Q.
I wanted to ask if you knew anything about Larson Financial….I haven't gotten involved with them yet, only went to a dinner where they spoke at and am meeting with a rep today just to get some more information. I was curious as to your knowledge of this company and any info you could provide.
A.
Before answering your question, I need to do the expected disclosure this blog is famous for. I was vaguely aware of Larson Financial from some of their marketing, but first came in contact with them when I was sent a copy of the book Doctor's Eyes Only by one of their advisors, which I reviewed on the blog. The review was actually fairly critical of the book. Although it contained a lot of good information, in my opinion there was way too much advertising included. One of the authors, Tom Martin, subsequently submitted three guest posts that were published on the blog, Lower Your Roth Conversion Rate, Locking In A Lower Capital Gains Tax and Avoiding The Alternative Minimum Tax. Tom and I have been collaborating on a project recently and he flew my wife and I out to Indiana and took us out to a nice dinner the night before we met for a few hours about the project. I learned a lot about Larson Financial in the process that I thought this blog's readers might be interested in. You should be aware that I have not been paid to write this review and that I do not get paid a dime if you choose to hire a Larson Financial advisor.
A Firm Serving Doctors
Larson is focused on serving the financial needs of physicians and dentists. They have offices in 27 states, but will work with you no matter where you live. They consider themselves the nation's largest financial planning firm exclusively for doctors. The organization is a bit of a franchise format, but with fairly heavy control exerted by the central offices both in advice rendered and in the investment portfolios. So when you hire an advisor, you get his expertise as well as that of the central management of Larson. Upon being hired, each advisor goes through a 2 year “fellowship” (their words, not mine) where he receives additional training, mostly geared toward the unique financial needs of doctors. The individual advisors keep a percentage of the fees they generate from serving clients, and then pay Larson a certain percentage toward overhead and profit. Interestingly enough, the profits at the firm-level are all donated to charity through the Larson Financial Foundation, primarily going to support entrepreneurs in poverty-stricken areas of the world, often leading to wells, orphanages, schools, and medical clinics being established. They also lead medical missions and have often included clients to provide medical expertise.
Financial Planning AND Investment Management
Although most of their clients avail themselves of both services, the company actually provides two separate services, and that separation is clear when you examine their methods and fee structure closely. On the financial planning side, clients first work with an advisor to build a comprehensive plan, then you have quick checkups on a quarterly basis, discussing different topics each quarter. In the Summer, you discuss cash flow, budgeting, employee benefits, insurance, and asset protection. In the Fall, you do tax planning and investment strategy, including your retirement accounts. In the Winter, you discuss major purchases, debt management, education savings, financial goals, and retirement planning. In the Spring you do estate planning, charitable planning, and beneficiary reviews. The financial planning fee also includes contract negotiation and review, a valuable service. If the firm is also managing your assets, you are given quarterly investment updates at the same time as these financial planning meetings. Advisors are also “on-call” between meetings to address additional issues. For additional fees they will also do contract review and negotiation, private practice analysis, and practice management activities. Their tax arm(MedTax) will also do tax preparation for you and your practice. Their law arm (Larson Law Firm) will do estate planning, corporate formation, and asset protection. In short, their goal is to be a one-stop shop for all your financial needs. But they're also willing to work with you a la carte for whatever you need help with.
They Use DFA Funds
In conjunction with the University of Chicago and DFA, they've developed 9 portfolios that they try to fit their clients into as best they can. These range from a 20/80 “Risk Averse I” portfolio to the 100/0 “Highly Aggressive” portfolio. They're really all pretty similar, just with a varying stock/bond percentage. They consider the models proprietary information that they spent a lot of time and money on, so while I've got them in front of me, I've been asked not to share the specifics. Suffice to say, they look like your typical small-and-value-tilted, Boglehead-style, Slice-N-Dice portfolios, composed almost entirely of DFA funds. Tom Martin describes the amount of small and value tilting as just as little bit more than DFA's US Equity Core 2 Portfolio. I'm convinced there isn't such a thing as a perfect portfolio, at least known in advance, but these portfolios certainly meet my requirement of being reasonable. Any reasonable buy-and-hold passive portfolio will work just fine for your retirement, as long as you stick with it over the long-term.
I was pleased to see they use DFA funds. If I were going to hire an investment manager (I'm not), using DFA funds would be one of my requirements. I really like Vanguard index funds, but if anyone was going to give them a run for their money, it would be DFA. DFA funds tend to match or slightly outperform Vanguard index funds over the long run and Bogleheads often debate the merits of DFA vs Vanguard. DFA funds aren't true index funds, but they are passively managed, and are done so in several ways that probably make them a little superior to a true index fund. Some smart people peg the advantage at 0.2-0.3% a year when properly adjusted for risk (remember that DFA funds in general tend to have a riskier value and small tilt). If you ask DFA, they may claim a 2-3% a year advantage. Some of their approved advisors might try to claim a 4-6% improvement, but when you pin them down they're usually comparing small and value tilted DFA funds to non-tilted Vanguard index funds. You can compare funds and come to your own conclusions. DFA's US Large Cap Fund has a 10 year return of 8.24% versus the Vanguard 500's 10 year return of 8.23%. DFA's Emerging Market Portfolio I has a 10 year return of 17.50% vs Vanguard's 16.50%. DFA's Small Cap Value Fund has a 10 year return of 13.04% vs Vanguard's 11.37% (but keep in mind that DFA's product is smaller and more valuey and thus riskier.) Unfortunately, you can't really get DFA funds unless you go through a DFA approved advisor like Larson. Many Bogleheads have concluded that it isn't worth it to them to pay an advisor 1% just to get DFA funds, but if you're going to use an advisor anyway, I think most smart folks would agree that using DFA funds would probably make up for at least part of the asset management fee.
Larson Will Manage All Your Accounts
One thing that I thought was pretty cool about Larson is that they're willing to manage and coordinate all of your various accounts, which is pretty important and can boost returns (Larson claims by 2-3%, citing Roger's Tax Aware Investment Management). Right now I have three personal Roth IRAs, a spousal Roth IRA, three 529s, two 401Ks, four taxable accounts, two HSAs, a UGMA account and I'll soon be opening a Solo 401K. I also have two empty traditional IRAs I use for Backdoor Roth contributions and a SEP-IRA I occasionally use. That's 20 accounts, and I've closed 3 others in the last year or so. It wasn't a big deal when all I had to deal with was two Roth IRAs and the TSP, but things get more and more complex as life goes on. Keeping my portfolio balanced across all these accounts becomes a more time-consuming task each year. Larson will work with each of these for you, saving you a significant amount of time, effort, and hassle. They used to email you instructions for those accounts, like your 401K, that they might not have direct control over. However, they've found it works far better to get on the phone with you, have you log on to your account, have you allow them access at the same time, and make any portfolio changes in real-time with their clients. That's a real benefit to someone who doesn't know how to or doesn't want to deal with this stuff. Another cool feature is that they can allow you to use DFA funds within your 401K (as long as it has a brokerage window such as through Fidelity or Schwab), even if they aren't normally available in the 401K.
Larson Is A Full-Service Firm, and They Charge Like It
Larson provides a lot of service, both with regards to financial planning and investment management. But they're not doing it for free (make no mistake, I'd hire them in a second if they were.) They charge fees that I would rate as average to slightly above average. Their financial planning fees start at $375 per quarter ($1500 a year) for an individual, although the fee is waived during training. They don't collect any mutual fund loads since they don't use loaded mutual funds, but they do receive commissions when they sell you a term-life or a disability policy (which is probably the main way residents compensate them for their services.) These commissions range from 40-80% of the first year's premium for most policies. Larson guarantees their financial planning fees in writing each year and expects to save its clients' time and money in an amount more than their fees, otherwise they expect to be fired and refund the fee.
The published investment management fees are:
- <$250K 1.75% AUM
- $250-500K 1.5% AUM
- $500K-$1M 1.25% AUM
- $1-2M 1% AUM
- $2-3M 0.9% AUM
- $3-4M 0.8% AUM
- $4-5M 0.7% AUM
- >$5M Negotiable
Tom Martin doesn't know of a single investor with the firm who is actually paying the 1.75% rate, however. Rates are significantly cheaper if they're managing 401K dollars for your practice. I think it is good that the rates get cheaper as your assets increase, but in my opinion, the rates start too high and they get cheaper too slowly. It obviously doesn't take 2 1/2 times as much effort to manage $3.6 Million as $900K. You have to consider what you're getting though. Keep in mind that many “DFA Advisors” simply won't take you until you get to $500K or $1M, and then just charge you 1% of AUM. At least this way you can get right into your desired portfolio even with just a few thousand dollars right out of residency. A highly-paid physician with a high savings rate won't spend that many years paying more than 1%. Fees are also generally paid “pre-tax,” either as a business expense or from tax-deferred accounts, further reducing the fee.
So, all in, a physician with his insurance in place and a $500K portfolio might be paying $2K a year in planning fees and $6250 in portfolio management fees for a total of $8250. Does that seem like a lot of money? It does to me, that's why I do both my own financial planning and investment management. But if I actually assigned my usual hourly rate to the time I spend doing this stuff, it might look like a bargain. Unlike me, most doctors don't see personal finance and investing as a hobby that is a fun way to spend their time. Although a relatively high percentage of this blog's readers are do-it-yourself investors, the truth is that most doctors desire to and probably should hire a GOOD advisor to help them. I don't have a problem with doctors paying a fair, fully-disclosed fee for good advice and good service. I'm convinced that Larson Financial is giving good advice and will leave it up to the reader as to whether they feel it is being offered at a fair price for them personally. Larson is a great solution for the busy doctor who has little time, interest, or expertise in financial matters.
My wife and I have been with Larson, specifically Tom and Colin, for 2 years. I think the white coat blog has it on the nose. It is smart investing and you get what you pay for. I don’t have the time, savvy, or strength to do what Tom and Colin have done for me in 2 years. On top of that, a friend of mine, who now works for Dimensional Funds, used to manage my investments in UBS. Before, I couldn’t get access to DFA. I didn’t have enough equity. And while our performance at UBS was solid, we didn’t get the diversity and the analysis that I get with Larson. On top of that, I was able to get into DFA funds which have lower costs and reflect the market better. And they have diversified me in a far better manner.
This doesn’t mean that Larson is perfect. Like Craig, there was an initial miscommunication. But we chose to accept the explanation, trust in them and make a long term investment. And we’ve really been happy with our decision.
Colin has spent more time with me than any financial advisor I know (when I really needed it!). He’s done great financial analysis of prospective jobs, house purchase, and has given good advice on several professional fronts. I found good legal advice for a contract through them. And we’ve had a solid performance thus far on investments. And they have similar core values. So for me the higher price has been more than worth it.
I have been a client with Larson Financial for over 2 years now and have been nothing but happy with their services. When I signed up, Forrest Friedow seamlessly coordinated my life and disability insurance plans. After reviewing carefully my long-term goals, several other investment accounts were set up which have all been profitable so far. I totalled my car a few months ago and they were a wonderful resource and helped make the whole ordeal with insurance and new car purchase easy. Over the past two years, Forrest & Larson Financial have been available, friendly, approachable and trustworthy.
I have read some critiques of the price. However, the amount of time I’ve saved not having to surf through stocks, investment accounts, disability insurance AND the amount of money I’ve saved and earned in taxes and investments, respectively, has more than made up for the cost. If you are looking for a pair of Payless shoes to use for the prom, Larson might not be your best bet but if you are looking for a quality pair of shoes to use for years, it might be better to go with a pair from Nordstrom’s…
Sure – there is always a question of whether or not you can trust someone with your money and that is a question that any intelligent person should pose to a future financial advisor. My experience has been top-notch and I’ve had no regrets or hesitations since utilising their services. Another HUGE plus for me is that they work with MDs almost entirely- they know our situation better than anyone else I’ve consulted with.
Recommend without reservation.
As a health care attorney, I have worked alongside various Larson Financial advisors (including Colin Wiens, Derrick Yohe, and Tom Martin) and have seen the added value they bring to their client’s careers. They are able to provide valuable financial information to their clients on various issues, and from a legal perspective they are very good at connecting and working with attorneys when legal review is required on legal health care issues. At the end of the day, when detailed and immediate action is necessary they are quick to gather a “team” of advisors for their clients, and they help to efficiently guide the process.
My wife and I are both physicians, and had turned down multiple offers for financial planning by various groups in various cities. At first, I had written off Larson Financial similarly, but on meeting our local rep, Lauren Law, I was struck by how sincere she was about helping us achieve our goals (and not about helping herself achieve her goals with our funding). I came back for a second meeting, and my wife came for the third. Afterwards, we signed up and have — over two years — transitioned the majority of our financial care to Lauren. Although she has saved us money, the services do cost a reasonable amount of money. However, compared to value we receive for those funds, we find it easy money to spend. Besides being knowledgable, our interactions have been very timely, professionally, and client-focused. We believe some of our financial goals are unique, and Lauren keeps those goals in mind in her discussions with us and her planning for us. I highly recommend her services! Please contact me if you have any questions: doug.hester at vanderbilt.edu
I have read the review, and after reading a few of the comments, I felt compelled to give my two cents worth. One of the most valuable lessons in medicine I was given centered around the fact that I had better have a keen awareness of when I just didn’t know, and be humble enough to ask for help when that moment came. I have found that this applies to more than just medicine. I was also taught that to spend my time effectively, I should stick to the things at which I’m great, and delegate the time-consuming things that I could do, but would not be in my best interests to spend time doing. Nowhere was this more evident than in planning for my retirement and financial future. I found myself asking, “Isn’t there anyone that would just care enough to ask me about my goals, then make a plan for me?” A concierge service, if you will. It was then I learned about Larson Financial through a friend. Their services were exactly what I was seeking. Their research into ALL aspects of my life (investments, savings, insurance, consumer debt) put my wife and I on a track that we had never enjoyed prior to their involvement. Todd and Ken were straightforward and honest with regard to my financial picture, and they seemed to genuinely care about me accomplishing my financial goals. They did exactly what I was told they would do, and I know for a fact that Ken’s passion is doing retirement planning for those in our profession. I like surrounding myself with advisers who have the passion for their work that I do for mine. Never once have I thought that Ken or Todd viewed me as a “commission.”
I have heard and seen people talking about how much it costs, and the thought blows my mind. We are talking about a service that pays for itself in dividends and saved time over the years. In business, you have to distinguish between an expense and an investment. When you consider the return for the service, this is most certainly an investment, and should be viewed as such. If the average practitioner has difficulty wrapping their mind around the first year cost, it’s the equivalent (at least from my days of practicing on my own) of seeing 4-5 extra patients per month. A small price to pay, if you ask me. To the doubters, I ask only this: how much is your time worth? Think long and hard when you toil over the cost. I have not regretted a single moment of my involvement. Our ability to provide for our families in the profession we’ve chosen can be taken away at any moment. After watching a close colleague become severely and permanently disabled recently, its importance really struck home for me. Tomorrow may come before you know it…don’t be caught unprepared.
The full names of my advisors were Ken Stillings and Todd DeKruyter. And I do also like their emphasis on the “things that matter”, and not just money. That does mean quite a bit.
I’m a radiologist and my wife and I have used Larson (Todd DeKruyter) for a little more than 2 years. I’m a bit of a “do-it-yourselfer” at heart and I was initially pretty reluctant to pay advisor fees. However, my perspective has changed a great deal since we began working with Todd. I’ve learned lots of financial stuff that I didn’t even know that I didn’t know. Our quarterly discussions certainly cover financial issues and the nuts and bolts of what we’re doing with our money and why, but we cover significantly deeper issues than those. My wife and I usually leave those meetings with a fresh perspective on life and more clarity with respect to our goals, values, beliefs and the role that finances play in that. They are truly experts in their field. They do exactly as you should expect: impeccable follow through, knowledge of recent pertinent legislation, mastery of tax efficient investing, etc. They integrate well with a tax service that I now use so that even that is relatively pain free (as far as the time requirement is concerned). I am almost completely stress free when it comes to our finances. I know it’s taken care of as well as it can be. I am certain that I am doing better financially overall than I would have if I had tried to tackle this myself. More than that, my wife and I have had many important discussions that would likely not occurred had we not used Larson. I’m sure there are rare individuals out there who can do a great job with their money and save the fees (at the expense of their personal time). I don’t think I’m one of them. I’m glad I decided not to be penny wise and pound foolish.
To White Coat Investor or someone w/ Larson or who uses their service,
Does Larson’s AUM fee include your 401(k) if you are not self-employed?? If your a doc receiving a paycheck, most of your retirement assets would be held inside a 401(k), 403(b), etc. They cannot have access to manage those accounts, can they? Thanks in advance for your help.
Yes they can have access if you give it to them. More assets, higher fee obviously, although I seem to recall something about maybe getting a break on 401K assets, so they’re managed at a lower AUM rate.
Go with Larson financial group! I started working with them right before finishing residency and they made my transition into becoming an attending much easier financially. Becoming their client has been the best financial decision I have made thus far. My adviser Forrest has educated me a lot on financial stuff. He has helped me set up my med schools loans repayment, retirement, savings, and disability funds. I trust him very much because he explains everything in detail and reviews the pros and cons prior to making any decision. He even took the time to go through financial aid packets that was provided to me from my work’s HR department. We reviewed chapter’s from the book “For Doctor’s Eyes Only” which I found very helpful. I know where my money is going because he explains it to me in simple terms and regularly send me updates and follows-up on what he promises. I recommend them to all my physician friends, especially ones who are about to finish residency. good luck!
I’m a dentist and my wife is an anesthesiologist. We’ve been working with our Larson Advisor, Forrest Friedow, for about 10 years. He is there for us whenever we need him to talk about anything related to finances, practice, retirement, or investments. We’ve been through many different situations with him and trust that he has our family’s best interest in mind. My wife and I are busy with family and careers so he helps lessen the burden of financial planning. This gives us more time with our family, friends, and other extracurricular activities. The price is worth the expertise we receive, and we save money while reducing our tax burden. He makes sure we are covered with disability, liability, business overhead, and life insurance by designing each for our needs. I don’t think you can go wrong with Larson Financial and Forrest if you’d like some help from professionals to manage your money. I would and do recommend Forrest to other friends of mine. Please, feel free to e-mail me with any questions about my personal experience.
Rob Thompson
[email protected]
[Comment held and commenter emailed.]
I am a pulmonary/critical care physician and my husband is a radiologist. We signed up for Larson Financial at the end of my fellowship at Vanderbilt which was 2 years ago. Throughout these 2 years I can’t tell you how much money Larson Financial has saved us! Our advisor, Lauren, is literally the most amazing resource we’ve ever had! To start with, she reviewed our contracts for our jobs that we ended up not taking, then reveiwed the contracts for the jobs that we did end up taking. She set us up with the best disability and life insurance policies and even managed to get us a huge discount since I had 30 days left of being a fellow, she hooked us up with all these tax saving measures, and has offered us invaluable advice about umbrella coverages, attorneys, wills, IRA conversions, Roth accounts, etc, etc. Most impressively, when we bought a house, Lauren called up dozens of banks and found the only bank in the city of Portland that allowed us to put just 10% down on our house with a 3.375% interest rate on a 30 year fixed loan!! And not only that, Lauren and everyone at Larson Financial always gets back to us asap about even the most minute of questions. And all of this is included in the once yearly fee. I will always be a lifelong Larson Financial customer based on my experience thus far, and I am certainly not an easy person to please.
I would like to echo my wife’s statements above (pulm/crit care and radiologist combo). Lauren has been a true blessing to our financial lives and is a joy to work with. For years I had been telling myself to take control of our finances and seriously plan out our future. Not suprisingly, my job, family, and life in general precluded me from spending the appropriate amount of time researching the issues. We needed professional help, and Lauren provided that and so much more. Beyond just helping with investments, she has provided invaluable and specific recommendations regarding insurance, mortgage, taxes, estate planning, college planning, and so much more. From across the country she has found specific loan officers and lawyers offering the necessary services and meeting ours/her strict criteria to help protect our financial security.
I thought this write-up was pretty good. I was quite impressed with the level of services that this firm offers. In terms of value, their clients are getting infinitely more for their fees paid than going the low-fee advisor route. Under the hood, often times you find these low-cost shops don’t do a very good job promoting discipline, their allocations change with the prevailing winds, or simply use funds in asset classes that don’t make very much sense (I’ve seen advisors choose iShares Russell 2000 Value or S&P 600 Value over DFA US Small or Targeted Value fund to save a few basis points in expense ratios, only to cost upwards of 1.5% in missed out on returns). Like most other things in life, when it comes to the services of a good independent fee-only advisor, you get what you pay for.
There was one part of the article that I thought was a bit far-fetched. And that is the “0.2% to 0.3% DFA advantage over Vanguard”. I know that is what some do-it-yourselfers want to believe to convince themselves they aren’t costing themselves more than they are (beyond the cost they impose on themselves for less-than-optimal allocations, fleeting discipline, a failure to coordinate all aspects of their wealth including risk management, wealth transfer, efficient charitable giving, effective tax management, etc.), but in reality that is a pretty poor estimate. Let’s see why:
1) IGNORING THE DIVERSIFICATION BENEFITS OF TILTED PORTFOLIOS: Yes, DFA funds tend to offer purer exposure to small cap and value stocks. And small and value companies have higher expected returns because of increased risk. BUT, market risk, size risk, and value risk are separate and distinct dimensions. So in a portfolio setting, a small and value tilted balanced portfolio doesn’t expose one to materially more risk than a Total Stock Index allocation, especially if the bonds are kept somewhat shorter-term in the former case. And this is compared to TSM mixes. Comparing DFA allocations to more watered down size and value tilted Vanguard mixes has an almost indistinguishable amount of difference in risk, as diversification benefits make up for slight increases in additional exposure to dimensions of risk and return.
2) HIGHER EXPECTED EQUITY RETURNS ALLOWS YOU TO LOWER RISK ELSEWHERE: I am a big fan of keeping fixed income to shorter-term issues with very high quality, and ideally globally diversified, just like stocks. If I were using total stock indexes (lowest expected returning equity asset class), or index funds with less than optimal amounts of small cap and value exposure, I’d likely have to hold either more stocks or riskier bonds to achieve necessary returns — neither are things I’d want to do. In the former case, it may cause me to bail out in 2002 or 2008, in the later case, my life will be a living hell if rates ever begin to rise and I am losing double digits in my bond portfolio along with the potential for stock losses (see 1970s for an example of when this happened last). So you can build much more favorable allocations when you have the flexibility to truly target small and value dimensions globally in a meaningful way.
3) VANGUARD OFFERINGS ARE INCOMPLETE: In some key asset classes, namely Int’l large value, small value, and emerging value, Vanguard doesn’t even have an offering. So while it is not an apples to apples comparison to observe the returns of, say, DFA Int’l Value fund to Vanguard Developed Markets fund, or DFA EM Value fund to Vanguard Emerging Markets fund (+3% to +4% in favor of DFA), it is what you have to do if you wish to compare available index products. Now, you could include iShares EAFE Value or EAFE Small (not value), but then we aren’t discussing Vanguard and inherently you are acknowledging the inadequacy of Vanguard. Or you could compare DFA to Vanguard’s actively managed funds, but that entails additional risk and clearly you would be cutting off your nose to spite your face if you went that direction (forced to assume active management risk just to avoid the ongoing cost of advice on your portfolio/financial picture).
4) NET OF EXPOSURE TO DIMENSIONS OF RETURN, DFA VALUE IS STILL 1%+: Going back to 3/2000, if we compare a 3 factor regression of DFA US Large Value and Vanguard Value Index, and ignoring DFAs higher expected returns due to additional exposure to value stocks, we still see 1.1% per year higher alpha net of expense ratios. If we compare the average of DFA US Targeted Value and US Small Value to Vanguard Small Value Index, and ignoring DFAs higher expected returns due to additional exposure to small and value stocks, we still see 0.6% per year higher alpha net of expense ratios. So in the asset classes where Vanguard actually has a comparable product to DFA, even if we ignore the higher returns from increased exposure to sources of return (small and value), we still find DFA funds are better engineered and produce almost 1% per year additional net of fee returns. iShares has a very similar Int’l Small Cap index (EAFE Small) to DFA, yet since 1999, if we look at a 6 factor global regression, we see the index alpha has trailed the DFA fund net of fees alpha by 1.2% per year, probably closer to 1.5% after we consider iShares fees. iShares EM Small Index has very similar size attributes to DFA EM Small, yet the index has trailed the fund by over 3.5% per year since 1998, and that doesn’t account for the 1% spread between the index and the ETF (in favor of the index) since 2011 — amounting to a whopping 4.5% difference.
On the bond side, while things are a bit skinnier, the value is still there. DFAs TIPS fund has outperformed the TIPS index by 0.5% annually since inception. Going all the way back to 1990, DFAs short-term global fund (5YR Global) has outperformed the Vanguard ST Bond Index by 0.7% per year with less risk (higher average credit quality, and not concentrated in just US bonds). More recently, DFAs Investment Grade Bond fund, which is similar to Total Bond Index, has outperformed since 2011 by 1% per year. So while not quite 1%, in the 0.75% range.
5) DFA-based ALLOCATIONS ARE MORE EFFICIENT: As was referenced in the article, with access to DFA, you can build the base of your equity allocations with the Core equity funds (US and World exUS) and only have to add small amounts of US and non-US targeted value to get to the level of small and value exposure you desire. The Core/Targeted Value mixes are more diversified (they hold every single publicly traded stock), and because both have varying degrees of small and value exposure, their allocations don’t drift very far from one-another, keeping the plan closer to balance and reducing trading and turnover costs and taxes. They also reduce the number of necessary moving pieces, while giving symmetrical exposure to the same companies and small and value exposures globally, instead of the typical tilted retail index portfolio that is forced to go heavy on domestic tilts with more market-based non-US allocations — exactly the opposite of what you would want due to significant non-US tilted allocation diversification benefits.
Finally, DFA also has a “core-like” Global REIT fund that allows one to bundle US and non-US REITs into one portfolio. SPDR does as well, (RWO), but since 2008, DFAs fund has outperformed it by 1.5% per year.
Hopefully this gives you some idea of the value of DFAs strategies over traditional retail products from Vanguard and iShares. Saying all that, would I hire an advisor for “DFA access”? No. The value of a good advisor far exceeds a better risk-adjusted portfolio return. Looking at the entire wealth picture, freeing you up to pursue more rewarding hobbies (not investing, that’s for sure!), spend more time with family, having the confidence that your assets are being invested in a truly optimal way instead of the clumsy “work-arounds” you are forced to adhere to with retail funds, helping you manage taxes, implement an intelligent estate plan that evolves with your wealth, risk management (asset protection, life and health insurance), adopt an appropriately balanced investment allocation that isn’t fatally overweighted to stocks at market tops and bonds at bottoms (as well as today) or use inappropriate “age in bonds” formulas, etc.
No, the investor who hires a low-fee firm for DFA access will jump ship after a 3-5 year period of “underperformance” relative to total market indexes, or some other “new era” allocation like the permanent portfolio or something else heavily weighted with alternatives or the current asset class du jour or what the latest book author is touting. Better off paying more for a variety of services so the value is there consistently even if short-term portfolio performance disappoints (which should always be expected and incorporated into an investment plan), or just do it yourself and ADMIT your cost is much greater than it should be. I’m always amused when I see folks submit 20,000+ posts to internet investment sites over a few year period, or spend hundreds of hours per year running websites and blogs, but never consider that time as a “cost” that could be delegated and spent on more productive endeavors. In many cases, these costs are several times the fees of a reasonably priced advisor.
I’m assuming your last paragraph refers to me, but I’ll try not to take it personally. While the time I spend on this site might not be a “productive endeavor” in increasing my net worth, the 40,000 people a month who stop by and learn something certainly consider it productive.
I’m amused that you seem to think “you get what you pay for” in investment management when all data suggests the opposite, that “you get (to keep) what you don’t pay for.” I see no reason why someone would jump ship from a lower-cost DFA provider and for some reason stick with a higher-cost DFA provider. I generally see the opposite. I think you overestimate the value of hand-holding.
The regular reader won’t be surprised to learn that Eric is a “DFA advisor” who doesn’t publish his fees on his website. In my experience, that’s because they’re high. If I’m wrong, please post a link to the page on your site with the fees, or post them as a comment here.
One can argue until the cows come home just how much “better” DFA funds are than other ETFs or index funds. I find that those who sell their advisory and management services using DFA funds tend to think it is quite a bit higher than those with a more independent viewpoint. Thus I’m not surprised to see your estimates in the 1%+ range. If they’re really that much higher, than it would make sense to hire an asset manager at 1% a year just for access. Yet you say you wouldn’t hire an asset manager just for access. You can’t have it both ways. Either the benefit of DFA funds exceeds the cost of the advisor, or it doesn’t. If it does, everyone should hire one even if that is the only benefit they get from the advisor. If it doesn’t, then the investor needs to place value on the other services offered by the advisor.
Whitecoat,
First, yes, I am amused when investors spend hundreds of hours blogging and participating in investment forums yet they don’t consider the costs of their time spend doing this as compared to more important and fulfilling activities. I DIDN”T SAY there was anything wrong with it, but obviously it is a very expensive commitment of time and one that client’s of advisors clearly don’t need to be bothered with.
Second, do you get what you pay for with professional help? For the right help, yes. Assuming RIAs with passive investment philosophies, lower fees simply mean fewer services, and in some cases not very good services. If a firm charges fixed fees, or 0.25% or so, you know you are just getting asset management and placed into one of a few model portfolios the firm uses with maybe 1 call per year or an email review. In the 0.5% to 1% range, you are getting wealth management services — what I would generally label asset management (but fully customized portfolios, several reviews a year including goals-based performance tracking), wealth enhancement and income tax mitigation, wealth transfer, wealth protection, charitable planning, and helping to coordinate a client’s professional network. Does everyone need all these services? Of course not, but those who do will have to pay more for the services. And it is silly to confuse cookie-cutter model portfolio asset management with wealth management. One firm I know of has been forced to raise their fee by almost 50% recently because when they asked their clients, it turns out they were looking for many more services which could not be provided at the current fee level.
Third, it is absolutely true that on average, clients of full service wealth management firms tend to be more disciplined and achieve better results. They know that their investment portfolio is just one facet of their overall financial picture, and just a means to an end to accomplish their financial objectives. These firms meet with clients regularly provide extensive education and counseling, as well as the perspective to understand how their results relate to what they want to accomplish. As opposed to an annual phone call or check in or email commentary that is the overriding client service model at the low-fee end of the business.
Fourth, I’m sorry to see you don’t believe “hand-holding” is generally that valuable. To the extent that it keeps investors from underperforming their investments by 2% or more per year (see Bogle, Clash of Cultures), it is one of the most significant inputs in determining financial success. And an annual check-in or email doesn’t cut it when the going gets tough. You see this in the form of lower-fee advisors in some cases lowering client’s stock allocations in early 2009, abandoning their small/value tilts due to tracking error regret, and adding the latest/greatest hot assets to their portfolio based on client pressures, etc. Most quality wealth management firms would tell a client to take a walk if they were dead set on imposing such costly mistakes on themselves, but not before extensive effort to convince them otherwise. If you want to see the reality of how difficult it is for DIY investors to be disciplined, go back into the archives of some of the prominent investment forums in 2008/2009. You’ll see post after post of “lost faith in stocks”, “getting out of the market until things improve”, “justification for all-bond or bond-heavy allocations”, etc. It was a real bad situation. Of course, most won’t admit to that today, but we know it was common place. And then we can see the cost of the typical “mental shortcuts” employed such as just using TSM/TISM/TBM instead of more diversified allocations, sticking with “age in bonds” instead of allocations customized for their particular circumstances.
Fifth, I am not a “DFA advisor”. I run a wealth management firm (providing all the services I mentioned above). As far as managing portfolios, which is just one aspect of what clients hire me for, I use what I believe are the best vehicles to accomplish the portfolio’s objective — consistent exposure to the asset class, broadest diversification, lowest total costs (including internal trading expenses, portfolio turnover and taxes, etc.). In most cases, for reasons I outlined extensively above, that means using DFA funds. But I also use Vanguard and even Schwab index funds in certain circumstances. Does that also make me a “Vanguard advisor” and a “Schwab advisor”? I also have access to AQR and Vericimetry funds, also not available to retail investors. And I don’t publish my fee schedule on my website because I am not trying to attract clients who are simply looking for the lowest fees or want to get into a pricing contest. I want clients who are looking for the services I provide, and get the most value out of the 0.5% to 0.75% fee I charge. I don’t think my fees are outrageous and work hard to give my clients the most value I can for what they pay. I will not be providing a link to my website because I am not looking to attract your readers as clients. I provided my comments above and these simply to correct what I viewed as incorrect comments about DFA and a misunderstanding about how the advisory industry works.
Finally, the reason many professional advisors hold DFA in high regard is because we have done the research, have been provided all the inner workings of the funds/strategies, spent time listening to the likes of Eugene Fama and Ken French discuss their findings on how markets work and how DFAs funds embrace that research so efficiently. As a DIY investor, you simply don’t have access to this information, so it is not something you can use when forming an opinion. And very rarely do you spend the time to run the regressions to determine the value-added as I did in my previous post. No, often what I find is that “independent” points of view are from DIY investors who don’t have access to DFA funds, and have a vested interest in downplaying their value, or don’t know how to determine their value. As you know, the angst towards DFA because they don’t work with DIY investors is overwhelming, and clouds the judgement of most who can’t get past that part of their business. I’ve come across a professional advisor or two with a similar mindset, but that is often in an attempt to curry favor with DIY types, or based on a shallow “expense ratios are all that matters” perspective. Many DIYers want to believe the myth that we use DFA funds because they aren’t available to them, so in effect we should be hired for DFA access. That simply isn’t true. They are great funds, for all the reasons I outlined. But a good wealth manager realizes they are just one piece to the puzzle and asset management is just one part of an effective financial plan.
And as I said before, the average person who will hire a fixed or low-fee advisor firm for DFA access doesn’t have, and will not receive the education necessary to understand the cyclicality of asset classes and markets, or the long-term nature of DFAs value added. They jump on board in 2006 or today after a string of good years for small/value stocks, only to jump off after a better run for large growth or a total market meltdown like 2008 where everything gets hit hard. And the advisors tend to encourage this behavior in a way, offering cut-rate fees for cut-rate service, believing their clients are better educated than the average investor, when in fact they are just better at chasing performance and running Morningstar screens. In my experience, the cost of this behavior outweighs the benefits of higher returns than may accrue during the period they are willing to stay with their plans. Now, if someone is looking for an advisor for all the reasons I mentioned, finding one with access to DFA funds is worthwhile, but that will not be where all the advisor’s value comes from.
Hope this helps.
Eric
Sorry, should have used the term “DFA authorized advisor.” I agree that hand-holding can be valuable for someone with inadequate financial education or discipline. I understand that is a large majority of investors. Thus, a large majority of investors are likely to benefit by paying a fair price for good advice. The primary benefit of a good advisor for these folks isn’t DFA (or AQI or Vericimetry) access. But when you take a reasonably well-educated and disciplined DIY investor, he wonders just how large the “DFA advantage” is, and whether it might be worth paying for. I did an analysis yesterday comparing 11 DFA funds to the best alternative available to the retail DIYer and was surprised to see there really wasn’t an advantage performance-wise over the last 10 years. I’ll run it in a few weeks on the blog and I’m sure it’ll receive some criticism.
The person considering the DIY approach (along with a proper education to do so) vs hiring an asset manager at the going rate (let’s say 1% a year), ought to think of the long-term cost of his decision. 7% returns due to paying the adviser 1% a year vs 8% returns make a huge difference over an investing career. For a doc investing $100K a year for 30 years the difference is $1.9M ($11.3M vs $9.4M). I don’t know about you, but $1.9M is awfully expensive handholding IMHO.
0.5-0.75% is a very reasonable price for a full service asset manager, with or without financial advice. But an investor needs to ask himself if the price he’s paying is worth it for him. 0.5% of $3M is $15K a year. That’s a month’s pay for a lot of docs. Just like with realtors, I’d like to see more flat-fee pricing and less based on percentages. It doesn’t take twice as much effort to sell a $500K vs a $250K house, and it doesn’t take twice as much effort to manage a $500K portfolio vs a $250K portfolio. But I can’t blame you. If I were an advisor I’d charge as much as the market would bear. An advisor doesn’t have to convince everybody his services are worth the price. He just has to convince a few dozen investors. If he can get $15K a year from 50 investors, and has 50% overhead, he still goes home with a nice income of $375K. It’s like the Larson guys reviewed in this post. Based on the comments above there are lots and lots of docs who feel like they’re getting a good value for their money by working with them. But I can think of another use for the $5-15K a year (and growing) I’d have to pay to hire them to manage my assets and give me advice.
Expense ratios might not be all that matters, but when you analyze mutual funds for predictors of future performance there’s really only one…the expense ratio. Thus one reason we see such persistent solid performance from low-cost passive funds from places like DFA and Vanguard.
I disagree that cut-rate fees necessarily mean cut-rate service. Lots of service providers use that line to justify fees that would be lower if competition forced them to be lower. Some people offer the same service at lower prices. For instance, compare yourself to a higher cost provider like Larson. Are you saying their service is twice as good as yours?
Last, while I think the value/small advantage is likely to persist long-term and tilt my portfolio somewhat toward those factors, I don’t think it’s necessarily a bad idea to stick with a total market approach. You eliminate tracking error and avoid periods of small/value underperformance. Plus, you don’t have to worry about new factors that seem to always be coming along, like profitability and momentum. And of course a total market approach is generally cheaper, especially in a taxable account, which as we know, is an important predictor of future returns.
P.S. A DIY investor obviously doesn’t have to participate frequently on an investing forum or run his own blog. You have to keep reasonably up to date and have to have a certain amount of interest in the subject, but the actual time requirements can be quite low to be a DIY investor. You’ve got to be able to trade your time at a VERY high rate or really hate learning about this stuff to justify hiring an advisor for that reason alone.
Whitecoat,
One more comment from me.
In your previous response you are making a typical DIY investor mistake. The option isn’t “7% minus 1% vs. 7%”, its more like “8-9% minus 1% (or less) vs. 4-6%. It’s not “paying 15K vs. nothing”, it’s “paying $15K vs. costing yourself $50K”. You can calculate the cost of the advisor, but you are ignoring the benefits. Just on the asset management side:
1. Better tax efficiency: efficient fund placement and ongoing tax-loss harvesting can add 0.5% to 1% per year vs. equal allocations and ignoring TLH. Most DIY investors are in the later camp.
2. Better portfolio structure: choosing balanced small and value tilted portfolios vs. TSM portfolios can easily add 2-3% in additional returns, with only fractionally more risk due to small/value/market diversification benefits. It also allows one to take less risk in bonds, which most DIY investors are panicking about right now, judging by the extreme # of “what to do about bonds” comments on investment forums.
3. Purer exposure to desired asset classes. Looking at DFA vs. what else is reasonably available, beyond the S&P 500/TSM (that are typically 20% of my equity allocations and I use Vanguard or Schwab in many cases), we see in the last 10 years, DFA US LV beat Vanguard Value Index by 1.2% per year, DFA US SV beat Vanguard SV Index by 1.3% per year, DFA Int’l Value beat iShares EAFE Value Index by 1.5%, DFA Int’l SV beat iShares EAFE Small Cap index by 1.2% per year, and DFA EM Value beat Vanguard EM index by over 3% per year. And because of the diversification benefits of market/size/value dimensions, the DFA-based portfolio didn’t come with materially more portfolio risk (indeed, when diversification mattered, from 2000-2002 it would have lost far less).
3. Ensuring that the portfolio is constantly maintained and rebalanced in good times and bad and not continually tweaked based on market-timing or “valuation-based” changes, or that asset class fund changes aren’t constantly taking place (we saw this with a well known advisor — starting with DFA US Micro, switching to Bridgeway Ultra Small, then to iShares 600 Value, and each replaced fund went on to significantly outperform the newly added strategy)
4. Keeping investor from bailing out in 2002 or 2008 when future seems bleak but expected returns are highest
5. Avoiding overly-conservative bond heavy portfolios due to irrational fear of short-term equity volatility or “age in bonds” allocations that are less than optimal for many investors.
6. Making sure you don’t pollute your portfolio with latest popular investments (like Gold, or riskier bonds) or strategies (like the Permanent Portfolio) that tends to happen 2-3 times a decade.
Most or all of these additional advantages would accrue to almost every DIY investor, making 1% or less a real bargain. You wouldn’t have to look hard to find 3% to 5% of annual value from a good advisor on asset management alone.
Is an even higher fee worth it (in the case of Larson)? I don’t know. They certainly do more than I do (I don’t negotiate contracts for my clients, for example), and their higher fees are on amounts far less than my minimum ($2M). I know this for a fact though — lower fees mean fewer services and less help/support, PERIOD. That is why some low-fee firms have had to raise fees — their clients wanted more and they couldn’t support that at their current rates. I have talked with investors who have shared the horrors of going the fixed-fee route — overly conservative “bearish” allocations, fixed income was put into auction rate securities, no support/guidance/counseling when things got tough in 2008, etc. How nice it would be if you could get a full service wealth management experience for a few thousand dollars a year fixed. But that is pure make-believe. You get a cookie-cutter model and a call every year and email responses to questions. No different than the on-line asset management firms popping up like Wealthfront–except they are forced to use inferior index funds/ETFs.
Finally, “not having to worry about new factors that seem to always be coming along” is a total farce. Size and value came about in 1990, momentum is just a “friction” that a well-engineered fund will try to avoid (so nothing to “worry about”), and profitability, while a significant enhancement, is really the first one in 20 years and will be incorporated into existing DFA funds, so nothing to “worry about”. A good advisor will keep their clients abreast of advancements in financial academic research and how it affects them and their portfolios, so the client has the confidence that their portfolios continually represent the most complete thinking about how markets work and how to take advantage of what they offer. A much less stressful process with much greater piece of mind.
As a matter of fact, the only people I see “worrying” are DIY investors who were already far enough behind with less-than-optimal global size and value strategies, and now they are falling further behind. This is really gonna drive DIYers nuts, but estimates put the additional benefit of adding direct profitability sorts on existing small/value funds at another 1% to 1.5% per fund, and that is on top of the 1% to 2% existing value that we can find over the last 10 years.
Good luck with your investments and your blog! I’ve enjoyed the chat.
Eric
Let’s take your points one by one. First, as far as 7%-1% vs 7%. We’ll have to agree to disagree. A good advisor (yourself likely included) compared to a bad DIYer is going to be a no-contest. Comparing a good DIYer to a bad advisor is also a no-contest. The only reasonable comparison is comparing a good DIYer to a good advisor. Let’s take you as an advisor and compare that to YOU as a DIYer. Can you come out 1% ahead? No, of course not.
Your point about not TLHing. Again, you’re comparing a good advisor to a bad DIYer. TLHing isn’t rocket science. It’s simple for a DIYer to learn to do. He might be willing to pay someone else to do it, but to suggest there’s something hard about selling TSM and buying 500 or something similar is silly.
There’s plenty of room to argue that small and value increases expected returns by increasing risk and not just through improved diversification to value/small factors. I know that’s the “company line” out of DFA, but it’s not exactly proven fact. Personally I would consider it a mistake to load up on equities because your equities are more diversified into small/value factors. Every other knowledgeable person I’ve seen discuss this point argues that you can hold MORE bonds in the portfolio because of a higher expected return from the small/value equities, not that you can/should hold fewer. Small and value certainly didn’t protect the investor in 2008 for instance.
There are plenty of asset classes were DFA not only didn’t outperform enough to justify an advisory fee, but didn’t outperform at all. I’ll address that in my future post. But yeah, they seem to do value pretty well across the spectrum. What’s up with comparing EM to EM Value? Really? Come on, you’re better than that. Also, value held up well in 2000-2002, but it certainly didn’t in 2008.
Your criticisms against the overly conservative portfolio, the performance chasing, the bailing out in a bear market etc are all comparing a good advisor against a bad DIYer. Straw man argument. Bad advisors bailed and good DIYers didn’t. It’s really not that hard to avoid that stuff. Do many investors need that kind of hand-holding? Absolutely. Do all? Certainly not.
I don’t know how much it costs to provide “full-service” asset management, however you want to define that. I’ve been told by advisors it’s around $3K per year. But as one hourly advisor likes to point out, you don’t have to hire a taxi (or a limo) if all you need are directions.
Lastly, I think your 1-2% estimate for value for a good DFA-authorized advisor over a good DIY investor is an order of magnitude off. I suspect we’ll have to agree to disagree.
I posted this on the VUL blog, but for those reading this post, i wanted to chime in here as well…
I was approached by Larson and the plan stated a “tax-free” investment in the proposal that turned out to be a suggestion to do $60k/yr into a VUL. I had not disclosed that a good familiy friend was in the insurance industry and found out that the death benefit they were recommneding was not close to the MEC limits. Larson does do a lot of sound planning on a lot of little points, but i fear it is a ploy to gain trust and sell highly commissionable VUL life policies.
Tom…please comment on your firms practices to use perm LI right away and please discolse the commissions that are generated for you and your peers when being the writing agent on this product. (EX: if you put in $60k/yr, what would your firm make?)
There’s an upcoming post on this topic that should answer your questions.
Has this information been posted?
Thanks.
[Comment held and commenter emailed.]
We have been with Larson for approx. 3 years. Upon meeting Tom and Colin, we could immediately sense that they were good, honest, educated individuals. They are extremely professional, yet personable, and always able to get the ball rolling. As procrastinators, we appreciate the gentle, consistent task-masters they are. They made it easy for us to fulfill investment and estate planning needs by doing all the research, presenting all the options, and walking us through the dreaded paperwork.
But on a more personal level, it is fantastic when a business relationship loses the formality and you feel like you are meeting with a friend. Not only has Colin been a wealth of sound financial advice, but he is also well-versed in technology and has become one of our sources of IT advice as well!
It is obvious that we are pleased with Larson’s services. We feel that they are dedicated to their clients, friends and families; which translates into their work ethic and presence in their communities.
Didn’t have the best experience with Larson- in contrast to previous posts, I was told to buy a VUL policy despite making around 200K. My advisor did not seem interested in hearing about my group’s 401K benefits or defined benefit plans, HSAs or back door roths, and had actually budgeted less to the 401k than the max allowed. I was stuck with a VUL policy costing several thousands a month without actually having maxed out the other traditional benefits. After learning more about the insurance policy, I was pretty disappointed and have thus left the company. Now I’m looking for hire per hour advisors (as recommended by WCI!) and have learned an expensive lesson about financial advisors who are really interested in just making commission.
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No matter whetner you ownn a manufacturing company andd run an industrial business, thhere are a number of advantages over cleaning your windpws carefully.
We had a mixed experience working with Larson. Initially they were thorough but pricey. After several years, variable life policies were pushed as vehicles for “savings”. They suggested that we would be able to quickly remove money to help fund a house purchase soon. While suggesting this they also mentioned that they didn’t understand my wife’s retirement match plan through work. When unexpected tragedy struck our family, our advisor told us to continue prioritizing funding of the VUL policies. We asked for help I’m developing a new financial plan as unexpected family medical bills continued to pile and we began to develop credit debt. We eventually sought out opinions of 2 other planners who questioned a Larson developed plan that seemed skewed to optimize commission for our existing planner. In the end we parted ways with Larson, and the experience cost us >50k. I would aggressively avoid Larson Financial Group. We have moved on and have an amazing planner, but we watch all financial moves with a microscope so that no one else might steal from our pocket again. Also, when you find an advisor, look them up to see if complaints have been filed about them in the past:
http://www.finra.org
[1/30/16 Comment removed at commenter’s request. While initially critical of Larson Financial, the matter has since been resolved to his satisfaction.]
90% of the complaints I hear about Larson have to do with the VUL issue. I’ve written a bit more about this subject here: https://www.whitecoatinvestor.com/could-there-be-a-good-vul-policy/
It’s a complicated subject, without a doubt. While I never intend to purchase a permanent life insurance policy, I can see scenarios where it would work out well. I’m disappointed to see an advisor recommend it over a 529 for education funding, especially if your state provided a tax break.
The other 10% of complaints I hear about Larson are about the relatively high AUM fees. There is no way I’d pay someone 1%+ for investment management, although based on the comments there are plenty of people who seem to think they’re getting good value at that price. I believe that any “endorsement” I’ve ever made regarding Larson has discussed those two issues.
[Comment held and commenter emailed.]
If you want to know why Larson always pushes VUL policies, all you need to do is look at their financial statements. See the following link: http://www.sec.gov/Archives/edgar/vprr/13/9999999997-13-003011 (hopefully that works)
They have their own broker dealer that they sell VUL policies through. They made over $11 MILLION in commission in 2012. See page 8 from the link above. It’s absolutely ridiculous. I know so many of my colleagues who bought these policies from them, some of whom bought them during residency! Not only do they make money from managing your money, but they also make commissions from selling disability and all these VUL policies. On top of that, they earn even more commission by using their own broker dealer. Then they also charge you for financial planning. Then they tell you to use their own accounting firm and law firm where they make even more money. It’s insane! Why would anyone trust one company to do everything for them? Where are the checks and balances?
Anyway, just thought some might find it interesting.
I’m not sure the actual dollar amount of commissions means much when you’re talking about a relatively large firm. It’s also hard to criticize a firm for getting commissions for selling disability insurance. You can’t buy the stuff without someone getting a commission.
Personally, I’d like to see firms charge you one upfront fee, and then subtract any commissions received from that fee. (Life insurance, disability insurance, something like a VUL etc.) But I can’t think of a firm that does that. The fact is that most commissions (term life, disability policies) are paid before you have much in the way of assets to manage. If a firm needs to make $1-5K from you to be worth their while, and they can only get $200 a year as an AUM fee (remember Larson and similar firms will take you without a $250K-$1M minimum) then they need to make that up somewhere, and commissions are a logical choice. I’m not sure you can blame them for charging separate legal and accounting fees, as I don’t know of a firm that lumps those in with asset management fees. Actually, I know of one that includes your tax prep in with your overall fee, but never legal.
There are really two schools of thought when it comes to comprehensive financial services. If you get everything from one company, you only have to deal with one company so it simplifies things. Theoretically, they are then able to see and coordinate everything, maximizing efficiency. On the other hand, if you use multiple advisors (a CPA for taxes, a separate attorney for estate planning, a CFP for financial planning, perhaps a different asset management firm, an insurance agent etc) then you’ve got more checks and balances in the system in case one of them is giving bad advice or charging too much. Of course, you’re then stuck dealing with a handful of different advisors/companies. Hard to blame a busy doc who just wants it all taken care of, and I get the impression that is the majority of clients at firms such as Larson.
[Post held temporarily. Commenter advised by email.]
Please convince me why anyone,”white coat” or otherwise, should participate in a traditional pre-tax 401k account, in any amount beyond what might be matched, in this tax economy. Really! What an incredibly absurd tax trap. Or even a ROTH invested in a traditional “managed” account with no floor on losses..Really? Although nobody here will ever accept this, the only real alternative, in this economy is to invest as much as you can in an Indexed Universal Life Account, using an allocation strategy with no caps or spreads on earnings, and at least 100% participation in the indexed gains, which once earned are locked in and never subject to market losses, and after cost of insurance, have a zero % floor, which means simply, if the allocation has a negative performance in any given year, the worst case scenario is 0%, and the policy resets for the next year. At “retirement” using preferably a fixed rate loan provision, it is possible to lock in a tax free distribution for life, if properly designed. Oh yes, of course someone “EARNS” an evil commission for setting this up and servicing it every year, because of course everyone else works for nothing too, right? Even “whitecoats”? Maybe not. Just saying.
Oh, BTW, I know many, many, credentialed, and I might add, over credentialed, advisors, who are absolute morons with respect to what they purport to be “experts” in. Old adage,review, ask for references/results, and do your homework, no matter how busy you are. Avoid VUL like the plague, IMO. Properly structured and funded FIUL, is a very attractive alternative in this Tax Economy.
Welcome to the website. Are you an insurance agent, a doctor, or a happy purchaser of an IUL policy?
As you might imagine, IUL has been discussed extensively on the site. If you wish to make further comments on the subject, I’d suggest you make them on the posts on that subject:
https://www.whitecoatinvestor.com/5-reasons-not-to-buy-indexed-universal-life-insurance/
https://www.whitecoatinvestor.com/rebutting-the-arguments-for-indexed-universal-life-insurance/
https://www.whitecoatinvestor.com/an-index-universal-life-insurance-illustration/
https://www.whitecoatinvestor.com/a-serious-reply-more-arguing-about-iul/
As to why “anyone should participate in a traditional pre-tax” retirement account, that is discussed here:
https://www.whitecoatinvestor.com/the-retirement-tax-trap-another-way-to-sell-you-insurance-you-dont-need/
I’m glad you’ve found an investing method that seems to meet your financial goals and sincerely wish you the best. However, in my experience I have found that after learning how cash value insurance really works, most physicians aren’t really interested in purchasing it. Unfortunately, most purchased it prior to understanding how it works, and are now faced with the unsavory options faced by the 80% of whole life purchasers who surrender their policies prior to their death.
Steve J,
As an advisor/agent, I agree with much of what you said. I am an investment manager with one of the largest independent brokers in the world. I use that to preface the fact that I have access to basically any company in the US for investments and I still like utilizing IULs for all sorts of things, including college planning, estate purposes, and retirement supplements. If set up right, these policies are fantastic for their flexibility and how their loan systems work. A good one will have a wash-loan provision or better. The fact that you can take out a loan and not impact your “income” is quite ingenious and creates an even tremendously efficient growth vehicle. I also like to utilize the policies that have living benefits on them that allow you to access the funds/death benefit for chronic, critical, and terminal illness.
I think what happens is that someone finds something that works for them based on their situation, personality, and goals and tends to think that should work for everyone. Not everyone has the know-how, desire, and time to manage their own money and/or portfolio, and set up all the complex systems to get around taxes, etc. And indexed UL are much simpler to set up and then not have to worry much about anything except funding the policy and discussing with your agent how everything is going. Of course a good agent would be talking with his client once a quarter anyway.
I am not going to comment on everything you said, but I did want you to know you are not the only one who thinks this way.
Regular readers may be interested to know how much money you and Steve received in the last year for selling IUL policies to clients.
Challenge accepted. Last year, out all the clients I met with and built a plan for, all the insurance I sold, all the money I managed, I made $0 off of Indexed Life insurance. That’s how often I recommend it. I know, I know. That sounds like a lot, but I made sure it was only to the right people.
If I did though here is an example of a commission of a properly structured UL for cash growth. This is for a 35 year old male with a preferred rating. On a 5500 (IRA contribution level) dollar annual premium, the first year commission is $1688.54. If you include the waiver of surrender charge rider, it is only $760.16. Takes a lot of those to get to 100k.
BTW, there are no commissions after that.
You’re awfully positive about something you’re not even selling to your clients.
That was mostly to demonstrate the objectivity with which I view my clients and the plans I build for them. Each person is unique, and so should their plan. That is why, occasionally, I recommend cash-value life insurance.
Why don’t you go fee-only if objectivity is so important to you?
Actually, I find the idea that you can only be objective as fee-only advisor something of a myth. I have seen what some of those people charge, and it kind of boggles my mind. I
am a fee-based advisor. Let’s look at pricing closely here. The average client will “pay” for some things regardless of the type of advisor. As a fee-based advisor I get commissions for certain insurance products. I am independent so I can “shop the market” for what is truly the best fit for my client. This is both a blessing and a curse. It allows me to be more objective, but I also have to put in a lot more time to find the right fit. I also charge a fee for assets under management. Typically 1% pr less. I rarely, if ever, sell a commission based investment product. This wrap fee is all inclusive and allows me to implement the kind of management appropriate to my clients.
Here is the pricing for a fee-only advisor. The client needs life insurance and may. someday, want an annuity. Therefore, he is going to pay a commission to an insurance agent. The advisor charges a management fee of 1% on assets under management. However, he/she also charges a fee to build a plan both the first year and all subsequent years. The average is about $3,000 for the first year on a basic plan and half of that every subsequent years. Plus, they charge anywhere from 150-250 per hour on advice/etc. that falls outside the scope of the plan. Let’s use a client 40 year male with $150,000 in assets. Here is simple breakdown:
Fee Based advisor:
500k 20 year term: 451.15 per year. 360.92 on 80% commission
150k 1% management: $1,500 paid by client. $1,200 payout to advisor
Total paid to other parties: 390.23 .26% (insurance agency and B/D)
Total paid to advisor: $1560.92 or 1.04%
Total paid by client: $1951.15 or 1.3% percent of total assets.
Fee only advisor:
500k 20 year term: 451.15 per year. 360.92 paid to insurance agent
150k %1 management: $1,500 paid by client. $1,200 to advisor.
Financial plan fee: $3,000
Total paid to advisor: $4,200 or 2.8%
Total paid to others: $751.15 (451.15+300 to B/D) or .5%
Total paid by client: 4951.15 or 3.3%
That is a pretty dramatic difference. If I was fee-only it would mean I could not meet with most of my clients since they don’t have that kind of pocket change hanging around. Honestly, most would not see the value in paying that much anyway, especially if their money is simply being put in passive index funds and not being provided any downside protection (the true value of GOOD active management, but that is another debate). I can guarantee that I, and the managers I work with, work harder than 95+% of the advisors out there to make sure our clients goals are being met.
On top of that, fee-only advisors charge things outside their plan, which we do not. We help people get those things in place by working with trusted partners. How hard is it to recommend 500k in life insurance and to get a will or estate plane done. Yet, a fee-only advisor charges for those things. That is common sense advice for anyone so how is charging someone a fee that and sending them to lawyer or agent to pay to have that stuff done, being truly objective. I challenge it is not. What Much of what I have read from fee-only advisors is all cookie cutter stuff. They recommend most of the same things, just a few different numbers, to all of their clients. Why? I am not 100% sure, but think about this. If you charge $3,000 for a financial plan how would you make more money. Spend 12-15+ hours putting a customized plan together or, spending 5-8 hours on an appropriate, yet not fully customized plan. That is why you here of mechanics/etc. cutting corners. They get paid by the job not the hour.
Ok, I know this is long so I won’t continue much longer. At any rate, I have outlined several reasons why I run my practice the way I do. I like being able to work with anyone, build truly customized plans, and remain independent and objective.
I have no doubt that one can find a “fee-based” advisor that is cheaper than a fee-only advisor. However, my advice when choosing a financial adviser is the following:
# 1 Make sure the advice is good
# 2 Make sure the price is fair
Good advice at a fair price. Unfortunately, there is no price too low for bad advice, and that is what you get from a commissioned salesman. And that’s what a “fee-based advisor” is. How do I know? I’ve had one. He gave me crappy advice, put me into crappy investments and sold me the wrong insurance. I paid him a fee. And I paid him commissions. Then when I got a clue, I fired him. Now he’s responsible for unleashing The White Coat Investor on the world. That’s probably okay with him. He’s probably selling cars or something. Oh nope, I just looked him up. He’s still a fee-based planner “specializing” in docs.
Do commissioned salesmen mean to do the wrong thing? Not usually. But they’re usually undereducated, underexperienced and even if not, they have to face this huge financial conflict of interest every time they meet with someone. That’s because the worst investments and insurance pay the biggest commissions (otherwise they’d never be sold.) So that poor commissioned salesman is forced to decide which is worse, letting his kids starve giving that rich doctor the right advice (that he should be going to Vanguard and buying mutual funds at 5 basis points instead of the 1% ER 5.7% load crap he’s peddling, or worse, some cash value life insurance plan,) or giving “less good” advice and feeding the kids. Even good people can’t last long when faced with that.
Sounds like what you’re doing is an AUM based fee and keeping the commissions on any insurance you sell. That’s not any different from what Larson is doing. Which as I recall, was what this post was about prior to its derailment. Although I could be wrong since it’s been 3 years since I wrote this.
“Regular Readers” should be embarrased by your feeling the need to ask that question. I’m retired, comfortably, and actually deriving an income from the above referenced strategy. Life Insurance Security, Tax Free Income that is guaranteed contractually, and I sold it to myself several years ago, and made a commission. Term Insurance, and certainly VUL are not the solution in todays economy and tax environment.
I’m very happy that it has worked out for you. Enjoy your retirement.
Readers benefit when financial conflicts of interest and biases are revealed in posts and comments. With cash value life insurance policies, 99% of the proponents on this site are those who sell the product (or like you, used to sell it.) Does that mean it’s bad? Not necessarily, but it certainly provides context to your comments.
I don’t know if anyone still reads this post, or checks up on it, but I thought that I would just update my experience with Larson Financial. I was initially introduced to them while in fellowship, and liked a lot of what they had to say. I was in the process of selecting a job, and had several contracts to review. They offered to look at them for me, but I declined. My father is an attorney and so I had access to several attorneys that could review the contract for me. I also had a lot of great information from the practice manager of my residency program’s practice, so I knew what fair market value was for different specialties in all areas of the country. In the end, I signed with a large hospital system and ended up with a very similar contract to the other 40-50 employed docs in my specialty.
They reviewed my disability and term life insurance and we mutually decided that I would be better off with a slightly different (but very similar) disability policy (and they were able to score me a discount), and a much higher term life policy.
At the dinner they talked about other benefits–how they would do a lot of the legwork for you for things like mortgages, car loans, finding a CPA, etc. None of that ever happened. I told my guy I was looking to buy a house and car, and never heard anything from him. Tax season has rolled around and I again didn’t hear a peep. In our last meeting, however, he was sure to bring up how I should apply for a VUL, even though when I initially met with him I had told him that I wasn’t interested in any whole life or similar policies.
The nail in the coffin for me also came during our last meeting when we were discussing a budget. I mentioned that I was going to be applying to have my student loans refinanced, and he had no idea what I was talking about. A financial advisor, who supposedly specializes in physician finances, had no idea about student loan refinance options available to physicians? He told me to look into it and let him know what I found out. I ended up refinancing a decent 6-figure loan at 6.8% to a variable rate at 2.63% for 10 years (obviously I plan to pay it off much sooner than that).
In my mind, the service I received certainly didn’t warrant the $1500 per year they were wanting to charge me, not to mention wanting to charge me northo of 1% to “manage” my investments. Not too difficult to pick low cost index funds from my plan’s choices, set an asset allocation, and rebalance every 3-6 months as needed.
Anyway, I had gone into my relationship with Larson Financial with high hopes, but in the end, anything that didn’t generate a commission for them they didn’t seem interested in helping me out, which would have been fine had they not told me that was part of what I would be getting. And then to have no idea about student loan refinancing options was unbelievable.
I would spend more time here and on Bogleheads and save yourself the money.
Thanks for sharing your experience. I get frustrated too when I hear about advisors who reportedly specialize in physicians who don’t know about student loan refinancing, backdoor Roth IRAs, individual 401(k)s, simple asset protection techniques, and other simple financial issues faced by a large percentage of physicians.
I got frustrated today when I looked at a portfolio put together by another advisor (not Larson) I list on my site. 30 funds, most with ERs in the 0.7-1% range, no apparent coherent strategy, a variable annuity with no apparent purpose (at least it had no surrender charge and okay expenses). No backdoor Roth despite the fact that the doc has a very good 401(k) accessible. It makes it very hard to refer people you care about to them when you see what kind of advice they get once they’re there. But there are lots of docs who just aren’t cut out to be do-it-yourselfers.
There are a few things do it yourselfers have going for them- 1) You’re not going to purposely screw yourself over, 2) You save at least the advisory fees (and thus can underperform by 0.5-2% a year and still come out ahead), and 3) You won’t assume your “money guy” is “just taking care of it.” You’ll at least have a sinking feeling you need to be checking on something. Can an advisor add value? Absolutely! Do they? Not as often as they should.
I had heard that Larson provides great service but invariably recommends VUL (whole life insurance) to a disproportionate number of its clients. I am all for great service but for all the reasons that have been described by The White Coat Investor I am very skeptical about this approach. Not to say there is never a place for this investment vehicle (VUL) but clearly it rewards the brokers handsomely and is rarely in the best interest of the investor. I would love to see all of the Larson clients on this forum comment if their Larson representative recommended a VUL (whole life policy). Also I would love to hear Dr. Dahle’s opinion on this practice since he generally had favorable things to say about Larson but also has been staunchly opposed to VUL as an investment vehicle.
[Part of comment held and commenter emailed.]
I think I just gave my opinion earlier today. Maybe it was on the VUL thread. Have you read that?
https://www.whitecoatinvestor.com/could-there-be-a-good-vul-policy/
And VUL is NOT whole life. They’re are both cash value life insurance, but have significant differences. I don’t like either one of them as a general rule, but both have areas where they can reasonably be used by the right person.
Email bounced back. Gotta use a real email address if you want me to email you.
Why we left Larson… I’m not a doctor. My wife is a surgeon and she was a good “mark” for this group or similar type groups. After just reading the White Coat Investor Book, I was a little bit surprised that this original blog post comes across as not quite, but maybe almost an endorsement for the group. (The original blog post kinda feels different than the tone of the book on such matters while. Speaking while it’s fresh on my mind, we just finished your book last week and started to visit the webpage.) Page after page in your book confirmed our decision last year to leave Larson. My wife has no desire to handle finances on her own, but the fancy wine and dine and friendly conversations from Larson helped us to relax and we pursued a financial relationship with them. So I can completely understand that if someone from Larson knows the Whitecoat Investor impact thousands of doctors, knows his endorsement or positive experience could bring them millions of dollars; then they will be willing to fly you across the states and buy your family dinner. I hope that doesn’t come across as an insult!! I’m sure there is more to it. I am a fan of yours! And very thankful your book and this blog are now in our lives. But from my outside perspective, I think that anyone who reads your book, would want to stay clear of such a group as this and it seems like your trip a couple years back tones your language down a bit. Maybe that is just my perspective, but found had we just read your book first, we would have saved a bunch of time and capital.
Our Larson Experience Issues:
1. This blog is the first time I’ve clearly seen the fee structure laid out. Other than the 1,500 fee I knew was coming after residency. I point blank asked Larson what fees were and he said I don’t know and changed the subject. To this day, that I believe was the number one lie/pivot that broke the relationship. Transparency is the biggest fault I give to Larson.
2. They sold us a bunch of products after saying they weren’t Northwestern Mutual who will sell you a bunch of products to get kick backs. Remember, I’m not a doctor and don’t make much money, but I was personally sold a 2 million Term life insurance policy! We didn’t make it to a stage where they offered a VUL. Best I remember, our Larson advisor steered us clear of these products and just toward Term, thank you! However, both my wife and I were 100% shocked when we found out they got kick backs for selling us products because he had made such a clear claim they didn’t make money off selling us stuff and that was why Larson was founded, to be fiduciary! We were both confused how statements changed on us. Again transparency.
3. They took over my portfolio to get management fees, but left several stocks I had bought in it and never would review it with me. One stock went defunct, the other lost big! I asked for over a year to understand where my money was, because in the bull market of 2012 and 2013 I didn’t see even 3% in gains, when we were in their Aggressive I portfolio. Maybe the “secret” DFA portfolios mentioned above could explain why we didn’t earn squat while the S&P was returning 13%. I believe because our portfolio was so small during residency that they didn’t make it priority. But yes, they will take your money when you don’t have much to invest.
4. Remember I said fees weren’t clearly explained. When we took back over our accounts, the TD Ameritrade advisor was able to back calculate our fees and they were just shy of 3%!
So that was our experience, for Us, it was pricey and not transparent. So ask questions better than we did. The people with Larson were very nice, but don’t let that misguide you with any group. And if you go with Larson, make sure you understand what you are paying for and have everything laid out. Positives: they did set up a good disability policy with discount, set up our car insurance when we moved for fellowship, didn’t demand the 1,500 when we left and to start the relationship, they took us out to the most lovely four course dinner and poured the most exceptional wine…. as Whitecoat Investor says in his book something to the effect “has to be paid for somehow.” It was good wine.
Sorry you had a lousy experience. Just a few comments:
Absolutely I have a financial conflict of interest with Larson. I hope you consider that to be fully disclosed.
I like a lot of what Larson does. Physician-focused, trying to bring most of the financial services a doctor would need under one roof so they can be a full-service provider, uses DFA funds etc. There are also a few things I don’t like. As noted in my post today, I don’t really like AUM fees, even at the “industry standard” 1%, especially when there are firms working for 0.37-0.75%. I have an ongoing disagreement with Larson about the percentage of docs for whom VULs are right. I think it’s a much smaller percentage than they do. I also don’t like the difficulty in maintaining quality as you grow the business. They’re quite large for a physician focused firm and that causes them a significant challenge- making sure all the advisors are giving top notch advice. They work very hard at that (they have what they call a fellowship to get all of the new hire advisors up to speed), but it’s a tough thing to do.
Sorry to hear about your issues with transparency. I would prefer their fee structure be front and center on the website, but the truth is most advisors don’t do that. The information is easily obtained by asking (and if they blew that question off to me, I’d be out the door 30 seconds later) or checking the ADV2. Life and disability insurance always pays a commission. That’s partly your fault for not knowing that, but I agree it would be nice if it were very prominently disclosed. I bet if you review your paperwork, it probably was disclosed in some way or another. I’d love to see people get a discount on their financial planning fees equal to that commission, but the truth is I don’t know of a single advisor that does that and it may even be illegal depending on how it is structured. If they sell you insurance, they get the commission. That’s pretty standard practice.
I don’t think a $2M term insurance policy is necessarily a bad thing. If you have an after-tax income of $80K a year, $2M basically replaces that. Might that policy be a little large for your needs? Perhaps, but it could also be too little. It’s certainly in the range of reasonable. I recommend docs get $1-5M. Even a non-working spouse may wish to carry something. Replacing all of what my spouse does as unpaid work would probably cost me that much every year.
Obviously I think the disability insurance was a good idea. They obviously got paid a commission to sell you that. Hopefully it’s the best possible policy for you.
Obviously not reviewing your current portfolio with you is an issue. There are reasonable reasons not to sell existing stock holdings (usually tax-related) although I would have expected them to at least discuss it with you. I can’t explain what happened to your gains in 2012-2013 unless your returns were calculated post-financial planning fees and you have a relatively small portfolio.
At any rate, I have yet to find a perfect advisor as I wrote about here: https://www.whitecoatinvestor.com/the-perfect-financial-advisor/ Certainly I think Larson’s firm is far better than most. But as should be pretty obvious, I haven’t hired them as my financial planner or investment manager. The value to me is less than the cost. But they have lots of happy clients I assure you.
Yes, you have disclosed your relationship. A big reason we value your opinion is transparency! The only reason I was on this post is because someone tried to sell us a VUL this week, several things felt wrong about the pitch, and I was researching your opinion. Up came Larson in the search.
So, I guess I was a little shocked, after our experiences, about your relationship with Larson after what we’d just read in your book (Noting their book was listed in advanced reading. Do they list your book?). But I know that is my opinion and experience. They ARE nice folks pleasant to talk with. I usually try to sleep a night on a negative comment before posting to make sure my thoughts are as clear as possible. Should have done that, period. I hope I did a fairly good job of not attacking anyone at Larson personally. I tried to leave out any of those details. And appreciate your response.
Just a few comments of clarity:
I should have known better. I should have asked more questions and pursed more answers. Yes, some of them came in literature after the fact. But it was last and only time in my life where I just signed papers. We just signed them, Jim! He put the paper in front of us, said this is this, sign here. Page after page we signed. And after several meetings and hang outs we trusted him enough to just do it. It’s embarrassing. I think that is some of my bitterness is because after dinner and personal phone calls and friendly meetings it felt like a friendship when it was business.
After that, we’ve paid closer attention to contracts. Much closer attention. We even knew it at the time we should have been looking into it better. We had a conversation on the way home about how quick it all happened.
I understand the standard practice of commissions now. But was told Larson is fiduciary. My understanding of that definition was they didn’t get kick backs from selling us stuff. I had a long argument with my mother in law about how they weren’t getting any commissions on selling us stuff. My defense was what Larson had told me. I was wrong. Did Larson lie, or just not communicate clearly? I’m more likely to believe the latter must be true now, but the wife and I were both under that understanding we weren’t getting sold stuff that they made money on. I know better now. But I’m afraid many doctors don’t consider these costs as I talk to more and more about investments and the products they buy. From my line of work, I’m inclined to believe doctors are gullible for many reasons. Most people are gullible (self included) and that shouldn’t be taken advantage of for financial gain. I could write a blog post on that!
The 2 million dollar policy was for me. My wife got a 4 million dollar term. I think that was good for her, but at the time of discussion it was pretty clear that my career is mostly to support her in residency and to become stay at home dad for a few years. 80K is totally obtainable in my work, but not most likely during the 10 year term of the policy while I can’t travel as much for my career.
Yes, gains were post fees. I still don’t understand why my gains were so small… Maybe you know someone in the group that can show what their portfolios produced during that time. I still don’t see how it could have been so small. (Is that why they want their portfolios not disclosed?) It’s in the past for me now.
Yeah, there will be no perfect advisor right! Will read link next. I’ve got a lot to learn still and know that Larson did a few good things for us and there are many advisors with the company, apparently some who push VULs. So there will be different experiences. This was ours. Our experience did not present the value when someone else could have sold us the policies and not taken a percentage of our IRAs. I’m sure Larson is a good fit for some people and had our advisor communicated somethings differently we would probably still be in the relationship… and never read your book. lol.
Thanks for sharing your experience. There’s a lot to learn there both for clients and advisers.