There have to be some decent folks working in the car industry but the picture painted for me by my classmate is probably what many people think goes on car dealerships.
There is some parallel to the business of giving financial advice. There is little in the way of barrier to entry and we know there are some dishonest people in the industry. Josh Brown took a machete to this post from a firm called Betterment which tries to democratize financial advice with low (or maybe no?) minimums using indexing strategy. The post from Betterment made a lot of sweeping negative generalizations about advisors and brokers--Betterment appeared to use the terms interchangeably which is not correct if preciseness matters.
Like any industry there are competent practitioners and there are incompetent practitioners. Where portfolio management is concerned an incompetent advisor may not be outed until something bad happens in the market, the tide goes out and as Warren Buffet has said we see who's naked. An example of this type of incompetence might be having had 50% in financials in 2007 by virtue owning a bunch of funds that were grossly overweight the sector.
Another form of portfolio incompetence would be stock selection that turns out to be peculiarly poor and is combined with inadequate diversification such that clients get blown up. These are just two examples.
On the financial planning front it may not take a bear market to damage clients. Simply embarking on the wrong course with a financial plan can be ruinous. Planning is not what I do but things like incorrect tax decisions, an incorrect spending program or insurance issues can obviously hurt people.
As far as what is not incompetent; if an advisor tells you ahead of time "we are going to hold on no matter what and rebalance" then going down 39% in a down 38% world is not incompetence. The prospective client needs to listen to that and decide "is that right for me." An advisor who sets an expectation and comes pretty close to that expectation is probably pretty good at their job.
There is another layer to the complexity I had in mind when I titled this post which is the advisor's own financial situation. There was an article recently (sorry no link I did not know I'd be writing about this) about a large number of advisors whose own financial houses are not in order. They have too much debt and don't save money. You might remember this from the NY Times a few months ago about an advisor who got caught up in the trade up/house as ATM trap and went on to lose his house.
This can be very complicated. Why is the advisor in debt and incapable of saving money? Someone with a sick child in this sort of situation is certainly different than the guy with a Ferrari and a boat. I would also expect that it is possible for someone to be very capable of giving excellent advice but be unable to see their own flaws, biases and tendencies (I can save later type of thing). How much does it matter if an advisor has negative equity and owes $12,000 on a credit card if he prevented all of his clients from panic selling a fast decline? Conversely, being debt free does not guarantee competence.
Personally it would be difficult for me to talk the talk without walking the walk. I wouldn't know how to handle a situation where I was asked how much I had saved and how much debt I had if as an RIA in my mid-40s I had none of the former and lots of the latter.
As a matter of personal belief I as an RIA would not want to be distracted by my own finances. How much time spent on personal trading is too much? Is the advisor going to freak out about declines in his own account at exactly the wrong time? The client base of an RIA is a crucial asset--financially life-sustaining, our financial future rests with my doing the right thing for our clients. In that context it is crucial that the interests of the client base be put before personal trading and financial worries.This is more easily achieved by minimizing the chances of having these distractions.
My take on how to manage this has been to have no debt, save a lot, have low allocation to equities and not trade that allocation a lot. I typically have 25% allocated to equities but it is a little less now as I am hoping to shift into a particular ETF should it list.
My approach reflects my biases and the manner in which other RIAs address these issues reflects their own biases. Where we are talking about biases and quirks things get complex. Personal motivations are also complex. Some want to work for a very short time and figure an exit strategy. As I enjoy my job I view this as a potentially evergreen annuity--it won't stay green if I don't do the right thing.
If you have an advisor it probably makes sense to take some time to understand where he is coming from (to our firm's clients, the above is where I am coming from). RIA are going face more scrutiny along these lines from clients, prospective clients and even the media.
This was kind of a heavy post but just like everyone else, advisors have fears and greeds that when mismanaged can be very detrimental to all concerned. If you (as an advisor or client) can easily define your greed and fear then I think you have a good shot at getting to where need to to be financially.
16 comments:
"As far as what is not incompetent; if an advisor tells you ahead of time "we are going to hold on no matter what and rebalance" then going down 39% in a down 38% world is not incompetence."
Right on! Refreshing to hear someone who approaches investing from top down say this.
Just as I don't think the top-down approach will produce after-tax superior results in the long run. However, if you hire someone to execute that strategy and they do it reasonably well even though it lags passive investing the person is still competent. You got the results you were paying for.
Nice comment.
just curious on why such a low allocation to equities? Also, is the remainder of the allocation in treasuries? if so, any concerns on buying bonds at "expensive" prices?
ground covered many times including this post. I don't know if I have a point where I would have an emotional reaction to a decline (I don't think so) but i do know that if I do, 25% is nowhere close to it.
I own no US treasuries. I own the same short dated foreign sovreigns our clients own and have a high percentage in cash.
We live way below our means and are quite comfortable, this allows a very high savings rate.
Roger,
Excellent post giving us more insight into your thought processes regarding financial asset management.
Do you do financial planning or asset allocation for clients or do you just manage portfolios. If you do just manage portfolios, do you limit your management to equities or do you include fixed income assets?
Usually a client will meet with one of my colleagues to determine an asset allocation mix of stocks/bonds/cash.
Then I implement based on the numbers plus anything about the client that makes them unique (almost everyone has something). This includes equity exposure and fixed income exposure, as mentioned before this is usually a combo of individual issues and funds on both sides of the ledger.
Not to be taken as a pitch by anyone but when someone comes in through the blog they usually know what sort of asset allocation they want/need/is suitable/ can be tolerated and so some of those folks I become the primary point of contact but that isn't even 15 people i don't think.
Hey Roger your 25% equity allocation is startling. If I remeber correctly you had 2% gold allocation also. So you must have a dismal outlook for stocks. Since stocks generate the most income for money managers it cant portend good things for them. BTW when I interviewed MMs for managing my account and stated I wanted a conservative portfolio, 40 percent equity was the lowest I got. I am in 50's and their argument was there is not enough growth for 7% return when you dip below 40%.
10:21, you're adding one plus one and getting 11.
I explain pretty clearly in the post and in the comment preceding yours why I have a conservative allocation.
F/U by 10:21
Sorry Roger, my current assetts already exceed my target for retirement by a large amount. So I do not need a large growt in my return, unless we get substantial inflation - I should have made that clear.
Thanks!
There are always going to be "just stupid" people in any industry. In a risky environment, like a fire, cover yourself and your partners. Just like in business. Don't get burned.
"I typically have 25% allocated to equities but it is a little less now as I am hoping to shift into a particular ETF should it list."
Thinking about eating your own cooking:-)?
Great post Roger. You are above all things consistent and honest. Good to hear about Pips. Another success story.
Sam
thank you Sam
there was an even better one of Pips on the Conservation Canines FB page (that is where this picture is from). Very neat how his story has worked out.
I've previously worked with/known/known of/still keep in contact with dozens in the industry, and there is as wide a diversity of spending habits as there is amongst the public.
The free-spenders - once their debts became known - stood out more than those of us who saved (or at least managed our finances adequately) although almost all were not known for bending any rules or being loose with the interpretation of their clients' needs. This was 2001-2006 so obviously there were some lax standards amongst a couple of the mortgage brokers.
Only the one time one of them (a colleague of a friend in the industry) was arrested for fraud (and walked out in hand cuffs, past her workmates, like Bud Fox) and it was a huge scandal. Other than that our compliance officers were continuously advising us on best practices and industry standards.
Another good post today from Wade Pfau on withdrawals from a portfolio.
http://wpfau.blogspot.com/2012/04/variable-withdrawals-in-retirement.html#comment-form
Roger
Is there any estimate available for when that ETF might be available?
The general time line has been June/ July and I believe that is still on track.
Roger,
Great post. I try to read you and Josh Brown, but not as much as I like. The Betterment site makes a lot of of incorrect generalizations and is rife with plenty of cute, simplistic marketing jargon. Perhaps a decent place for very beginning investors but no one else.
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