By Dr. James M. Dahle, WCI Founder
I spend a lot of time interacting with financial advisors, helping readers find advisors, addressing issues with their advisors, and evaluating advisors for inclusion on my financial advisor recommended list. While I think there are plenty of decent people out there providing advice—and even a few competent, ethical, low-cost advisors (even if they're the tiny minority of their profession)—I am left with the gnawing feeling that it's so much easier to just learn how to invest your money yourself. In that spirit, here are eight reasons to be your own financial advisor.
#1 Being Your Own Financial Advisor Will Save You a Lot of Money
Financial advice, even low-cost financial advice, is expensive stuff. It has gotten to the point where I think that if you're only paying four figures a year, you're getting a good deal. But even just $10,000 per year invested for 30 years at 8% grows to be $1.2 million dollars. Most Americans and many doctors retire on less than that. And there are plenty of docs out there paying MORE than $10,000 a year in total investment costs.
Consider an advisor charging just 1% who is putting you into mutual funds with an average expense ratio of 1%. If you have a $2 million portfolio, you're paying $40,000 a year! And that's not counting any commissions, 401(k) fees, etc. That kind of money really adds up. The less you spend on advice, the more you get to keep. That means you can save less now, spend more later, take less risk over the years, and/or retire sooner. It really does make a difference.
Some investors may worry that they won't do as good a job as a professional advisor. That's a realistic concern for many high-income professionals. But bear in mind that you don't have to do better than the advisor. You don't even have to do as well as the advisor. You only have to do as well as the advisor minus the cost of their advice, and that's an easier benchmark to beat. In my experience, it is rare for a very early retiree to use a traditional financial advisor. Those retirees might not know everything, but they know enough—and they coupled it with a very high savings rate partially enabled by saving advisory fees.
#2 You Won't Rip Yourself Off on Purpose
Competent advisors are sometimes appalled when I share stories with them that readers have shared with me. They had no idea how many self-styled “advisors” are either crooked or completely incompetent. You're not going to go “Bernie Madoff” on your own portfolio, nor are you going to purposely sell yourself a crappy mutual fund or whole life insurance policy to make a commission. Might you make some mistakes? Sure. But they'll be innocent ones, and those usually have much lower consequences than using someone who's doing everything they can to transfer wealth from your account to theirs.
My 6-year-old “hanging 10” at Lake Powell
#3 You Don't Have to Learn How to Recognize a Good Advisor
I've said many times that by the time you know how to recognize a good advisor, you probably know enough to be your own financial advisor. It's a bit like finding a good doc if you don't know anything about medicine. Asking your physician friends for a referral to an advisor is like asking your carpenter friends for a referral to a doctor. Sure, they might know about their bedside manner, but they have no idea of their clinical competence.
There isn't that much to learn or that much discipline required to be your own financial advisor and investment manager. Heck, I drew up my own plan as a busy resident after reading a few books and monkeying around on the internet a bit, and I am still basically following that same plan today. It made me a millionaire seven years after residency. It clearly works. I had less than one-tenth the knowledge I have now when I drew it up. But you don't have to know anything about advisor compensation models, advisor credentials, or how to look up an advisor on the regulatory websites if you just do it yourself.
#4 You Don't Have to Spend Time Looking for an Advisor, Evaluating Your Advisor, and Finding a New Advisor
The most valuable commodity for a high-income professional is time. That high earner can generally trade their time for money at a very high rate, and they place a very high value on the limited free time they have. The last thing they want to do is spend that time looking for an advisor.
It can be really tough to find a competent, ethical, and low-cost advisor, much less someone you feel is a good fit. To make matters worse, you're not even done once you find one. If you're even appropriately suspicious, you should then have this constant worry in the back of your mind (at least for the first few years) that the advisor is taking advantage of you or doesn't know what they're doing. You're always evaluating the advice, maybe getting second opinions from other advisors or internet forums, and then possibly even starting the process over. And that advisor is going to retire eventually. If you were smart and hired someone experienced the first time, you're almost surely going to have to replace them once—if not twice—when they retire. You only have to learn to be your own advisor once.
#5 You Don't Have to Spend Time Meeting with an Advisor
I drove downtown for a meeting a few years ago. The meeting ran an hour and a half. Between driving through traffic, parking, walking around the building, and the meeting itself, I left home at 3:15 pm and returned at 6:45. That's basically half a day for a single meeting, and I had to plan my entire day around it. And that assumes you and your advisor are in the same town. If I want to meet with my advisor or see how my investments are doing, all I have to do is flip open my computer. I can use that saved time to earn more money—or at least go for a nice mountain bike ride.
#6 You Only Have to Learn the Stuff That Actually Applies to Your Life
Advisors hoping to sell you their services rightly point out that there are plenty of complexities in personal finance and investment management—IBR vs. REPAYE, PSLF vs. refinancing, 401(k) vs. a defined benefit plan, Backdoor Roth IRAs, the tax code, mortgages, active vs. passive investing, options, muni bond yields, revocable trusts, etc. etc. etc. It can seem so overwhelming. Until you realize you don't have to know it all to be your own advisor. You only have to know the stuff that applies to you.
Once your student loans are gone, you no longer have to know a thing about managing them. Same with a mortgage. Once you buy your dream home and pay off the mortgage, who cares what's available out there. Same with claiming Social Security. You don't have to know that before your 60s and only have to make the decision once. You don't have to keep up to date with every change that comes out for 50 years.
The tax code is complicated, but 95% of it doesn't apply to you. And the part that does is almost exactly the same part that applied last year. If you've decided to invest in index funds, you don't have to know a single thing about trading individual stocks, options, actively managed funds, and flash crashes. It just doesn't matter. You don't have to know about every retirement plan or every mutual fund out there. You just have to know about your 401(k) and the funds in it. You only have to buy life and disability insurance once.
You can get specialized advice as needed. Advice is available from student loan experts, insurance agents, mortgage agents, accountants, and attorneys—all on an hourly or flat rate basis. You can even meet with financial advisors on an hourly or flat rate basis for specialized questions or just to get a second opinion on your plan.
With personal finance and investing, the law of diminishing returns kicks in surprisingly early. Save a significant part of your salary. Invest it in a reasonable manner. Pay attention to costs and taxes. Stay the course. It's not that hard. Get the big things right and you can ignore a lot of small things.
#7 You Don't Have to Prevent Investment Misbehavior
Advisors (and studies) point out that the greatest benefit of having an advisor is to keep you from doing something stupid. While I agree it is far more likely that the individual investor will do something stupid, advisors aren't immune from performance chasing, market timing, and bailing out of a good plan in a terrible market. Especially if they are paid on an AUM basis. They see their income going down right along with your assets, and it can cause them to panic. When you are your own advisor, you only have to control one person's emotions.
#8 You'll Pay More Attention to Your Financial Life
But the greatest benefit of being your own advisor is that you cannot mentally put the responsibility for your financial salvation on someone else. The buck stops with you. Knowing that should cause you to pay more attention to your spending, your investing, your insurance, your estate planning, and your asset protection. You know you need to do some “Continuing Financial Education” each year because no one else is doing it for you. I'm confident that those who spend more time thinking about saving money, investing well, and becoming financially independent are far more likely to actually do it than those who only think about these subjects twice a year. You might have to be a bit of a hobbyist to be a successful DIY investor, but there is no better-paying hobby out there.
Set Yourself Up for Success as a DIY Financial Advisor
Your first step should be establishing a written investing plan. If you'd like help building one, I designed an online course, provocatively entitled Fire Your Financial Advisor.
All that said, I'm well aware that most docs (80%?) are going to be better off connecting with a competent, ethical, low-fee advisor. But for most of them, that isn't because they cannot become their own advisor. It is because they choose not to. For those people wanting or needing a good advisor, I keep a list of recommended advisors. For the rest of us, go look in the mirror and get to work.
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What do you think? Are you a do-it-yourself investor? Why or why not? Have you ever used an advisor? Good experience or bad? Did you choose to fire them? Did you do it yourself in the past and now use an advisor? Why the change? Comment below!
[This updated post was originally published in 2016.]
You hit the nail on the head WC. ALL my financial mistakes occurred when I had a financial advisor. Despite have a busy clinical practice, physician spouse, large family, big old house, hobbies, etc., I managed to figure out the basics. Three hours with a fee only fiduciary (in order to double check my asset allocation of Vanguard index funds) and the WCI site/book, I’m pretty much set. I have such a peace of mind NOT having a financial advisor! Rather than feeling like a sucker, I enjoy being in charge of my financial life. Frankly, it’s not that difficult and I believe most people should DIY.
I’ve been investing my own capital since 1980. I think fees for financial advisors are too high compared to their returns. Thus, I agree with some study you can become a DIY. At the end of the day it is your money and you should be in control of it.
Great post
I have been thinking about going the doing it yourself route and this may just be the push I needed.
We were lucky to find a few only advisor from this website relatively early in our careers. Currently we are paying 1800 yearly flat fee for about 1 million in assets (0.18% and this will go down as hopefully our assets increase).
The advantages in my mind that have so far prevented me from doing it myself have been:
1. Access to DFA funds (now I understand that there are comparable vanguard funds but I still like the extra value and size tilt – extra risk and hopefully extra returns).
2. Though I have tried to involve my wife in all financial planning am not sure she would want/be able to do all the financial planning in the event of my untimely demise.
3. Quarterly performance reports with charts from morning star which makes it very easy to track the assets and their performance without having to do any calculations myself.
Was curious if there are people in similar situation and if they thought that it was worth saving the extra money.
1. Rare to have any actual special fund out there that isnt replicated somewhere. Factor funds like those you mentioned there are thousands of, you’re likely not getting an extra risk adjusted return anyway.
2. Dont leave it up to chance. Write out a plan just in case that can be applied at any time. Pick an allocation or glidepath and have it spelled out how and what to do and when. Make it simple, remember its unlikely any specific choices outside broad allocation/diversity impact anything.
3. Every brokerage will be able to drown you in data, whether or not you pay them, this is by far the easiest thing to come by.
Learning DIY personal finance is easily the best financial move a person can make. What other DIY skills can save you millions in a lifetime?
It’s important to have some base knowledge before getting started. With all the great books and sites (like WCI, Bogleheads), the required knowledge difficult to attain. #6 is a great point. I’m not well versed on some of the esoteric stuff out there, but I don’t need to be.
DIY can also be done very poorly. I’ve read often how the “average investor in Fund X” underperformed the Fund by 5% or more each year buying high and selling low. Make a plan, believe in it, and follow through.
Good column, WCI. Certainly applies to more than just docs. Nameless raises some good points, to which I would like one more that may eventually apply, and that’s aging. At 77, I am aware that my mental faculties are not what they were 30 years ago. At some point, someone else should take over, and I may not realize when it is necessary. My wife is uninterested in learning what is necessary, and in fact pays an “advisor” to manage her tax-deferred assets and send her a monthly check and statement. They do as good job — in fact the profile of her portfolio is very similar to mine in terms of diversification, allocation, etc. But I don’t want to pay the fees she pays, snd I do still enjoy continuing to learn how to do it better. BTW, in #5, you can substitute the words “lawyer”, “mechanic”, “accountant” or even . . . “doctor” and it is still true. Most of us seem to waste a great deal of time around meetings, which may themselves not be very productive.
Can you provide a list of the essential resources one needs to educate ones self on how to be your own financial advisor? (Other than this excellent website).
Reason number 9: Math is hard. I don’t think 1% of 2 Million is 40k 😉
I think he stated 1% for financial Advisor and 1% ER for a total of 2% or 40K….
Granted, even DIY’ers have to pay ER’s but they are usually along the lines of 0.1% to 0.5% instead of 1% or higher.
WCI would never make a math mistake 😉
Ha! No, it’s not.
BUT, 1 + 1 = 2, and 2% of 2 million IS 40k. 🙂
Might want to brush up on the reading skills, Patrick…
Math is hard, though. No joke.
D’oh!
It’s just like coding. Early in your career you think it’s too complicated or someone else should do it. Eventually you realize it’s super important for you to understand and likely something you should do yourself.
I agree with everything in the post, but one important thing to note is that the most important determinant of a successful outcome (ahead of asset allocation, fees etc.) is behaviour. It’s critical to avoid behavioural errors, especially “the big mistake” of panic selling in a crash. Even some Bogleheads bailed out in 2008. You have to be careful that you have your asset allocation right so you stay the course in the next crash. There hasn’t been a significant pull back since for 7 years, so there are many newer investors that have not yet experienced a crash.
This is an excellent article for its main readership — practicing doctors for whom retirement is not yet bright on their radar. For those at or near retirement, or those who are in a different socio-economic position, a different emphasis might be better. Your conclusion is appropriate for most HNWI: ” All that said, I’m well aware that most docs are going to be better off connecting with a competent, ethical, low-fee advisor. But for most of them, that isn’t because they cannot become their own advisor. It is because they choose not to.”
My only point of disagreement is that you do not take a firm position against hiring an advisor who charges a percentage of AUM fee, and some of your recommended advisors do. If an advisor instead charges an hourly-based fee that is fully transparent (including a fixed fee based upon hours), then the client will be able to decide whether to spend his own time, or use the services of someone who is better qualified. In most cases the advisor’s hourly-based fee should be less than that which a doctor earns per hour (if not look elsewhere).
Hilarious. If you could find me a decent sized list of qualified folks who charge an hourly fee less than what I make an hour who don’t already have enough clients and who are willing to spend money advertising, I’d love to see it. I’ve been looking for those folks for years. I keep having the good people I do find tell me their practice is now full and they no longer have a need to advertise. It doesn’t do anyone any good to hook doctors up with an advisor who is basically full. The advisor doesn’t need more clients, the advisor has no interest in paying me for more, and the client can’t even get in and see them. I don’t love the AUM fee structure (as I’ve written here: https://www.whitecoatinvestor.com/my-two-least-favorite-ways-to-pay-for-advice/ ) but until more advisors become willing to work on a flat annual fee or an hourly rate, I don’t see very many good ways around it. Many of those who are fee-conscious enough to get a flat fee or hourly advisor are en route to the DIY path anyway.
Unfortunately, the conventional wisdom does seem to be as you suggest: you may not be able to find a competent advisor who does not charge %AUM, so either DIY, or pay the exorbitant fee. WCI says: “I don’t love the AUM fee structure… but until more advisors become willing to work on a flat annual fee or an hourly rate, I don’t see very many good ways around it.”
Wishful thinking won’t help; doctors should be ideal agents for helping to change the fee structure. Doctors make ideal clients because either they are high net worth or likely will be, so they should be able to claim some leverage. For those doctors who “choose not to… become their own advisor”, why not use the leverage that you have? Anyone who presently uses a financial advisor should ask for a detailed dollar summary of fees paid annually, both expense ratios and advisor fees (the 1% and 1% discussed above). The client should then ask the FA to explain the fees in the context of professional and administrative hours spent, and the ER in the context of low cost index funds. The advisor will likely try to avoid the matter by claiming their fee is based upon value received rather than hours spent, but WCI’s article above refutes that claim — yes there is value, but no special sauce justifying exorbitant fees and expenses. An hourly based fee such as that charged by attorneys and CPAs is equitable and simply makes more sense; ERs in excess of .25% are likely excessive. Of course those seeking an advisor should ask the same questions, negotiate, and shop around.
My friend, who is a business owner, told me recently that we live in the age of incompetence ( we had a discussion about very simple to medium complexity bank transactions botched several times on several levels at a too big to fail bank).
I thought about our everyday life, how often do we see fast, mistake-free, courteous service from anyone or anywhere? I understand (and “Hanlon’s razor” is a great everyday reference guide :)) that most of it due to incompetence, not malice.
But are doctors now the only professionals who are expected by our society to be 100% correct 100% of the time on the 1st visit, keeping the interest of the patient (ie client) as the only interest to be considered?
Seems easy in retrospect, but most people “luck into” becoming educated DIYers by finding sites like this, Bogleheads forum, or the right book. Problem is early on, even the basics seem daunting and financial advisors are skilled salesmen when you are starting to figure out that the fix is in. We need parents, colleges, and medical schools to teach personal finance. MDs are smart but we need exposure at an early age or we don’t stand a chance. Figuring it out at age 40+, while the norm, is a shame.
I think a major step in the right direction would be for residencies to set up a Roth 401k target date fund at 10% deferral of pay as the DEFAULT. Bi-annual personal finance conference weeks on insurance, index investing, etc…
How many wish they had a time machine to go back and contribute to Roths during residencies, I know I do.
Be the change you wish to see for your kids. That is what I am doing. They force me to come up with fun analogies to keep them interested. Makes personal finance more fun for me too. After awhile so much of it gets basic and boring which is good for personal returns, but not so much for teaching my twenty somethings. They keep me on my toes!
If you cannot figure out how to screen for an independent, fee-only RIA (no conflicts of interest, fiduciary) who uses passive investing strategies (hint: DFA Website – find an advisor), or you have no idea what any of these things mean, what hope do you have of determining an appropriate asset allocation (rarely is this “age in bonds”), implementing it as tax efficiently as possible with the best available funds/ETFs and sticking with it through thick and thin? Bernstein puts the odds of investors being able to pull this off successfully at like 4% for everyone. If you can’t do the following 30-second exercise, I’d say the odds are more like 0.004%?
And if “knowledge” was the only prerequisite for success, we’d live in a world of billionaire librarians. Plenty of people have some working knowledge of investing, yet on average investors still cost themselves over 2% per year due to bad behavior (http://news.morningstar.com/articlenet/article.aspx?id=637022). And, no, ratcheting down your asset allocation to almost all bonds doesn’t count, because instead you are paying a low-return penalty instead.
Vanguard puts the value of good financial advice at something around 3% a year over time (and this is before considering the superiority of DFA funds over Vanguard – which the latter will never acknowledge). For the average person, it’s a no-brainer than 0.5% to 1% per year is money well spent to net 2x to 3x that much.
The funny thing is advisors aren’t immune from bad behaviors to say the least. There isn’t any evidence they protect you from bad decisions. I won’t be giving up 1/3 of my retirement funds
Many advisors, especially those who use DFA funds in constructing portfolios, are mostly immune to behavioral pitfalls and have discipline-inducing counseling as a core service offering. At the very least, they are much more consistent than even the most experienced DIY investors and save them most of that 2% behavioral gap the average investor pays.
The proof is in the pudding, DFA funds had positive quarterly inflows into their stock mutual funds EVERY single quarter between 1/2008 and 3/2009 and net outflows from bond funds – clients were still rebalancing! The rest of the mutual fund industry saw almost $400B of NET outflows over this period.
As a matter of fact, looking at this chart from Morningstar, it looks like US funds and ETFs had net redemptions every year through 2013 while bond flows were strongly positive: http://submissions.morningstar.com/wp-content/uploads/042516-chart.png
I’ve got one more submission that proves my point. Who is the most knowledgeable investor who advocates for DIY investing? Surely HE is a disciplined investor, right? Wrong:
(1) 58% in stocks at 2000 market peak: http://investors.morningstar.com/news/cmsAcontent.html?t=VBIIX&resourceId=79963&src=Morningstar&date=08-29-2002&nav=no®ion=USA&culture=en-US&ProductCode=mle
(2) only 25% in stocks at 2008 market low: http://www.wsj.com/articles/SB123137479520962869
(3) now back up to 60% stocks 6 years into a bull market? http://finance.yahoo.com/news/jack-bogle-winning-portfolio-strategy-124327705.html
Finally, here’s the bad news – because individuals tend to suffer from overconfidence, they all believe they are immune to these behavioral mistakes! But the behavioral psychology research finds we have blind spots when it comes to seeing our own faults…much easier to see in other people. And this is the very role an advisor plays – pointing out and helping their clients avoid these mistakes individuals are blind to.
Eric, WCI suggests that the typical doctor on this blog can be their own advisor and you suggest they cannot. If WCI is correct, financial planning is not exactly rocket science because smart people are capable of effectively learning DIY in their spare time, thereby netting your 2x or 3x on their own. I fully agree with WCI, but many or most doctor’s don’t want to spend the time or effort to do so properly; in those cases, I agree with you that they may well benefit by hiring a FA.
I believe that attorney’s and CPAs (and doctors) add more value in their fields than financial advisors do in their financial planning. As WCI points out, it is possible to effectively perform DIY financial planning, but most would be crazy to attempt DIY of legal, CPA, (or medicine).
Eric, I agree that many who are not willing to spend the time and effort to do DIY right are better off hiring a FA. Lawyers and CPAs typically charge an hourly fee based upon their skill levels (or flat fee equivalent). It is not uncommon for financial advisor fees for HNWI to convert out to $1000s per hour, considerably more than would be charged by attorneys or CPAs. Such fees arise from percentage AUM. Do you believe these fees and the % AUM fee basis is justified?
Plans dont have to be the best, and that changes over time and no one is told before hand what those will be. You just have to have a reasonably diverse and appropriate plan setup and be consistent.
Doctors are only 0.3125% of the population, so we’re already a small subset, and its not as if 100% of drs even want to do their own finances even though most could.
The basics, including tax efficiency are pretty straightforward.
That’s like saying it’s a no brainer to spend $150 on an oil change because it saves you thousands in engine repair. The question is whether the extra $120 I spent on the oil change saved me $120 in engine repairs compared to the $30 oil change. It doesn’t and neither does the fee structure of any financial advisor in my city.
I think you are way too dismissive of the abilities of someone to manage a portfolio. Someone told you in the past that ‘appropriate asset allocation’ was a magical formula that required a lot of thinking…this is not true. And what’s the point of taking time to research low-cost DFA funds, then seek out an advisor on the DFA website, just so you can meet them and say “Put me in DFA funds!”? Anyone can do that. Its called Vanguard. If you already know you want low-cost funds, just go straight to the horse’s mouth and buy some. 1-2% of my portfolio is way too much money to just give away.
If you read bogle’s book you learn what the “tyranny of compounding means”; on a graph it shows the 2% difference between active and passive investing
BEST BOOK, BEST 20 BUCKS SPENT-Random Walk Down Wall St
We all know wall st is crooked so WHY PLAY?
Billions upon billions lost on unnecessary fees by millions of investors
I cringe when I see the choices 401 plans offer!!!
Having been both a physician (20+ years as a pulmonary/intensivist) who “did it himself” and now a fee only planner, I’d argue with your position.
I’ve met very few physicians who have the interest or the time to assimilate even the bare minimum of information to avoid mistakes that can be very costly.
Investing is often the least complex part of financial planning-if a family saves enough and buys a cheap diversified portfolio and just leaves it alone-that’s as good as I can probably do.
But the value of having a Fiduciary consultant often pays off in large ways-here’s a few:
1) making sure that the titling of property/cars/rental properties avoid or at least minimize risk
2) saving “enough”-it’s amazing how many physicians get used to spending 90% of their high incomes only to find that they will be on the treadmill longer than they want
3) Avoiding costly “investments.” We physicians are constant targets for all types of silent partner investments-I see them over and over and over. None of them ever work out. It helps to have an experienced advisor to help with these decisions.
4) Avoiding costly investments in the public markets-you can pay 0.05% or 2% for the same S&P 500 index fund. You can be fleeced by whole life insurance and annuity salesmen all day long.
That’s just a start. I believe strongly that getting counsel from an experienced Fiduciary fee only planner is one of the single smartest things that any physician can do. Most physicians have no more ability to be their own quality planner than most financial planners have the ability to be their own doctor.
Steven Podnos MD CFP
Wealth Care LLC
I don’t disagree. Most docs don’t have the knowledge base and don’t have the interest or time to learn it. That’s very different from saying they CAN’T do it. If they have even a small amount of interest, they can find the time and gain the needed knowledge base.
Wrong, as I’ve pointed out above. Just because a doctor reads a few books or posts on investment forums does not mean they have the emotional fortitude to stick with their plan…assuming it’s s good one to begin with.
And plunking everything into a total stock index, or age-in-bonds, more often than not is not the best course of action.
It’s hilarious that were even discussing doctors as a profession that should be able to DIY. They’re are the last profession in the world capable of it. I’ve met with dozens over the years, evaluated their portfolio, and as any experienced advisor will tell you, doctors are the worst investors! Their intelligence is a hindrance – they usually think just finding another “smart” person like them to handle their finances (money manager, active mutual fund) is the silver bullet. Or they actively trade their own portfolios because they just know how much smarter they are.
Ask Bill Bernstein about this, he’ll tell you the same thing.
Actually it is so easy. It’s so easy they can buy a target date fund and never think about this stuff again. This is not my ideal asset allocation for me, but it is good enough for anyone not willing to learn more.
As for emotional support, there are plenty of good places for that. I go to WCI and bogleheads for that. I’m sure there are other good “stay the course” sites as well. Last time I did the math, an extra 1.5% I fees for someone maxing a 401knor SEPP IRA is worth $0.75 million dollars in fees over 30 years. I’m sorry but for 3/4 of a million dollars the financial adviser can go barking up someone else’s tree.
I don’t buy any of that. Numbers 2,3, and 4 can be mitigated by simply putting all your retirement money in a vanguard target date index and taking 2 minutes to check out one of the million retirement calculators online. Number 1 is highly unlikely to be worth .5-1% a year. It would literally take all of 5 minutes to explain to someone and 5 minutes to implement.
Target date funds are mostly trash. They have no tilts to small cap and value stocks (whose premiums worldwide have been 2% and 4% per year since1920s), and the amount they hold in bonds as you sge is egregious.
It is not at all unthinkable that you can do 2% to 3% per year better over time with a growth-oriented, small/value tilted global portfolio if rigorously maintained (big, big if!)
The vanguard target date for my age is 90% split between total stock index and total international stock index. Good luck convincing people here those funds are garbage.
Small caps have beaten large cap (at the expense of increased volatility) by 2% since the 1920s. So unless your tilt is 100-150% small cap, I don’t see you getting an additional 2-3%…
Hmmm. I guess I could be my own dentist, too. . .a good first-year DD school book, a pair of pliers, a fine air drill, a good mirror, lots of opiates . . I’m fine, on average.
As with anything, finding a good expert and coach for a particular need– then listening, exploring, and benchmarking them–is the actual job. It’s not the cost of good advice that matters; it’s how expensive bad or average advice can be (that matters). You know what our legal friends say “A man who is his own lawyer has a fool for a client.”
My advisor has enriched me with worlds of advice and coaching that reaches so far beyond the simple math and trajectory of asset management (your sycophants are so narrowly-focused), as pertains to my entire financial and economic life, that I can’t begin to assess my “total” return–especially in light of behavioral mistakes I would have made. Financial life is not a perfect linear outcome.
I’d rather devote my time to building my business and being more proficient in it. And this is especially true the closer I get to retirement.
Well, the main problem with your analogy is that, learning dentistry or law is massively more complicated and time consuming than becoming proficient at managing one’s own personal finance situation. As WCI said, you don’t need to become an expert in personal finance in general. You just need to become proficient in the handful of things that apply to you.
Secondly, do you mind sharing an example or two of this enriching advice that your advisor has given you? I honestly can’t even imagine what you could possibly be talking about.
Every physician and even we dentists have more than enough brainpower to learn the simplicity of stock and bond investing. In one hour max, I could teach anyone the basics.
THIS needs to be taught in high school
I have not met a female yet knowledgeable about the subject.
Will need to find an advisor when I become aged
You need to meet more women. I’ve met plenty. In fact, in head to head studies, women have been shown to be better investors because they are more likely to stay the course.
http://money.usnews.com/money/personal-finance/mutual-funds/articles/2015/09/15/are-women-better-investors-than-men
Ken, you disappoint me. There are lots of female posters on this site who obviously understand about stocks and bonds. Myself, Doctor Mom, and JZ come to mind.
Thanks Hatton. I was going to leave this one alone and give Ken a pass. But, I concur!
A female?
I should have included you in the list Johanna sorry
no offense taken, I just thought I was one of the bad guys. (bad girl has a different connotation, eh?)
Please see this presentation from Research Affiliates, page 19 and 20: https://www.researchaffiliates.com/Production%20content%20library/Jason_Hsu_Why_Value_Investors_Underperform.pdf
They find (a) the behavioral gap has been 1.9% per year.
(B) What about all the “knowledgeable” investors in the lowest cost funds? -1.3% per year
And do not forget, if, as a DIYer, you’re reading, researching, posting on investment forums all the time, you have to add the cost of this time spent to your actual fees. There are posters on Vanguard forums with 30,000 posts! You are talking about hours every day…that’s a full time job! Trust me: inordinate time spent on this stuff, inferior allocations and an average 2% behavior gap. It’s a pandemic when you add it all up.
Give me a break. 3 of the 50,000 Bogleheads have more than 30,000 posts. Less than 1% have more than 1,000 posts. And I assure you that the vast majority of those with gobs of posts haven’t made changes to the portfolio in years. They’re there for the fun of it and to help other people out.
Your nearly religious adherence to the dogma of small/value tilting isn’t science either. Just because the data we have suggests it is a good idea doesn’t mean it actually will be going forward. Now I tilt my portfolio too, but I wouldn’t be surprised if it ended up not helping over my investment horizon.
And behavior gap measurement is fraught with problems. For instance, the infamous Dalbar study is terribly skewed by the fact that most investors are adding money to their portfolios as they go along. So when markets go up, there is a gap. When they go down, there is a negative gap. But since markets go up most of the time, investors come out looking like fools. I’m sure there is still a gap, but it’s not as big as many would like you to believe.
And of course my assumption when saying someone can do this themselves is that they actually do it. The vast majority of individual investors aren’t even using index funds, much less putting together a reasonable portfolio and sticking with it. That doesn’t mean they can’t do it though. They just need an interest, some minimal guidance, some time spent learning, and a reasonable emotional disposition. Still, despite the relative ease with which it can be done, it will always be a minority that can actually do it successfully. But it really doesn’t seem that much harder than figuring out what a good advisor looks like.
What if there is no small cap premium?
http://awealthofcommonsense.com/2015/04/what-if-there-is-no-small-cap-premium/
No big deal. The bigger problem is if there is a large cap premium. But it can be solved by working longer, saving more, and spending less in retirement.
OK — so where can a concerned school teacher two years from retirement put her American Fund Roth-IRA’s now that I’ve read AM. Funds are junk and I’m losing lots of cash with the fees my planner is getting? I just want to grow some money in these last two years and am only sitting on 65,000k. Certainly want some increase — help.
You say you’re two years from retirement. What will be providing your income in retirement? You say you want to grow some money and want some increase, which suggests to me that the resources to fund your retirement are not yet in place. So I’d start with your goals- how much you want to spend each year of retirement. Then subtract out your guaranteed sources of income such as Social Security and your pension. If that doesn’t cover your spending goal, then you’ll need a portfolio that can make up the difference. You can generally spend something like 4% of your portfolio indexed to inflation each year in retirement. So if you need your portfolio to provide $20K a year, then that’s a $500K portfolio. There is obviously a big gap between $65K and $500K, and it is probably a bigger gap than a typical teacher can cover in just two years. So either you’ll be working longer than 2 years, or this portfolio won’t be a significant source of your retirement income.
At any rate, start with your goals, then design an asset allocation to meet those goals, and then select funds to meet that asset allocation. You’re wanting to jump right to step 3 without discussing steps 1 and 2. So while I generally prefer Vanguard index funds to American funds, that switch alone is unlikely to resolve all of your issues with a retirement plan. If your current plan will work with Vanguard index funds, it will probably work with a reasonable selection of American funds.
But certainly learning to do your investment management well yourself will at least save you the advisory fees (or more likely, commissions) so I’d start with education. Try reading a book called The Millionaire Teacher. I think you’ll like it and learn a lot.
I concur with the WCI! It didn’t take me long to learn to be my own financial manager. Right after my dental residency I trusted my sister, a Prudential adviser, with my investments. I lost some money on a utility stocks and learned that if my own sister isn’t worried by my money, no one else will be worried. Advisers have too many clients to worry about, they can’t tract your money on a daily basis. I’d rather make my own mistakes and learn from them to become more financially savvy. I read numerous books on how to be my own financial manager and our family lived well below their means. Along the way I made a few minor to moderate mistakes with no catastrophic errors. Like Bernstein stated,”Quit when you’ve won the game.” Retired at 53 making $250K passive income (a little inheritance helped).
Weird. You’d think that was impossible listening to Eric talk about how hard this is to do yourself.
The whole point of your blog is to encourage physicians and other medical professionals to take an interest in and learn more about personal finance. Just because our profession isn’t known for DIY well when it comes to managing their portfolios doesn’t mean we Can’t and Shouldn’t Even Try! That’s ridiculous. If someone feels that way why are they even reading this blog? TedC is right, no one will care more about your money than you.
FYI- I’m also a girl
Keep up the great work, WCI!!!
Lots of girls reading the blog and managing their own portfolios
Girl Power!
I agree with the point that you don’t have to learn and understand every aspect of investing at once, only the part that currently involves you. One example is student loan refinancing. WCI never really had to learn it for his situation, but as his website evolved, he learned it write for the audience.
Likewise, I frankly don’t care to spend my free time learning about finance, but I sure know that if I spend even half the amount of time on it that I did studying for all of my boards, I’d at least have a working understanding of the basics. And that is exactly that I do. No more, no less. I’ll learn as I go. Of the doctors who I’ve spoken to about finance, it seems like most of them want to learn the material even less than I do–they want an easy way out of the asset management part. However, more of them seem interested in other quick money schemes like ancillary investments, real estate, or buying gold or land.
After I posted yesterday, I came across this column from another advisor that makes some great points:
The Job Security of a Great Advisor
Posted April 25, 2016 by Joshua M Brown
The road from ancient Eleusis into the heart of Athens winds its way through a narrow pass in the mountains. Road-weary travelers on that route sometimes come into contact with the friendly innkeeper, Procrustes, who is quick to offer them a room to rest and a place at his table. They are informed by this golden-tongued, solicitous stranger that his iron bed will fit them perfectly.
What they are not told is how this could be.
Upon lying down, travelers who are too tall for the bed of Procrustes have the excess length of their appendages sawed off. Those unwitting guests who are too short for the iron bed are stretched with ropes or hammered out until they fit it just right. Procrustes then relieves their corpses of whatever wealth they’d been traveling with and heads back to the road to offer his bed to the next wayfarer.
This continues until someone clever comes along and questions how it could be that a bed could perfectly fit everyone. Plutarch tells us that none other than the heroic Theseus detects the ruse and gives Procrustes a turn of his own in the iron contraption.
***
There is a great deal of fear on Wall Street about job security. There are articles being written about the automation of stock picking, bond trading, back office functions and investment advice nearly every day. So-called robo-advisors are the subject of a new article pretty much hourly these days. What the media gets right is that they are important insofar as they’ve set the “market-clearing” rate for basic asset allocation. What the media misses is what the true impact will be on the wealth management industry.
Automated investing advice is a giant step forward for a large segment of the population. Middle class savers (with financial assets of between $50,000 and $100,000) and the mass affluent investor class (investable assets between $100,000 and $500,000) would otherwise have either little attention paid to them or the wrong kind of predatory services being offered. In comparison to the alternatives – apathy from wealth managers or treachery from conflicted salespeople – I believe that robo-advice and other software-based tools that enable investors are a grand slam.
However, the notion of a once-size-fits all solution to financial planning and asset allocation ignores the most critical aspect of investing – that it’s journey, not the destination, that counts. Software can show you the long-term projected performance of a portfolio on a computer screen. But it cannot make you feel, in advance, what you will feel along the road to reaching that destination.
Automated advice can do many things, but it cannot detect the subtle differences in emotional states, behavior and predisposition of each client. Knowing you have the right allocation mathematically, upon initially investing, is not the same as feeling you have the right allocation on an ongoing basis, nor is it as important. Surviving the journey is what pays off, anyone can plot the course in advance.
Backtests do not accurately reflect the experience of holding onto a portfolio through the trying times, even if, on a chart, things worked out okay in the end. Extrapolations are linear, while life is not. Projections are smooth, yet the terrain we must tread en route to fulfilling those projections is anything but.
While online risk tolerance questionnaires can quantify your attitudes about risk and reward, they cannot account for the fact that these attitudes are dynamic and highly dependent on the mood of the subject on the day during which they were completed. People who have recently been rewarded for the risks they’ve taken will largely feel better about how much risk they can bear.
On the other side, behavioral studies and real-world evidence have shown that people become significantly more risk averse and much less concerned about potential reward immediately following short-term losses in the market. This is when “preservation of capital” shoots up as an investment priority while hedging and risk management become the dominant behavior. Paradoxically, it is is precisely at these moments when investors should be taking more risk, but the human psyche can work no more counter-cyclically in the realm of portfolio management than it can in any other aspect of our lives.
Unfortunately, software cannot, on its own, solve for this elemental feature of the human condition. Nor can an average advisor. This is work that only a great advisor can do.
Knowing a client personally enough to anticipate what market environments will trigger their worst impulses toward either crippling fear or reckless greed is a task uniquely suited to emotionally intelligent, skilled human advisors. And for a wealthy investor with a lot to lose, this relationship becomes indispensable. Major emotional mistakes in the investing realm are not calculated in basis points, they are tallied in the hundreds of thousands of dollars, or, in extreme cases, in the millions.
Wealthy people know this. They’ve learned to forge alliances with doctors, lawyers, accountants, consultants and advisors whom they can trust and confide in. The costs have paled in comparison with the benefits – in some cases, over generations. Consistently good counsel pays for itself where large sums of money are at risk – and we are all at risk at all times. In comparison, “free advice” or nearly free is worth exactly what it costs, nothing.
Social intelligence cannot be programmed. Hard-earned trust cannot be arbed or gamified. And, at its highest levels, empathy cannot be machine-learnt. Great advisors get into this business because they care and that is why they flourish. Advisors who do not care, or who peddle one-size-fits-all solutions where nuance is important, can absolutely be replaced by software. And they should be.
Average advisors are worried about what automation means for their job security.
Great advisors are embracing it as yet another tool that can help them deliver the personal aspect of advice that’s literally unquantifiable when the chips are down. Forward-thinking investment firms are using software to their advantage – saving time, saving expense, saving energy – so that they can maximize what makes them special to clients – their humanity.
The problem is, it’s very difficult to find a great advisor who charges a reasonable fee, not one who will fleece you with an AUM fee model. Here’s one of the good guys.
http://www.forbes.com/sites/baldwin/2016/04/20/save-52000-on-financial-advice/?utm_source=followingweekly&utm_medium=email&utm_campaign=20160425#10825c30a41b
Thanks so much for posting that, Steven Podnos MD CFP. It really resonated with me. This has been a particularly frustrating blog post to follow. There is so much more that a great planner adds to relationships that spending a few hours studying does not approach and Josh’s piece articulated it much better than could I. Plus I believe any counter I post will simply appear self-serving, which I am probably overly sensitive to.
I have no problem telling clients that, with all due respect, if what they pay me doesn’t more than pay for itself, they need to look elsewhere. I’m in business to add value, not decrease it. So as not every person is an ideal candidate for what I do, neither can every DIY investor realize the true cost of being their own financial planner – because they do not know what could have been. OTOH, it is so difficult to cull the weeds from the blossoms in our industry that I understand why many smart people prefer not to take that risk and so DIY.
I realize financial planning is not brain surgery. I am very blunt in telling clients that the easy part is investing. The difficulty is all the other components of financial planning that must be coordinated and tended to. The portfolio is simply a servant to the plan.
Yea, it’s a tough argument for the advisors posting here to win. You might be convinced of the value but you appear biased. Your clients might be convinced of your value, but they don’t read sites like this nor post here.
I’m a reader who’s a client of a fee-only advisor who is MORE than worth his fee. I know enough to trust him, but he’s the one with the in-depth knowledge to help me navigate the various situations I’ve been in over the years (just one example: partnership added mid-level-provider employees but was told the docs could keep doing their own solo 401ks – MY advisor is the one who raised the red flag on that). Without him, we’d probably make serious mistakes without realizing it. As I’m learning more, we’re leaning on him less, but he’s steered us right so far, so I definitely don’t begrudge him his (very reasonable) flat fee; he helps us stay on track and is a sounding board whenever I DO have a question.
I think these are really good points. Some people really need to be sat down and instructed as to how to manage their money (not necessarily how to invest it, but how much to save and where to put it, etc.). And there likely is a large number of these people in many high-paying specialties. It just doesn’t seem that way on a message board for this site, because if you’re hanging out here frequently doing some reading then it’s likely you have a pretty good base of knowledge and are fine on your own.
I don’t know. It’s a nice article but it boils down to “you should pay a good advisor tens of thousands a year to hold your hand in a down market.” I think I’d rather do that myself and save the fees. Maybe many docs, maybe most docs actually need that service, but I remain unconvinced that most cannot learn how to hold their own hand.
There are two sides to this debate, but the debate is not about whether all doctors should DIY. There is broad agreement that most doctors do not have the desire to spend the time and effort necessary, or that they simply wish to avoid what they consider to be a disagreeable task. As WCI says: “it will always be a minority that can actually do it successfully”.
The debate is also not about whether the majority who does not DIY should use an advisor. It seems pretty clear that the consensus is that most doctors who choose not to DIY, most of whom are HNWI, should seek the assistance of a competent financial advisor. I agree.
The real debate should be about the fees paid for the advisors’ services. No HNWI should think twice about spending $1000 or $2000 per year for such services. On the other hand, most will (should) have considerable difficulty accepting annual %AUM fees of $20,000 or $30,000 or more, which are commonplace for HNWI. So the bottom line is that most doctors could DIY, because it is not that difficult, but choose not to. Fair enough, but should the alternative be exorbitant fees?
The argument made in support of these high %AUM fees is that they are justified because the value received by the client exceeds the fee. This argument was made several times above, and the most common example of value received was the benefit of the advisor’s monitoring of the client’s behavior. Someone referred to a Vanguard article that stated an advisor might add 3% in value; in fact, the article states that 1.5% of that 3% was for behavioral coaching. Of course it is true that advising an HNW client not to panic sell in a market downturn, or buy into some harebrained investment scheme, might save the client $50,000, but does that then justify the $30,000 annual fee? When you consider the other services provided by the advisor, those that a doctor who learns these in his spare time could do, do those justify the $30,000 fee?
The issue is not whether doctors are capable of DIY; they are. The issue is not whether a doctor who decides not to DIY should use an advisor; in most cases they should. The issue is whether the %AUM fee is justified.
John, you still do not get it.
A one-time plan doesn’t help you in the least bit when a 2002, 2008, 2011 or even 2015/2016 eventually rolls around. And the person who is only willing to pay for a one-time plan (which, by the way, means only using retail index funds, for which there is a cost in terms of missed-out-on performance) is not going to re up when they’ve lost 20%, 30% or 40% of their portfolio – no way they’ll want to “lose more”. But what we’d find is:
1) they aren’t rebalancing (don’t believe the plan still applies)
2) they probably aren’t even sticking with what they have
3) they’re probably chasing performance and opting for lower-risk or better performing strategies.
The only way to avoid this behavior, short of a few iron-willed individuals, is to parter with a fee-only advisor who provides continual ongoing education and counseling that is preventative in nature. In the sense that you won’t like the bear markets, but you’ll be better prepared for them. And if it only saves you from missing out on 20% once a decade (which you got in just two months between April and May of 2003 and 2009, just to name two), that nets you 2% more (or you pay 2% less) per decade.
And this just measures the cost/risk of bailing out of stocks. What about bailing out of bonds fearing rising rates? Vanguard TIPS fund was saw the greatest redemptions in the entire industry in 2013. What above (assuming you diversified here in the first place) giving up on size/value or international stocks after a few bad years? The do-it-yourself forums are chocked full of examples where this is happening.
Huh? Nowhere have I suggested a one-time plan. In fact, I have suggested that most who who choose not to DIY should hire a financial advisor, and then I proceeded to discuss annual fees. I agree that, for those individuals, an ongoing relationship is a good idea, and that ongoing behavioral advice, when needed, is beneficial. However, I thoroughly disagree that it is appropriate to scale fees to value received as you suggest.
In your example, the client panics and tells you that he plans to bail in late 2008. You say don’t do it, and he doesn’t. The market turns and you just saved the client $400,000. Your fee for that decade is $20,000 per year, which you say is justified solely by the fact you saved the client a net $200,000. Seriously, do you expect anyone to buy into that logic? For those who chose to DIY in 2008, they found all their trusted sources of information screaming not to bail out, and that was free.
“I have suggested that most who who choose not to DIY should hire a financial advisor”
You either DIY or hire a financial advisor., there is no third option. What you stated is like saying “if you don’t want to eat by yourself, I suggest you eat with somebody else “
What!?!? Huh… thanks for your advise,,,,,
Fair point on the comment phrasing, but in reality how you hire help and how much you get is a continuum. For example, someone can hire an advisor to help draw up the plan and then implement it themselves. Someone can be a DIYer and still pay an hourly rate for a second opinion every few years. Someone can do the financial planning and still pay someone else to do the asset management. Lots of options.
“someone can hire an advisor to help draw up the plan and then implement it themselves“
You hired a financial advisor.
“Someone can be a DIYer and still pay an hourly rate for a second opinion every few years”
Some years you DIY, some years you don’t
“Someone can do the financial planning and still pay someone else to do the asset management”
You hired somebody for asset management and DIY financial planning
The only third option that I would give you may be if you don’t do anything, don’t invest, don’t plan, then yeah….
Part of being a successful advisor is selling your services as important and necessary. Good salesmen know that they need to create/amplify a need or fear in those they’re selling to. “What will happen to my money if I don’t hire an advisor?” is exactly what you want that potential client thinking. So you drop these little seeds like:
– without an advisor you’re stuck in “retail” index funds instead of these fancy schmancy optimized tilted passive DFA funds
– without an advisor you won’t rebalance and that’ll cost you 2% a decade
– you can’t handle a bear market emotionally
etc. etc. etc. You say the only alternative “except for a few iron willed individuals” is to hire an advisor. I say that’s a false dichotomy. There is a third choice- teach people how to be an iron willed individual and provide a place where, for free, they can come and get sufficient ongoing reassurance and education to stay the course. Now we have a few iron willed individuals, a somewhat larger number of people who can successfully do it themselves with a little help, and then the chunk of folks that advisors will continue to serve, hopefully in a competent way and at a fair price.
As stated no one cares about your $$$ more than you
“TRUST NO ONE”-Andrew Tobias
BTW-his book is a good primer
AUM fee is NEVER justified
There’s an old saying in the legal community – a man who represents himself has a fool for a client. I’d say for many people, trying to invest themselves, they’ve got a fool for an advisor too.
That’s a scare tactic. You’re basically saying a financial advisor is the equivalent of a defense attorney. The way I usually hear this one is that they’re the equivalent of a heart surgeon. It just isn’t true. It’s more the equivalent of a drywall guy. Yes, there are some basic drywall skills you’ve got to learn before you do your own drywall. And yes, some people hate it so much they’re willing to pay someone else pretty well because they don’t want to learn how to do drywall nor do it. But it’s not rocket science, heart surgery, or criminal defense. It’s just portfolio management and it is relatively easily learned. Yes, the nerds (like you and I) like to mentally masturbate about all the small and value and momentum and profitability tilts and asset location and all that crap. But the truth of the matter is if he just combines a 20% savings rate with a simple portfolio like a target retirement fund that a high income professional will retire wealthy. It really can be that easy. Take a look at Mike Piper. He’s smart as a whip. What’s his entire portfolio? Life Strategy Moderate. That’s it. Eliminates behavioral issues. Saves gobs of time and effort. And it’s good enough when combined with an adequate income and savings rate.
If any novice was shown what expense ratios, loads, AUM fees, etc etc etc affect their pot of gold after 40yrs they would be shocked
In Bogles book he shows that you wind up with 23% of the profits after 40yrs in a taxable account comparing returns with a 2% difference(the cost factor)
I IMPLORE all to review THE TYRANNY OF COMPOUNDING in bogle’s Common Sense on Mutual Funds
No reason anyone should not self educate be it a doc or not
After I read random walk, IT WAS A BREEZE to passively invest and it was luckily a great time, end of the 70’s
A few questions:
1. How come every post WCI has turns into a e-fight or e-ego competition? Mine is bigger than yours?
2. So I stroll back here after a while and I hear all this argument about do this or that, invest in real estate or boglehead or whatever but how do you know if going forward which strategy is the best? And if assuming that everyone else is saying “hey but this is the best we got” well then it is NOT the best as you can’t predict future. So shouldn’t conclusion be do whatever you think is the best way YOU think is the way to grow money rather than blindly follow the herd ?
Weird.
1. Drives readership. Sit back and try to enjoy the humor.
2. Yes, absolutely!
1. You guys know the comments section is optional, right? 🙂 You can actually stop reading when the post ends.
Not Hardly
The INDEXING HERD is on the proper path to wealth creation. Gotta have a plan and goal. Just look how billions or trillions have poured into index funds over the last 40yrs!!!
So that makes it right? Billions were poured into MBS. And where did that go?
I am not sure. In medicine you have RCT to prove something. Well that cannot be done in a non-controlled random financial world.
Without evidence to me even indexing just following what everyone else is preaching and doing. Doesn’t make it foolproof.