
Is Your Financial Adviser Making Money Off Your Bad Investments? - colinprince
http://mobile.nytimes.com/2015/09/30/opinion/is-your-financial-adviser-making-money-off-your-bad-investments.html?referer=
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tdees40
Never, ever, ever go to a financial adviser paid on commissions. I mean never.

I work at an insurance company. There are products that we sell all the time
to commission-based advisers that we almost never sell to fee-based advisers.
Why? Because those products aren't right for the customer, but with 5%+
commissions they sell like hotcakes.

~~~
gavreh
Never go to an insurance salesman for financial advice. Go to an insurance
company (salesman) to buy insurance.

~~~
TeMPOraL
In general, never go to any salesman for advice related in any way to the
thing they're selling. They're being paid for securing the best deal for their
employers, which usually is _not_ the best deal for you.

Yes, there is such thing as reputation, but it doesn't come into play unless
you play on the same power level as them. That is, if you are a wealthy person
with connections then by all means, find a reputable financial adviser,
they'll happily work in your interest. Such clients are scarce, after all, so
they need to care. But if you're a Joe or Jane Random, salesmen have little
incentive to offer you a good deal - they have hundreds or thousands people
just like you every month, and none of you can do any damage to them.

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DeBraid
Fees should be calculated relative to returns, not assets. From the great
Charles D. Ellis, CFA:

"When stated as a percentage of assets, average fees do look low — a little
over 1% of assets for individuals and a little less than one-half of 1% for
institutional investors. But the investors already own those assets, so
investment management fees should really be based on what investors are
getting in the returns that managers produce. Calculated correctly, as a
percentage of returns, fees no longer look low. Do the math. If returns
average, say, 8% a year, then those same fees are not 1% or one-half of 1%.
They are much higher — typically over 12% for individuals and 6% for
institutions...

Thus (correctly) stated, management fees for active management are remarkably
high. Incremental fees are somewhere between 50% of incremental returns and,
because a majority of active managers fall short of their chosen benchmarks,
infinity."

[https://blogs.cfainstitute.org/investor/2012/06/28/investmen...](https://blogs.cfainstitute.org/investor/2012/06/28/investment-
management-fees-are-much-higher-than-you-think/)

~~~
gizmo
Fees on returns instead of assets is also a bad idea. The investment manager
doesn't have a downside when he loses the customer's money, but makes money
when the returns are good. We've seen time and time again (on wall street
especially) that incentives like these result in utterly reckless behavior.

~~~
whatok
Not necessarily a common thing in practice but:

[https://en.wikipedia.org/wiki/Hurdle_rate](https://en.wikipedia.org/wiki/Hurdle_rate)

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late2part
All of the studies show that you are statistically better off going in an
indexed fund, v. a managed account with a financial advisor. The answer to the
titular question is "duh." Even without the conflict of interest.

~~~
meric
The irony is if everyone went to an index fund and no one went it alone or
with the help of a financial advisor, the markets will be compromised - there
would be no rational actor giving their input into pricing of securities and
all investment would be based on sentiment alone.

~~~
lazyant
I don't understand, index follows basically the whole market by a
representation of it like SP500 or Dow 100, how investing in whole market
compromises it or it's based on sentiment versus investing in stock of
particular companies?

~~~
afterstep13
Index investing is passive investing.

We need investors who actively invest, by evaluating the companies, so that
more money goes to good companies and less money goes to bad companies. The
index represents the current batch of the top 500 good companies in recent
times as decided by the active investors. The index is re-balanced as the
preferences of the active investors change.

So, if there were no active investing, then investing would be completely
pointless.

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qntty
Can someone explain the advantage of having a financial advisor? I was under
the impression that mutual funds offer the best returns for low risk
investments

~~~
rcavezza
I'm probably not the best person to get into the details, but I'm a developer
at a financial company so I can probably explain a little bit.

Comparing financial advisors to mutual funds is comparing apples to oranges.
Many times, advisors will advise you to invest in mutual funds as a part of
your overall portfolio strategy.

So you have to think about having a financial advisor versus not having a
financial advisor. In my company, the advantage I have mostly seen has been
high net worth clients looking for tax advantage investing strategy and
protecting their wealth. There are probably other advantages that I don't see
on a daily basis.

The cost is typically a large disadvantage. Advisors typically take a small
percent on your investments even if you lost money. 1% of a hundred million
dollars is a million dollars. Is the utility provided by a financial advisor
worth a million dollars?

In a similar vein, you can also think of the advantages/disadvantages of
mutual funds versus single stocks. The same goes for the
advantages/disadvantages of actively managed mutual funds versus passively
managed mutual funds.

~~~
hesdeadjim
This.

I had an exit a few years back for a sizable, but not retirement-worthy,
amount of money. My friend who was one the founders did make retirement level
money and went the full financial planner route with a large investment firm.

I had begun to do a lot of research for where and how to invest, but before
meeting with "his guy" I doubled down and consumed everything I could find. I
ended up deciding that if I went my own route I would just go with Wealthfront
for the simplicity of their strategy and the extras like tax-loss harvesting
and immediate and near-real time account re-balancing.

I eventually did meet with the financial planner and his staff did their best
to make me feel "special". The waiting room was modern and wood paneled, I was
offered drinks and snacks, and when he brought me back to the war room he had
another member of his team there and reassured me that I'd have their full
resources at my command. This triggered immense skepticism off the bat, since
a few simple calculations with their fee structure revealed that I was
essentially a chump to them compared to my friend. We talked for a while and
he led me through various investment options and I later left with a few
personalized investment strategies in a nice leather-bound folio.

It took all of about five minutes of study to determine the proposals were a
waste of time and an even larger waste of money. For a 1.5% management fee
they would invest in high cost mutual funds -- the kind that even do kickbacks
to the advisers, and provide me with a once a year re-balance of my accounts
with no opportunity for tax-loss harvesting. I told him all this and that I
was just going with Wealthfront instead and in a subtle but patronizing manner
he told me I did not understand his value proposition.

Unless you are high net-worth I have a hard time understanding why you would
ever go the planner route as opposed to just keeping a safety net and dumping
the rest into a service like Wealthfront.

~~~
matwood
FYI, if you don't mind spending an hour every quarter rebalacing you can save
the Wealthfront fee by using TDAs commission free ETFs. Last time I checked
they had almost all of the same ones Wealthfront uses.

Maybe the fee is worth it to you to never have to think about it, but since
you mentioned the 1.5% management fee, I thought maybe you might not want a
fee at all :)

~~~
hesdeadjim
More effort than I a willing to spend ;)

Tax loss harvesting has been significant for me over the last few years as
well and that is not something I would want to deal with myself even if I just
simulated Wealthfront's trades. It's also made harder once you start using
their index tracking individual stock trade functionality -- they do the
harvesting on a per stock level for that one.

~~~
matwood
Fair enough. I do this sort of thing as a side hobby so managing it myself is
'fun'. Wealthfront/Betterment seem like fine zero effort choices.

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ikeboy
_I think the model is: You can (A) get financial advice that is paid for
through nontransparent kickbacks that are paid out of overpriced mutual fund
fees, or (B) get financial advice that is transparently paid for by you. When
I put it like that, you, the sophisticated reader, would probably choose
option B. (Or you 'd self-advise and buy index funds, like I do, though I
certainly do not recommend that you take financial advice from me.) But it
does seem possible that transparent fees would turn some people off to
retirement advice -- and, perhaps, to retirement saving -- entirely, since
people are more likely to consume free ("free") products than expensive ones.
It's also possible that saving an adequate amount in an overpriced
underperforming mutual fund is a better outcome than saving an inadequate
amount, or nothing, in a low-priced index fund. Both of these are distinctly
sub-optimal, of course, and I tend to sympathize with the idea that retirement
brokers should be fiduciaries, but I don't think it's quite as easy as
Batchelder and Bernstein make it out to be._

(From [http://www.bloombergview.com/articles/2015-09-30/spinoffs-
ki...](http://www.bloombergview.com/articles/2015-09-30/spinoffs-kickbacks-
and-arbitrage))

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lordnacho
Coming from an investment background and comparing to what I see offered to
retail, it seems you could just be your own investment manager by picking up
any college finance text. This would tell you the orthodoxy on just about
everything you need to know, and doesn't cost much.

This is especially true if you don't have much money or can't write your own
automated trading strategies.

The real reason to get an investment manager is access to interesting
investments, for instance private debt which is the sort of thing you need
some connections for. You'd only be thinking about this at rather large
amounts of assets.

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meeper16
Full article: [http://www.nytimes.com/2015/09/30/opinion/is-your-
financial-...](http://www.nytimes.com/2015/09/30/opinion/is-your-financial-
adviser-making-money-off-your-bad-investments.html)

99.9% have no basic knowledge of Technical Analysis (TA)
[https://en.wikipedia.org/wiki/Technical_analysis](https://en.wikipedia.org/wiki/Technical_analysis)
thereby not applying it in basic investment decisions they advise on. TA is
valuable even though it tends to break down in very bad markets.

~~~
jevgeni
Technical analysis is the financial markets' equivalent of astrology. It is
especially bad, if you are considering investment horizon of over a day.

~~~
meeper16
Let me correct you.

Indicators based on statistical analysis can't be argued with in terms of
their value in providing additional insight into the present condition of a
stock or index. Think in terms of moving averages, a common application in TA.
[http://mathworld.wolfram.com/MovingAverage.html](http://mathworld.wolfram.com/MovingAverage.html)

(BTW: Wolfram and mathematica do not deal in astrology)

For example, indicators involved with technical analysis include, lagging
indicators or those that show overbought or oversold conditions for stocks or
entire indicies such as the Moving Average Convergence/Divergence ratios or
MACDs.

[https://en.wikipedia.org/wiki/MACD](https://en.wikipedia.org/wiki/MACD)

If you are a financial advisor, you should be using these to make sure that
when you advise on taking a postion in a stock for example, the stock has not
spiked up 10% on the previous day. If the stock did spike the previous day or
week and as a financial advisor, if you advised your client to take a position
in that stock, you'd effectively be placing them in a position of risk as the
stock is likely to retrace. TA indicators are very practical in this case.
This is just one of many examples.

You're getting your robust methods of statistical analysis confused with
astrology.

~~~
computer
Statistician here with experience in the financial world: you're wrong. Don't
confuse the existence of Wikipedia pages and books written by people wanting
to make money with actual science.

Moving averages have a function in statistics. But there is no evidence that
they can be used to time the markets. If they could, it would be done
algorithmically by hedge funds, closing the possibility.

Please show actual analysis of market data (i.e. recent published scientific
papers) supporting your positions. Without those, it's quackery.

~~~
lordnacho
I've been working in hedge funds for over a decade, and it's interesting what
the variety of opinions is. There's a great deal of secrecy, and good reasons
for it, so getting to know how other quants do things has been quite
informative.

On the one hand, your arbitrage argument makes sense. If there existed a
simple strategy that made money, it would be traded out of existence.

On the other hand, I happen to know how the major quantitative funds allocate
their money. It is a simple formula, with a number of small twists. (Yes,
people will not believe you if you claim this. Rightly so.)

Now, how can these facts coexist? The answer is that the formula "sort of
works". There are long periods where it doesn't work, and periods where the
returns are phenomenal. If someone were to start a new fund, they would have a
number of issues:

\- It is just not quite believable that such a simple formula is profitable.
What are those hordes of phds actually doing? (Squeezing a lemon actually).
Surely someone else would have found it?

\- Institutional investors have all sorts of issues with investing. It's done
by committee. They need you to have a long track record. They want all the
right boxes checked.

\- What happens if you launch and you start with a fallow period?

\- Even if a simple formula works, why does it work? Are you happy to trade
something that you don't really understand?

~~~
meeper16
I've been on the hedge fund algo side for years. You're spot on and it's what
a lot of these guys on this thread are clueless about.

Basic or simple approaches can be combined with others and be
statistically/mathematically sound and robust.

Some work for periods of time, some don't, some stop working. Algorithms
degrade over time and that's continued optimization is a must.

Case and point: LTCM and the story behind black scholes algo running up
against a black swan.

I'd highly recommend watching this for the others reading this thread that
really just are familiar with the whole space:

[https://www.youtube.com/watch?v=lmvxZgnwwD4](https://www.youtube.com/watch?v=lmvxZgnwwD4)

~~~
jevgeni
> black scholes algo

Black Scholes isn't an "algo". Sweet mother of god...

~~~
meeper16
No need in explaining the difference between an algorithm that wraps around an
equation or to call an equation a "model" or to call a model a "formula". Take
your pick but focus on the meat of the discussion if possible.

