Financial Advisor "Interview" Results in what you expect

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Fedaykin
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Financial Advisor "Interview" Results in what you expect

Post by Fedaykin »

This isn't news to anyone, but I thought I would add to the dog pile.

A few years ago I hired a financial advisor and gave him 20% of my liquid assets. I wanted to diversify a bit beyond indexes and I wanted to believe that someone who's job it is to manage money would be able to do better than me. I figured I would give him a bit of money as an "interview" and be patient.

Yesterday I fired him.

Without getting too specific, the assets he managed performed at <1/2 the market average as measured by the S&P500. It would have been worse if the couple of items I had picked (in an IRA previous to hiring him) had not done amazingly in that time period.

I decided to just give him my objectives (growth for a retirement in several decades) and let him choose. After all, he does it for a living he should know better than me right? He chose, of course, an alphabet soup of stuff and most of it performed pathetically (well below S&P500) to horrific (lost money in one of the best bull markets ever). He did put quite a bit just in SPY but all his other picks (mutual funds, etc.) other than that have performed worse. He really, really liked to talk about how "really smart the manager of this fund is!".

Add in his 1% fee and it was horrific. Luckily the total overall is only a small portion of my assets but it still stings.

Anyway, lesson learned and I thought I would share to help others not fall into the trap of paying some idiot only to underperform index funds.
Silk McCue
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Re: Financial Advisor "Interview" Results in what you expect

Post by Silk McCue »

Free at last … free at last.

Congrats on the move.

Cheers
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Fedaykin
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Re: Financial Advisor "Interview" Results in what you expect

Post by Fedaykin »

Silk McCue wrote: Fri Oct 15, 2021 8:05 pm Free at last … free at last.

Congrats on the move.

Cheers
Yeah it's exceedingly clear that the financial advisor scene is 100% a means to extract money from people and that they provide at best no value, more likely negative value (as in my case).
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beyou
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Re: Financial Advisor "Interview" Results in what you expect

Post by beyou »

The bar is pretty low to do that for a living.
If you can use a phone, make cold calls, call your relatives and friends, your in.
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Fedaykin
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Re: Financial Advisor "Interview" Results in what you expect

Post by Fedaykin »

beyou wrote: Fri Oct 15, 2021 8:25 pm The bar is pretty low to do that for a living.
If you can use a phone, make cold calls, call your relatives and friends, your in.
I should get licensed and just put people's money in indexes, hah. ~1% yearly of several peoples nest egg is nothing to sneeze at.

To bad I have ethics, lol
CocoaMi
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Re: Financial Advisor "Interview" Results in what you expect

Post by CocoaMi »

Timely topic, I’m interviewing them myself. Were they a fiduciary? Would you recommend a CFP with a flat fee? I am interviewing one with $2400/yr ($600/qtr). An additional %fee if they managed money but I’m honestly just looking for someone to look at the full gamut of our stuff.

What situations would you actually recommend someone get a CFP?
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Fedaykin
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Re: Financial Advisor "Interview" Results in what you expect

Post by Fedaykin »

CocoaMi wrote: Fri Oct 15, 2021 10:26 pm Timely topic, I’m interviewing them myself. Were they a fiduciary? Would you recommend a CFP with a flat fee? I am interviewing one with $2400/yr ($600/qtr). An additional %fee if they managed money but I’m honestly just looking for someone to look at the full gamut of our stuff.

What situations would you actually recommend someone get a CFP?
He was a fiduciary/CFP from a well respected company (which I won't name in case it's against the TOS here).

I can only warn against someone managing your money for a % fee. I don't know if there is value in other arrangements.
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nedsaid
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Re: Financial Advisor "Interview" Results in what you expect

Post by nedsaid »

Fedaykin wrote: Fri Oct 15, 2021 7:59 pm This isn't news to anyone, but I thought I would add to the dog pile.

A few years ago I hired a financial advisor and gave him 20% of my liquid assets. I wanted to diversify a bit beyond indexes and I wanted to believe that someone who's job it is to manage money would be able to do better than me. I figured I would give him a bit of money as an "interview" and be patient.

Yesterday I fired him.

Without getting too specific, the assets he managed performed at <1/2 the market average as measured by the S&P500. It would have been worse if the couple of items I had picked (in an IRA previous to hiring him) had not done amazingly in that time period.

I decided to just give him my objectives (growth for a retirement in several decades) and let him choose. After all, he does it for a living he should know better than me right? He chose, of course, an alphabet soup of stuff and most of it performed pathetically (well below S&P500) to horrific (lost money in one of the best bull markets ever). He did put quite a bit just in SPY but all his other picks (mutual funds, etc.) other than that have performed worse. He really, really liked to talk about how "really smart the manager of this fund is!".

Add in his 1% fee and it was horrific. Luckily the total overall is only a small portion of my assets but it still stings.

Anyway, lesson learned and I thought I would share to help others not fall into the trap of paying some idiot only to underperform index funds.
The S&P 500 would be the benchmark for an all-US Stock portfolio or better yet a Total U.S. Stock Index. Did your Advisor have you 100% invested in US Stocks? If not, the benchmark you are using is not the right one.

If the Advisor had you invested in a mix of stocks and bonds, then you need to use a blended index. Furthermore, if some of the stocks were International, the blended index needs to take that into consideration. What you do is use a weighted average return of the indexes to give you a more fair comparison.

The AUM Fees of 1% a year are a drag on performance as are the internal fees of the mutual funds. So yes this all adds up over time and this is why you want to keep mutual fund fees as low as possible. Adding to that, it is hard to predict in advance which fund managers will outperform the index. So the fees are one culprit.

Second, it is hard for Active funds to beat their benchmark indexes mainly because of expenses but also because the fund manager sometimes guesses wrong. Some managers have skill and can generate excess returns but we don't know in advance who those managers will be.

So depending upon how the Advisor managed the money, tilting the portfolio one way or another, you have to look at that too. So if there was a mix of US Stocks and US Bonds in the portfolio, of course it would underperform the S&P 500, as over time stocks outperform bonds. If the manager tilted the stock portion of the portfolio towards Value, we know that in recent years that Growth has outperformed Value, so it follows that a tilt towards Value would cause underperformance vs. the S&P 500. Also International stocks have been underperforming US Stocks, so if the Advisor had International Stocks in there, that would have also contributed to the portfolio lagging the performance of the S&P 500.

Behavioral errors can cause underperformance as well. Unfortunately, Advisors are human and can be subject to performance chasing. Putting a portfolio together is more than picking the recently hot funds. One reason for hiring advisors is to avoid behavioral errors you would make if you were investing on your own. Advisors should be better at the behavioral aspects of investing than individual do-it-yourself investors, but they are human too. Dan Solin, a more Boglehead minded Advisor, admitted to panic during the 2008-2009 financial crisis. A good Advisor should tell their clients to stick with the plan during bear markets. Investors don't want to sell at the bottom and then miss out on much of the rebound, but this is sometimes what individual investors do.

What an Advisor can do for you is properly allocate your portfolio according to age and your life circumstances. An Advisor cannot guarantee that you will outperform a benchmark, particularly with an Assets Under Management fee. The additional 1% in fees is a pretty big hurdle to overcome. You also have to consider other services the Advisor is performing for you and if those additional services are rolled up into the AUM Fee or billed separately. These services could include comprehensive financial planning. The Advisor should also be aware of the tax consequences of various types of accounts, investments, and trading.

I have personally been reluctant to pay Assets Under Management fees as they really add up over time. Not only do returns compound over time but also the affect of fees. So you have to watch your expenses and determine if the fees paid are worth the services provided. In your case, you were dissatisfied. I have been test driving an Advisory service in part because financial planning was included in the price, but like you with a portion of my portfolio.

What you will find to is like everything thing else, you will find varying degrees of competence. There is nothing wrong with "test driving" an Advisory service to see how you like it. I have been mostly a do-it-yourself investor but I have sought advice over the years too. Some years ago, I also went through the financial planning process. I also took advantage of a few free reviews of my portfolio most of which were performed by existing providers. I looked at these encounters with Advisors as learning experiences, each time I learned a couple of things.

My advice has been to take advantage of whatever free advice is available. This is a good test run if you want to hire somebody in the future. As you learn, you have to learn to separate the wheat from the chaff. The more you know, the better your baloney detector becomes. This forum is a good source of information.
A fool and his money are good for business.
CocoaMi
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Re: Financial Advisor "Interview" Results in what you expect

Post by CocoaMi »

Yep test driving makes sense. This forum does provide a lot of great info. Thanks to the OP for sharing their lessons.
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JoeRetire
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Re: Financial Advisor "Interview" Results in what you expect

Post by JoeRetire »

Fedaykin wrote: Fri Oct 15, 2021 7:59 pmI wanted to diversify a bit beyond indexes

Anyway, lesson learned and I thought I would share to help others not fall into the trap of paying some idiot only to underperform index funds.
I guess the takeaway is not to hire idiots?
Or is it not to attempt to diversify beyond indexes?
Or to "interview" advisors using less than 20% of your liquid assets?
It would have been worse if the couple of items I had picked (in an IRA previous to hiring him) had not done amazingly in that time period.
I'm not sure I understand. You picked items within this 20% that you gave him to manage for you?
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260chrisb
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Re: Financial Advisor "Interview" Results in what you expect

Post by 260chrisb »

Fedaykin wrote: Fri Oct 15, 2021 7:59 pm This isn't news to anyone, but I thought I would add to the dog pile.

A few years ago I hired a financial advisor and gave him 20% of my liquid assets. I wanted to diversify a bit beyond indexes and I wanted to believe that someone who's job it is to manage money would be able to do better than me. I figured I would give him a bit of money as an "interview" and be patient.

Yesterday I fired him.

Without getting too specific, the assets he managed performed at <1/2 the market average as measured by the S&P500. It would have been worse if the couple of items I had picked (in an IRA previous to hiring him) had not done amazingly in that time period.

I decided to just give him my objectives (growth for a retirement in several decades) and let him choose. After all, he does it for a living he should know better than me right? He chose, of course, an alphabet soup of stuff and most of it performed pathetically (well below S&P500) to horrific (lost money in one of the best bull markets ever). He did put quite a bit just in SPY but all his other picks (mutual funds, etc.) other than that have performed worse. He really, really liked to talk about how "really smart the manager of this fund is!".

Add in his 1% fee and it was horrific. Luckily the total overall is only a small portion of my assets but it still stings.

Anyway, lesson learned and I thought I would share to help others not fall into the trap of paying some idiot only to underperform index funds.
I'm not sure I really understand why you did this in the first place! Seems to me you knew what the results were going to be. I knew how this was going to end before I even read your post. One can easily diversify beyond indexes without the help of anyone else especially if, like you, you're already managing liquid assets. I say this, live this, and mean this; when is enough, enough? Seems we're always trying to get the BEST return on our investments or higher returns on our investments. I don't know; the S&P 500 index is up 20% YTD, how much better does one need and how much more risk are you willing to take, and at what cost? I'm glad you fired him but 20% of your liquid assets (even if they are completely lost) isn't enough to greatly impact your world.
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Re: Financial Advisor "Interview" Results in what you expect

Post by beyou »

CocoaMi wrote: Fri Oct 15, 2021 10:26 pm Timely topic, I’m interviewing them myself. Were they a fiduciary? Would you recommend a CFP with a flat fee? I am interviewing one with $2400/yr ($600/qtr). An additional %fee if they managed money but I’m honestly just looking for someone to look at the full gamut of our stuff.

What situations would you actually recommend someone get a CFP?
Look into planvisionmn.com
Low fee guidance for those who would rather DIY but with someone to talk to, and some tools not widely available to individuals. Much cheaper than what you quoted above but requires more work on your part.
CocoaMi
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Re: Financial Advisor "Interview" Results in what you expect

Post by CocoaMi »

Thanks for that suggestion I’ll have a look!
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Fedaykin
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Re: Financial Advisor "Interview" Results in what you expect

Post by Fedaykin »

JoeRetire wrote: Sat Oct 16, 2021 6:50 am
Fedaykin wrote: Fri Oct 15, 2021 7:59 pmI wanted to diversify a bit beyond indexes

Anyway, lesson learned and I thought I would share to help others not fall into the trap of paying some idiot only to underperform index funds.
I guess the takeaway is not to hire idiots?
Or is it not to attempt to diversify beyond indexes?
Or to "interview" advisors using less than 20% of your liquid assets?
It would have been worse if the couple of items I had picked (in an IRA previous to hiring him) had not done amazingly in that time period.
I'm not sure I understand. You picked items within this 20% that you gave him to manage for you?
My takeaway is that the common advice that financial advisors are a waste of money and that on average index investing is better is true. I'm not saying there aren't a few that can be worth it but I certainly got hit like what seems to be the majority of people do. I didn't pick this guy at random I shopped around, got recommendations and talked to him extensively before signing on.

I was a bit unclear: I handed him 2 accounts which had some investments already with instructions that I had no preference on whether or not to keep them. None of them fit into the plan he pitched but I don't remember his reasoning for keeping them. One has vastly outperformed the market to both our surprise. Outperformed so much that it has become about 15% of the portfolio after starting at ~0.5%.
Last edited by Fedaykin on Sat Oct 16, 2021 10:35 am, edited 1 time in total.
Topic Author
Fedaykin
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Re: Financial Advisor "Interview" Results in what you expect

Post by Fedaykin »

260chrisb wrote: Sat Oct 16, 2021 7:20 am
Fedaykin wrote: Fri Oct 15, 2021 7:59 pm This isn't news to anyone, but I thought I would add to the dog pile.

A few years ago I hired a financial advisor and gave him 20% of my liquid assets. I wanted to diversify a bit beyond indexes and I wanted to believe that someone who's job it is to manage money would be able to do better than me. I figured I would give him a bit of money as an "interview" and be patient.

Yesterday I fired him.

Without getting too specific, the assets he managed performed at <1/2 the market average as measured by the S&P500. It would have been worse if the couple of items I had picked (in an IRA previous to hiring him) had not done amazingly in that time period.

I decided to just give him my objectives (growth for a retirement in several decades) and let him choose. After all, he does it for a living he should know better than me right? He chose, of course, an alphabet soup of stuff and most of it performed pathetically (well below S&P500) to horrific (lost money in one of the best bull markets ever). He did put quite a bit just in SPY but all his other picks (mutual funds, etc.) other than that have performed worse. He really, really liked to talk about how "really smart the manager of this fund is!".

Add in his 1% fee and it was horrific. Luckily the total overall is only a small portion of my assets but it still stings.

Anyway, lesson learned and I thought I would share to help others not fall into the trap of paying some idiot only to underperform index funds.
I'm not sure I really understand why you did this in the first place! Seems to me you knew what the results were going to be. I knew how this was going to end before I even read your post. One can easily diversify beyond indexes without the help of anyone else especially if, like you, you're already managing liquid assets. I say this, live this, and mean this; when is enough, enough? Seems we're always trying to get the BEST return on our investments or higher returns on our investments. I don't know; the S&P 500 index is up 20% YTD, how much better does one need and how much more risk are you willing to take, and at what cost? I'm glad you fired him but 20% of your liquid assets (even if they are completely lost) isn't enough to greatly impact your world.
I didn't really know the outcome before hand. I "knew" what I'd read on random websites but didn't really believe it. This post is pretty much me eating crow.

I am not really concerned with the absolute best returns but his performance which was only a small fraction of the markets performance in that time is completely unacceptable. His performance (combined with fees) is so bad that it would take a 1929 scale market crash to have lost more than he lost for me.
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ApeAttack
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Re: Financial Advisor "Interview" Results in what you expect

Post by ApeAttack »

If the adviser's results were 10% better than the relevant index performance, would you have given him more of your money to manage? How would you know he didn't get lucky?
May all your index funds gain +0.5% today.
2commaBH
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Re: Financial Advisor "Interview" Results in what you expect

Post by 2commaBH »

Could you share the general amount of his mandate (ie, 5 figures, low 6 figures, high 6 figures, etc)? My sense is at the higher thresholds there's more they can do from a tax/alternatives perspective.
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Re: Financial Advisor "Interview" Results in what you expect

Post by Soon2BXProgrammer »

My 2 cents:

Find an advisor who believes it is impractical to beat the market and that costs matter when it comes to investment management, and therefore recommends a bogleheads like approach. (maybe with a twist of small value, or something, but the key is costs matter, and strategy is stuck to for the long run). <--------- This isn't the value creation part.

Then have the advisor for all of the other topics of Comprehensive Financial Planning. this is where the value is and what people should pay for.
Earned 43 (and counting) credit hours of financial planning related education from a regionally accredited university, but I am not your advisor.
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Re: Financial Advisor "Interview" Results in what you expect

Post by MarkNYC »

Fedaykin wrote: Fri Oct 15, 2021 7:59 pm This isn't news to anyone, but I thought I would add to the dog pile.

A few years ago I hired a financial advisor and gave him 20% of my liquid assets. I wanted to diversify a bit beyond indexes and I wanted to believe that someone who's job it is to manage money would be able to do better than me. I figured I would give him a bit of money as an "interview" and be patient.

Yesterday I fired him.

Without getting too specific, the assets he managed performed at <1/2 the market average as measured by the S&P500...
Stories like this always remind me of Bill Miller, the legendary (at the time) manager of the Legg Mason Value Trust. His fund outperformed the S & P 500 for 15 consecutive years, a feat unmatched before or since. Over the next 2 or 3 years, Miller made some bad decisions, his fund tanked, and I believe during those years his fund performed in the bottom 1% of his investment fund's peer group, destroying the wealth of so many investors who, based on Miller's record, were confident they had selected one of the very best money managers in the business.

I have a close friend who was invested with Miller during a large part of that 18 year period, and sang his praises. During the good years, I once asked him what he would do if Miller had a couple of bad years. His response was "I'll stick with Miller - he's a genius."
When the bad years came, my friend could not take the pain and he liquidated his account near the bottom of the fund's downturn,
probably more than offsetting the gains he obtained during the good years.
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Re: Financial Advisor "Interview" Results in what you expect

Post by friar1610 »

MarkNYC wrote: Sat Oct 16, 2021 12:08 pm
Fedaykin wrote: Fri Oct 15, 2021 7:59 pm This isn't news to anyone, but I thought I would add to the dog pile.

A few years ago I hired a financial advisor and gave him 20% of my liquid assets. I wanted to diversify a bit beyond indexes and I wanted to believe that someone who's job it is to manage money would be able to do better than me. I figured I would give him a bit of money as an "interview" and be patient.

Yesterday I fired him.

Without getting too specific, the assets he managed performed at <1/2 the market average as measured by the S&P500...
Stories like this always remind me of Bill Miller, the legendary (at the time) manager of the Legg Mason Value Trust. His fund outperformed the S & P 500 for 15 consecutive years, a feat unmatched before or since. Over the next 2 or 3 years, Miller made some bad decisions, his fund tanked, and I believe during those years his fund performed in the bottom 1% of his investment fund's peer group, destroying the wealth of so many investors who, based on Miller's record, were confident they had selected one of the very best money managers in the business.

I have a close friend who was invested with Miller during a large part of that 18 year period, and sang his praises. During the good years, I once asked him what he would do if Miller had a couple of bad years. His response was "I'll stick with Miller - he's a genius."
When the bad years came, my friend could not take the pain and he liquidated his account near the bottom of the fund's downturn,
probably more than offsetting the gains he obtained during the good years.
I telephone-interviewed with Legg-Mason for a position as a “Financial Planner” during the Bill Miller hey-day. I was retiring from the Navy and happened to see an ad for FPs in the Baltimore Sun. I had absolutely no experience but did have (or thought I had) an interest in the field. I was just beginning to morph into a Boglehead about that time.) I sent my resume and an HR person called a week later. She said they had a guy who was a retired naval officer and they’d have him give me a call. When he called we had a nice chat but, perhaps because we were two old Navy guys, he was very honest with me and pointed out:

- the “Financial Planner” title sounded nice but, at heart, you were a salesman. If you couldn’t sell mutual funds, you wouldn’t be around long.
- I’d be expected to use my Navy network to the fullest extent possible, as distasteful as it might be for me to be knocking on the doors of former shipmates and trying to sell them mutual funds.

Before the conversation was done, I realized this was not for me and I told him so. Deftly switching roles, he attempted to sell me Bill Miller’s Legg-Mason Value Trust which, in those days, was beating the pants off of the S&P 500. He had obviously absorbed the realities of being a “FP”.
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lws
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Re: Financial Advisor "Interview" Results in what you expect

Post by lws »

Buyer beware!
Learned that in high school economics class and never forgot it.
Thank you Mr. Looney.
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Eagle33
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Re: Financial Advisor "Interview" Results in what you expect

Post by Eagle33 »

MarkNYC wrote: Sat Oct 16, 2021 12:08 pm Stories like this always remind me of Bill Miller, the legendary (at the time) manager of the Legg Mason Value Trust. His fund outperformed the S & P 500 for 15 consecutive years, a feat unmatched before or since. Over the next 2 or 3 years, Miller made some bad decisions, his fund tanked, and I believe during those years his fund performed in the bottom 1% of his investment fund's peer group, destroying the wealth of so many investors who, based on Miller's record, were confident they had selected one of the very best money managers in the business.

I have a close friend who was invested with Miller during a large part of that 18 year period, and sang his praises. During the good years, I once asked him what he would do if Miller had a couple of bad years. His response was "I'll stick with Miller - he's a genius."
When the bad years came, my friend could not take the pain and he liquidated his account near the bottom of the fund's downturn,
probably more than offsetting the gains he obtained during the good years.
As long as your friend reinvested his liquidated $ in say VTSAX, then he just tax loss harvested and has losses that he can use to offset taxes for the rest of his life.
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Re: Financial Advisor "Interview" Results in what you expect

Post by Misenplace »

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