere near those levels, but if you are in the low 7's you are probably
still fine investing in index funds. However, there are probably a few
investment options that would start making sense:

1\. Real estate investments can be very attractive due to access to cheap
financing and tax benefits. Obviously there is risk (avoid those bubbles), but
if you play it smart and find cash flow positive rental properties, you will
probably net much better returns than the stock market.

2\. As you get higher on the wealth ladder, finding tax savings starts to show
good ROI. So you might want to hire an advisor or an accountant to help with
that.

3\. The standard advice for us normal folk is to have ~6 months of rainy day
funds in a savings account. If you are in the 7 figures, you might want to map
out some worst case scenarios to get a sense of how much risk tolerance you
have and what you would need to 'survive' those bad scenarios. If I had
moderate wealth, I would probably make sure I had a few years worth of living
expenses stashed away somewhere. Also, I would probably have a nice mix of
bonds, gold and other safe(ish) assets. This leads into #4

4\. While I might keep a higher % in safer assets than I do now, I would
probably try and balance that with some more riskier assets. At higher levels
of wealth you have access to a much wider array of investment opportunities
(lookup 'accredited investor'). For the most part, these investment classes
suffer the same issues as actively managed funds (generally perform worse than
the market, after fees. Look up 'average VC, PE, and hedge fund returns'). But
the one advantage here is that, unlike index funds, you also have a (small)
chance of hitting astronomical returns (ex: angel investor in a unicorn). So
it could make sense to allocate a small portion of your portfolio to these
types of investments. As mentioned, the average expected outcome is probably
worse than just investing in index funds, but an index fund will never return
1000x where as there is a small chance that an angel investment might.

So the tldr is that there is nothing wrong with index funds, especially at the
low 7's (and probably even into the 8's). But most people at those levels have
much more complicated financial lives (own a business, have a bunch of real
estate investments, need to worry about inheritances, etc..) that the standard
advice about index funds becomes less suitable. For example, Warren Buffet,
the champion of index funds, probably has the vast majority of his wealth
locked up in BRK.

~~~
pmiller2
I totally agree with the tldr here. I think the tipping point is probably
somewhere around $10-12M in assets, where you should start looking further
than what Vanguard has to offer. At that point, following the 4% safe
withdrawal rule, you can have an income from returns that puts you at or near
the top 1% of Americans. Beyond that is when you should start looking into
things that the truly rich consider, like hedging for capital preservation.

------
iopq
I started with Wealthfront and Betterment, but honestly I could just buy some
mutual funds at Vanguard and pay 4 or 5 basis points in fees instead 25 (and
then the same 4 or 5 basis points for what they buy).

~~~
JBReefer
ETFs are free to trade on Vanguard, but you can't buy fractional shares and
there's slight differences in how values are calculated.

~~~
iopq
Sure, if you buy VTI, for example. If you want to buy fractional shares, you
can buy VTSAX which is a mutual fund. You can buy both of them for free from
Vanguard and they both have 0.04% expense ratios.

------
BadassFractal
Let's say you had a successful exit and now have a bunch of stock or cash on
your hands. What do you do to both protect your assets and possibly grow them
without getting too aggressive because you want to retire on that lump of
money?

Looks like fiduciary duty advisers cannot be trusted. Some claim that index
funds such as vanguard are also not guaranteed to continue being a safe bet
once everybody and their dog switches to them vs managed funds. What else is
left to do?

~~~
wayn3
you go to a private banker in a jurisdiction whose sole job it is to do
private banking and get that shit private banked. dont pretend you dont know
which country im talking about.

thats a really simple problem with a known solution. its just not advertised
at all. everyone above a couple mil gets 10-15% annually and just doesnt talk
about it to average randos. because instead of listening they always start
shouting matches about how its so unfair that normal people dont have access
to this stuff and taxes and tax evasion and all the lowlife hate thats
inevitably going to happen.

~~~
BadassFractal
Why wouldn't private bankers be as predatory of high net worth individuals as
other financial professions are of normal folk? How does having a couple of
mil protect you from being taken advantage of by charlatans? Don't the rich
fall for dumb schemes the same was everybody else?

~~~
wayn3
Private banking, in said jurisdiction, is a line of work with centuries of
tradition.

And they just don't have any fucking reason to fuck over their clients.

Protection? If you are a billionaire and your banker fucks you over, I think
they're more scared of you than you are of them.

I did not tell you to private bank with bank of america new york city. If you
do that, kiss your money goodbye. They'll take all of it, funnel it into the
next garbage scheme and yell "stakeholders".

------
jeffdavis
Doctors and lawyers do have conflicts of interest, too, and it's really hard
to keep them in check.

Financial advisers have an even more direct conflict of interest -- your loss
is literally their gain.

Doctors' conflicts are probably the least direct and easiest to fix of the
three. Financial advisers are hopeless, as far as I'm concerned.

~~~
toufka
This is precisely why both doctors and attorneys are considered 'professions'
\- as they both have articulated professional obligations that are primary to
their making money. They both have duties of either care, or of law to their
client, _even_ and _especially_ when those duties conflict with them making
more money. If you chose the more money of standard of care, or more money
over the client's interest, you lose your professional license. In the context
of a financial advisor, that duty should be fiduciary in nature, but as there
is no professional obligation, no recourse for failure to keep that
obligation, you have a race to the bottom.

------
ars
Why do I have a feeling that some disclosure law is not going to suddenly make
people not be greedy?

It's one of those laws that make it look like you did something, while doing
nothing.

The new government is right to get rid of it - it's pointless and will help
nobody.

Now if you made a law that made commissions completely illegal (in finance,
insurance, and other similar areas) - that would do something.

~~~
zaidf
The point of a law is two folds: (1) to act as a deterrent (2) when violated
and the violator is caught, to have an avenue to prosecute them (and provide
some form of justice.)

Even if you're completely right (I don't believe you are) and the law doesn't
deter ANYONE from committing the crime, its second purpose still has value.

Laws against homicide, robbery etc. haven't resulted in 0 homicides and
robbery; and yet, they have been used to prosecute people who have committed
those crimes. If those laws didn't exist, murder and robbery would not be
against the law. We can argue all day if the law has done much to deter those
things but it's a fact that the law helps in delivering justice. Without the
law, it would be legal to murder someone and face zero legal consequences.

~~~
ars
That would be true _if_ law would actually be used to prosecute anyone. But it
won't.

The criteria are nebulous "must pick the best product". The advisor will just
say "I believed this one was the best".

How are you going to prove that? On top of that, victims don't typically even
_know_ if the advisor was wrong!

So they'll never even take him to court.

Plus it's a civil matter, meaning it costs the clients lots of money to bring
a case.

It will not have the effect you describe.

Are there are requirements for review of advisors? That their advice goes to
some panel for review? That the panel would have the power to actually arrest
them if they disagree? It does not. It's a pointless law.

