# competent Financial Planners typically add around 3% a year



## Marc (12 May 2018)

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## Duke of Marmalade (12 May 2018)

Marc said:


> You should meet with a Financial Planner and set out what you are trying to achieve. www.sfpi.ie
> 
> For full disclosure I am a board member of the SFPI.
> 
> ...


Decided to read [broken link removed].  First it should be noted that it is written from an American perspective especially with respect to tax aspects.  It was also addressed to financial advisors as a sort of morale booster from Vanguard.

The report makes it quite clear that financial advisors cannot advise on which funds will outperform, in fact it rightly points out that even large scale dedicated investment management firms can't do that.  Meeting a benchmark like a Global Index is as good as you can hope for.

So where does the 3% extra performance come from?

The biggest contribution is (4) above which Vanguard reckons adds 1.5% p.a.   What is their evidence?  During the 5 tumultuous years from 2008 to 2012 they compared the performance of those self invested folk who adjusted their portfolios (presumably in panic at the crisis) with those who stuck it out, the former underperformed by 1.5% p.a.  The argument is that with a financial advisor holding their hand they wouldn't have panicked.  Sorry, but I find that a very selective sample and a very dubious inference.

(5) and (6) refer to managing the US tax system to best advantage and, depending on circumstances, can add up to 1.85% p.a.  I admit that tax is an important consideration in pension and indeed non-pension planning but I would find this claim dubious in an Irish context.  You can get pretty informed advices on this front from AAM.

(2) above was frankly a bit of a nonsense. It added 0.35% p.a. according to Vanguard.  How did the argument go?  They took an example of someone who chose a 60/40 Equity/Bond asset allocation at the start.  As equities outperformed this drifted out to a 80/20 portfolio but would have underperformed a portfolio which had the same average risk throughout the period.  Again very selective sampling and totally unsound statistical arguments.  Anyway I think OP is capable of rebalancing his or her self without the input of a financial advisor.

As to (3) above, AAM is perfectly appropriate for pointing towards low cost funds.

The others were not given any quantitative value even by Vanguard.

I am not saying financial advisors provide no value but I would like to nip the 3% p.a. added value claim in the bud.


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## Marc (12 May 2018)

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## Duke of Marmalade (12 May 2018)

The 3% can be seen to come essentially from two fronts - persuading punters to stick out falling markets and management of the tax rules. Even if the former has value a punter can simply tell herself to stick it out.  If she wants someone to keep saying this to her, fair enough.  The latter does need some professional advice.

But a throw away comment that financial advisors add c.3% p.a. might be good for the morale of the troops but should not be taken seriously at all by potential clients.


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## cremeegg (12 May 2018)

Marc said:


> One of my favourite client meetings was with someone who had a bunch of stock in his employers company. We advised him to sell and diversify.
> He came back two years later and said to me; “ I don’t need to pay someone to tell me I should diversify”. To which I said;”we’ll have you?”
> “Err, no”



This anecdote seems to me to disprove your point entirely.

You gave good advice, but that advice is freely available anywhere, you did not convince him to act on the advice. What value did you add ?


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## Marc (12 May 2018)

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## Bob2018 (12 May 2018)

I couldn't find any that were fee only - all wanted a % of assets as a charge. This is not fee only in my opinion. I know you have a different view which I disagree with. One of the advisers I met was CFP qualified - the other was not. I was particularly unimpressed with the CFP guy.


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## Marc (12 May 2018)

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## Duke of Marmalade (13 May 2018)

It is fine for Vanguard to try and endear itself to financial advisors by telling them that they add 3% p.a. value to their clients' portfolios.  I hope this does not lead to said advisors making this claim to their clients.  By responding to this claim on AAM I am trying to give balance to those who seek DIY advice in this forum.

The main club is "behavioural coaching" which between convincing folk to stay with falling markets and getting them to rebalance amounts to nearly 2% of that 3%.  The samples chosen to "prove" this assertion were highly selective but even so bear some scrutiny.

Obviously someone who sat out the financial crisis did better with hindsight than those who panicked and got out.  But does that mean they were wrong to panic?  As your portfolio shrinks it is natural to become more risk averse. The financial advisor is portrayed as a sort of father confessor type urging "keep the faith, my daughter".  But let us remind ourselves that there was a fairly substantial advisor sect who would tell their retiring clients to go for nice safe bank shares, but of course with a bit of diversification between Anglo, AIB and BoI.  Anyone who was persuaded to keep this faith from 2008 to 2012 has got a taste of purgatory on this planet.


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## Gordon Gekko (13 May 2018)

Dalbar produce some very interesting material on this very topic; what I’ve seen supports Marc’s assertions.

http://realinvestmentadvice.com/dalbar-2017-investors-suck-at-investing-tips-for-advisors/

From memory, the average US investor left to his/her own devices has achieved a nominal return of circa 2.4% per annum on average. That’s based on actual fund flows. Conversely, a 60/40 portfolio has done circa 7% and the market has done circa 8.5%.

Based on what I’ve seen over the years, 3% sounds entirely reasonable. Keeping clients from buying high and selling plus being optimised tax-wise are worth a hell of a lot.

So much is written about individuals on their own buying a low-cost tracker and achieving X return; in reality, I doubt they do because behavioural failings kick in.


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## Duke of Marmalade (13 May 2018)

That Dalbar link shows that the average mutual fund retail investor earned 7.26% in 2016 compared to 11.96% by the S&P.  Now it is really hard to believe that over a mere 12 month period any substantial part of this 4.7% gap arises because those who bought in during 2016 did so at the market highs whilst those who sold out did so at the market lows.  It surely derives almost completely from what Dalbar lists as "sales charges, fees, expenses and other costs".

After all if the retail punters are underperforming the markets through bad timing then someone else is benefiting from this bad timing.  Who is that someone else?  Institutional investors?  i.e. Mutual Funds?  Mutual Funds = retail investors.  So I rest my case, the underperformance of retail investors is mainly down to "sales charges, fees, expenses and other costs".  Dalbar damns benchmarking of indexes.  The reason?  Because indexes have such an unfair advantage over the real world.  Conclusion from these two messages from Dalbar is that a tax efficient, low cost ETF is your only man.


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## Marc (13 May 2018)

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## Sarenco (13 May 2018)

Marc said:


> Posts on AAM cannot be justified simply because they are pro-DIY investors.


I hope you would agree that the reverse is also true.

Posts cannot be discounted simply because they do not encourage investors to incur advisory fees.


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## Duke of Marmalade (13 May 2018)

_Marc _that is a bit of a change of subject.  I am challenging the hubris that financial advisors can add c.2% p.a. from mere "behavioural coaching".  I don't even think the evidence is there that punters lose out substantially by bad behaviour.  They lose big time from "sales charges, fees, expenses and other costs" as seems fairly clear from the Dalbar link above.

Is this the typical conversation between a financial advisor and a punter?

FA:  I can add up to 2% p.a. to your portfolio by behavioural coaching
P:  Howz that go?
FA:  Well, say markets are falling and you are feeling a bit queazy, give me a ring at this number, doesn't matter if your watching the Nikkei and it is the middle of the night.  I will be there to talk you off the ledge.
P:  That is a real comfort, anything else.
FA:  Well take the opposite situation,  markets are soaring ahead and you feel really bullish - don't do anything, ring me at that number and I'll tell you to keep cool and don't buy nuffin
P:  Gosh you guys really can call the markets?
FA:  Not at all, we haven't a clue, nobody has, but we are always there when you are in a crisis.


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## Gordon Gekko (13 May 2018)

I think it’s crazy to dispute that a good independent investment advisor can add that level of value on an ongoing basis.

All of the evidence shows that investors make a pig’s ear of things when left to their own devices. The “buy a cheap ETF” thing doesn’t work because the investor makes all of the usual mistakes of buying high and selling low and trying to time the market.

The biggest parts of an investment advisor’s job are getting the asset allocation right at the outset and keeping the client invested through periods of weakness, whilst moron in the media are screaming that the world is ending.


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## Duke of Marmalade (13 May 2018)

Gordon Gekko said:


> All of the evidence shows that investors make a pig’s ear of things when left to their own devices.


Certainly not the Dalbar evidence.  Even if we accept their interpretation of the figures that mutual fund investors underperform the market more by their bad behaviour than by being gouged, my guess is that the majority of those retail investors did have "professional" advice and were not saved from themselves by so doing.  

If the punters behaved so badly who do you think benefited from their bad behaviour?  Remember the stockmarket is a sort of zero sum game.


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## Gordon Gekko (13 May 2018)

Duke of Marmalade said:


> Certainly not the Dalbar evidence.  Even if their interpretation of the figures is that mutual fund investors underperform the market more by their bad behaviour than by being gouged, my guess is that the majority of those retail investors did have "professional" advice and were not saved from themselves by so doing.  If the punters behaved so badly who do you think benefitted from their bad behaviour?  Remember the stockmarket is a sort of zero sum game.



You are misinterpreting the Dalbar research!

https://www.google.ie/amp/s/seeking...tor-returns-vs-market-returns-failure-endures

The conclusion is that investors do terribly when left to their own devices and that investors need investment advice.

To be frank, the advice that’s sometimes given here about “doing it yourself” is laughable; we procure advice in relation to most areas yet somehow investment advice is viewed with suspicion because of all the misleading data out there and the sharks who frequent the industry.

My question is “how many people get those market returns when they go DIY?”


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## cremeegg (13 May 2018)

Gordon Gekko said:


> All of the evidence shows that investors make a pig’s ear of things when left to their own devices.



This does not really mean anything. It is a prime example of social science research trying to produce physical science results.

If I have a loaf and you have no bread, research would show that the average punter has a half loaf. That tells nothing about your position or mine.


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## Duke of Marmalade (13 May 2018)

Gordon Gekko said:


> My question is “how many people get those market returns when they go DIY?”


As Dalbar points out in another article, nobody should expect to beat Mr Market.  That's because Mr Market is an artificial construct with constant rebalancing at no cost.  However an index tracking low cost fund comes pretty near.  I will repeat my critique of Dalbar's interpretation of the gap between mutual fund investors' experience and that of Mr Market.

1)  On a 12 month 2016 view it is not credible that the 4.70% gap arises in any substantial way because buying in that year was at the top of the market and selling was at the bottom.  Even if that was true, over a mere 12 months it would not generate a large gap. Clearly it is nearly all costs, and in particular sales costs.  The inclusion of sales costs in every year will also mean that even for longer durations the gap can be explained mainly if not entirely by costs.

2)  I presume that the majority of mutual fund investors actually use professional advisers and as _cremeegg _pointed out there is nothing in this analysis to suggest that they too did not suffer a gap.

3)  Buying and selling in the stockmarket is a zero sum game.  So if mutual fund investors have lost more by this activity than the leakage of costs, who are the beneficiaries?

Look, the tax complications alone probably justify getting professional advice but I don't think I will ever be persuaded of the added value of "behavioural coaching".


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## Fella (13 May 2018)

Ireland is a nightmare for investing for tax purposes , it took me a long time reading and I got great advice here in regards tax treatment of ETF's etc. All the advice here was free , a competent financial planner is not free so they add fees that I don't have doing my investing myself. 

I highly doubt a financial planner could add any value to my portfolio , I am not going to sell because the markets fall and I believe in efficient markets I don't think you can go wrong buying anything once its liquid enough you are getting fair value.


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## Gordon Gekko (13 May 2018)

Nobody is talking about beating the market!

The aim should be to achieve decent results relative to the market.


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## Fella (13 May 2018)

Gordon Gekko said:


> Nobody is talking about beating the market!
> 
> The aim should be to achieve decent results relative to the market.



Well if a DIY investor just buys a low cost market tracker , the Financial Planner will need to beat the market to add 3% value or any value.


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## Gordon Gekko (13 May 2018)

Fella said:


> Well if a DIY investor just buys a low cost market tracker , the Financial Planner will need to beat the market to add 3% value or any value.



No.

Because the DIY investor doesn’t buy the tracker and forget about it.

He/She chops in and out at the slightest sign of Paul Sommerville ranting and raving on the radio; he/she repeats the classic behavioural mistakes and greed/fear dynamic which have plagued investors for generations.

Dalbar’s data indicates that the average DIY investor achieves an average annual return of circa 2.5% which is appalling.


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## Fella (13 May 2018)

Gordon Gekko said:


> No.
> 
> Because the DIY investor doesn’t buy the tracker and forget about it.
> 
> ...



Well I'm a DIY investor and I don't chop and change I can't speak for all the others.


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## joe sod (13 May 2018)

Gordon Gekko said:


> No.
> 
> Because the DIY investor doesn’t buy the tracker and forget about it.
> 
> ...



Great points made, I've read that before about the retail amateur investors having the worst performance of all in the stock markets. Also the point about Sean Quinn's disastrous foray into derivatives of Anglo Irish bank has never been properly analysed with many Irish investors also losing hundreds of thousands individually. We would rather take the moral high ground about the "big bad banks" rather than our own dumb decisions and why we as individuals got it so wrong. Actually the whole financial crash apart from "the big bad banks" narrative has never been looked at too closely. I think Ireland as a society is too influenced by "what the neighbours think and do",  the guy down the pub holds more sway than some "financial advisor"


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## Gordon Gekko (13 May 2018)

Fella said:


> Well I'm a DIY investor and I don't chop and change I can't speak for all the others.



Have you considered that you might not be an “average investor”?


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## Duke of Marmalade (13 May 2018)

Gordon Gekko said:


> No.
> 
> Because the DIY investor doesn’t buy the tracker and forget about it.
> 
> ...


I've been thinking about that Dalbar methodology.  It seems highly defective.  For a 30 year comparison they are  either using 30 separate years in which case they are really only tapping the costs leakage.  To attempt to assess the bad timing impact they would need to treat the aggregate of mutual funds as a single investor.  Then using the schedule of cashflows work out the implied 30 year growth rate.  They don't seem to be doing that but even that would be highly suspect for the timing of cashflows would be highly tilted towards the back end by inflation so that the apparent bad timing would not be because of bad behaviour but because of this effect.

What gets me is that I suspect that these very suspect analyses by Dalbar and Vanguard et al are wheeled out by financial advisors to blind their clients with pseudo science.


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## Marc (13 May 2018)

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## Fella (13 May 2018)

Gordon Gekko said:


> Have you considered that you might not be an “average investor”?



When i read “averages” in anything it’s generally fake news , averages suck at telling the true story they are too skewed by the people who lost everything. 

If you take a retail investor who doesn’t have a lot of cash , he isn’t going to go to an advisor or financial planner but he also doesn’t want 4% a year steady growth on his 1000€ he has invested , you read this kinda stuff all the time , people dabbling in stock market throw in a few hundred or a few thousand hoping to get rich quick . I’ve seen people myself buying bank shares when they dropped on advice from others , ask them where the money is now ? gone they took it out they don’t care about cgt or whatever and it’s not worth the while to go to a planner  . How much are they skewing figures ? hugely i would say . 

the average person investing 6 figures of there own money is as well read as advisors imo , and advisors will add very little value .


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## Duke of Marmalade (14 May 2018)

_Marc_ I am sure you do give a professional service.  But I suggest that in your claim that the bulk of that service comes from "behavioural coaching"  you are doing yourself a disservice.

Thanks for the link to the Kitces' criticism of Dalbar. The above comments by me on Dalbar were original but I am rather chuffed that from this criticism and on further Googles I am spot on.  Dalbar is a sham.  The importance of bad timing by punters is way overstated and indeed may not exist at all.

 by Edessus, Tsui, Fabbri and Peacock makes many of my points.  They concede that there may have been bad timing by the punters but that this was not because they behaved badly but simply because the baby boomer savings flow was more tilted towards the flat second half of the 20 year period from 1992.

They also refer to Kitces' observation that a regular investor over the period would have been outperformed by the actual investor experience, thus suggesting actual investor experience was better at timing the markets than simply blindly investing the same amount every year.

 from Professor Pfau is even more damning, almost shocking.  The previous report did not question the Dalbar methodology, only the interpretation of the results.  Pfau points out a gross error in the actual methodology and asserts that the right approach is to calculate Internal Rate of Return (IRR) - I fully agree.  Harvey, the CEO of Dalbar hit back.  His response is vitriolic and really not credible, for example he denies that his report is targeted at financial advisers even though he charges them €1,000 a pop.  But crucially he does not address Pfau's criticism of the methodology.  Instead he argues that IRR is not the only method for identifying bad timing - sorry but it is.

The following quote is right out of my book:



			
				Pfau said:
			
		

> If mutual fund investors (which includes many professional investors) are underperforming the market so dramatically, then who exactly is on the other side of these trades to outperform by so much?  This remains an unsolved mystery.


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## Steven Barrett (14 May 2018)

I would argue that behavioural coaching adds a lot more than 2% or 3% to someone's wealth but not by just telling them to stay in the market when things are going crazy. 

It's about making people think about what they want to achieve in life, what is the big picture and what needs to be done to achieve that. It is about people understanding that unless they are lucky, big plans and goals won't happen by accident and they have to work on achieving them over time. That means saving money now so they can really enjoy it later. Helping people discover what they really love doing means that it is easier for them not to spend money on things that bring them little/ fleeting joy so they can spend it on things that bring them real happiness. Good advice also shows them the effect that their spending will have on their future and how they will have to continue to work so they have the salary to maintain their lifestyle. 

Staying in an investment is the easy bit, it's getting people to change their spending habits that is the difficult thing. Do that and the added value is multiples of 3%. 


Steven
www.bluewaterfp.ie


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## Duke of Marmalade (14 May 2018)

I am unaware of the syllabus for the current QFA and other professional advisor examinations.  Ìs "behavioural coaching"  a major element?


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## Gordon Gekko (14 May 2018)

Duke of Marmalade said:


> I am unaware of the syllabus for the current QFA and other professional advisor examinations.  Ìs "behavioural coaching"  a major element?



Let’s call a spade a spade...the QFA is a yellow-pack qualification. A series of multiple choice exams and a “planning for dummies” finale. If your advisor is proud to a QFA, run a mile because he’s probably wearing a shiny suit and out to flog you product.


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## Duke of Marmalade (14 May 2018)

SBarrett said:


> I would argue that behavioural coaching adds a lot more than 2% or 3% to someone's wealth but not by just telling them to stay in the market when things are going crazy.
> 
> It's about making people think about what they want to achieve in life, what is the big picture and what needs to be done to achieve that. It is about people understanding that unless they are lucky, big plans and goals won't happen by accident and they have to work on achieving them over time. That means saving money now so they can really enjoy it later. Helping people discover what they really love doing means that it is easier for them not to spend money on things that bring them little/ fleeting joy so they can spend it on things that bring them real happiness. Good advice also shows them the effect that their spending will have on their future and how they will have to continue to work so they have the salary to maintain their lifestyle.
> 
> ...


Ahh!  The Eddie Hobbs silver bullet - give up the fags  The Vanguard report cited by _Marc _did not actually reference this aspect of behavioural coaching.  It majored on the fact that punters make big timing mistakes.  This then led to _Gekko's _reference to Dalbar who have made this claim their mantra. Further digging shows this claim to be essentially bogus.


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## Colm Fagan (14 May 2018)

This thread is fascinating.

I have long believed that the job of a financial adviser is very difficult.  The discussion reinforces that belief.

Despite having long experience of investing and a good track record, I want to run a mile if any of my family or friends ask me for investment advice.  The best I can do is tell them what I’m doing, pointing out the associated risks.  After hearing the risks, the vast majority tend to stick with Prize Bonds, so I agree with many of the contributors that the key value added by a financial adviser is “behavioural coaching”.

A high level of investment in real assets is advisable for long-term investors of all ages.  In developing proposals for a new approach to drawdown on DC pensions, which I presented to the Society of Actuaries, the IAPF, and the Institute of Pensions Management earlier this year, I gave considerable thought to what steps could be taken to persuade members of DC schemes to commit more to higher-risk / higher-return real assets.  I concluded that the vast majority of financial advisers *exacerbate* clients’ natural risk aversion rather than alleviate it.

A study by a Working Party of the Society of Actuaries in Ireland, which reported in November 2015, tends to support my conclusion.  It found that over 40% of insured ARF’s were 100% in cash.  This is a scandalously high percentage.  The vast majority of those investors were presumably advised by financial advisers, but as one contributor to this thread noted, there are many shades of “financial adviser”.

The reasons of risk aversion on the part of advisers can be explained in part by behavioural psychology.  To quote from the Nobel Prize-winning behavioural psychologist, Daniel Kahmeman:  “..decision makers who expect to have their decisions scrutinised with hindsight are driven to bureaucratic solutions – and to an extreme reluctance to take risks.”  Financial advisers are in the front line of people who can expect to have their decisions scrutinised with hindsight.  In the same book (“Thinking, Fast and Slow”) Kahneman said:  “Hindsight is especially unkind to decision makers who act as agents for others – physicians, financial advisers, ….  We are prone to blame decision makers for good decisions that worked out badly and to give them too little credit for successful moves that appear obvious only after the fact.”  Financial advisers will recognise the truth of this last statement.

In presenting my new approach, I said that I could readily understand an adviser’s reluctance to advise clients to put their money into equities when the odds were shorter than 2-1 that they would lose money in the first month.  (I derived those odds by analysing monthly market movements over the last 32 years).  I also added:  “Some would say it is the adviser’s job to educate clients to accept the volatility that is part and parcel of investing in riskier assets.  I don't agree.  Do you really expect an 80-year-old, with no experience of the stock market, to accept with equanimity the type of volatility we have seen on some of the earlier slides?” (The “earlier slides” noted that there were 8 occasions over the last 32 years when market values fell by more than 8% in a month, in one of which they fell by over 20%).

Other aspects of the adviser’s involvement in the client’s decision-making process reinforce my belief that they are more likely to exacerbate rather than alleviate the problems of low returns.   For example,
advisers (and investment managers) have a bias for action.  It helps to convince themselves (and their clients) that they’re doing something to justify their fees/ commission.  It’s exactly the wrong recipe.  Experience shows that sloth pays.  For example, studies have found that dead people are among the most successful investors: no-one is advising them to chop and change their portfolios.  A contributor on AAM (Sarenco) recently alerted us to a fascinating study on a so-called Sloth Fund, which has kept the same holdings for the last 80 years and which has outperformed the S&P500.


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## Bob2018 (14 May 2018)

Duke of Marmalade said:


> Ahh!  The Eddie Hobbs silver bullet - give up the fags  The Vanguard report cited by _Marc _did not actually reference this aspect of behavioural coaching.  It majored on the fact that punters make big timing mistakes.  This then led to _Gekko's _reference to Dalbar who have made this claim their mantra. Further digging shows this claim to be essentially bogus.



I with _Marmalade_ on this one. Hard to argue with Pfau's analysis.


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## joe sod (14 May 2018)

Colm Fagan said:


> Financial advisers are in the front line of people who can expect to have their decisions scrutinised with hindsight. In the same book (“Thinking, Fast and Slow”) Kahneman said: “Hindsight is especially unkind to decision makers who act as agents for others – physicians, financial advisers, …. We are prone to blame decision makers for good decisions that worked out badly and to give them too little credit for successful moves that appear obvious only after the fact.” Financial advisers will recognise the truth of this last statement.



good points , probably also an extension of the modern phenomenon of people believing in junk science and not getting children vaccinated and distrusting qualified doctors.


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## Duke of Marmalade (15 May 2018)

Colm, agree with much of what you say and I for one regret not following your tips in the Sunday Times - too late now!

The fascinating sideshow is this Dalbar thing.  His methodology seems seriously flawed and as Pfau et al point out his interpretation is at best a serious overstatement of the effects of bad behaviour (buying at the top and selling at the bottom) on behalf of punters.

Nonetheless, I do remember from my days in the unit linked retail sphere that sales always boomed in bull markets and sank in bear markets.  Encashments were probably fairly stable but in aggregate it definitely seemed to me that the collective retail investor bought high and sold low.  And that was every bit as true of the broker sector, so those who espoused _Marc's _passion for behavioural coaching were definitely a minority cult.

But that leaves us with Pfau's conundrum.  If the collective retail sector systematically buys high and sells low some sector must be picking up the windfall.  I don't think it's the likes of your good self who doesn't claim to be able to time the markets.  I don't think it's the pension funds whose investment strategy is dictated by funding requirements.  In fact I don't think it is any sector managed by professional investment managers.  By definition it is not your sloth funds - they don't buy or sell at all?

So what sector is systematically selling high and buying low?  The above argument suggests it is some category of private individuals, not a collection of whizz kids calling the markets, but some sector whose psyche means they pick up the windfall passively - almost by accident. 

One such sector that I can think of are those who are actually given shares and never buy them.  Two major classes here - inheritances and company incentive schemes like share options.  These are clearly systematic sellers by definition but sellers at the highs of markets?  Yes maybe.  Somebody given a dollop of share options will be tempted to sell when markets are a good bit higher than when granted and will tend to wait till they perceive that to be the case.  Inheritances may be the same.

However, I can think of no sector which naturally increases its buying when the collective retail punter is a net seller.


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## Colm Fagan (15 May 2018)

Duke

I agree with you on Dalbar.  In the course of my research last year for the pension drawdown proposals, I wanted to find out how much private investors lost by buying high and selling low.  I tried Dalbar, but decided against using their results as I couldn't square them with other sources.  I don't have your analytical skills or perseverance, so just left it.  

I also agree that the "buy high, sell low" phenomenon is driven to a large extent by brokers/ advisers.  We both remember the infamous Tony Taylor full page ad (in the Sunday Tribune, I think) on the Sunday before Black Monday in 1987, exhorting people to buy into equities,  and boasting how much their clients had gained in the last year,  9 months or whatever.  The market fell by over 20% in the next two days.  

As I mentioned in my post, brokers (of all types, including stockbrokers) believe they have to earn their crust by telling people to do something, to buy, or sell, or whatever.  That's a guaranteed recipe for under-performance.  I'm also reliably informed that the commission structures of some insurance companies' ARF offerings are designed to encourage churning after 5 years.  I don't know if it's true.  I'm sure some of our contributors will confirm.  

Interesting question:  who wins if retail mutual fund investors are losing?  I can think of a few possible answers.  One is simply leakage in the form of fees and charges (and stamp duty, etc.) by brokers, custodians, etc.  As someone who deals in shares directly rather than through funds, I see the range of charges that are levied, including bid/offer spreads for the stocks themselves.  They do mount up.  Another candidate is private "family" portfolios.  I believe that there are quite a number of players in this market who keep a low profile and don't advertise their performance.  It could be a case of "If you can, do it; if you can't, sell your services as an investment manager."   Speaking personally, I have a  good track record over a number of years and have occasionally thought of selling my services to others, but any time the idea has crossed my mind, I've dismissed it within a couple of minutes.  It would impose massive constraints; there is a massive regulatory overhead and you can only charge a trivial amount for providing the service.  I reckon I can do far better by gearing up my personal portfolio.   I would think that the really good investment people have much the same attitude.


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## Colm Fagan (15 May 2018)

Duke
As a PS, I don't have much time for Pfau, having read some of his stuff.  Sometime, I'll get round to a proper critique of it.


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## Duke of Marmalade (15 May 2018)

There is no doubt that retail punters lose big time to costs and this makes up the lion's share of the Dalbar "gap" I would say, though Dalbar do not themselves try and split out the costs gap from the bad behaviour gap.  Maybe the answer to the conundrum is that collective retail investors simply induce a windfall plus for all other sectors with no particular sector having a systematic claim.

Colm, Pfau is a Professor, in the same league as David McWilliams, how can you speak so disparagingly of him

He claims that Dalbar would calculate the 20 year yield on, say, level cash flows as follows.  Let's say 1 p.a. for 20 years grows to 30 then that is a profit of 10.  Dalbar divide 10 by the 20 invested to get a 50% return which they then convert to an annualized return.  Now that is sheer nonsense but the surprising thing is that Mr Dalbar in his tirade of a response did not deny the accusation.  The problem is that Dalbar do not tell us just how their methodology works.


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## Bob2018 (15 May 2018)

I am not an expert in finance but I have found Pfau's site extremely interesting and only wish a similar site existed in Ireland. Thanks for the reference, Duke. For the retail customer, my feeling is that Dalbar is dangerous but I also think promoting the idea in any way that retail customers can beat the market with a small portfolio of shares is quite dangerous also. As I say, this is just my layman's view.


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## Steven Barrett (15 May 2018)

Colm Fagan said:


> I'm also reliably informed that the commission structures of some insurance companies' ARF offerings are designed to encourage churning after 5 years.  I don't know if it's true.  I'm sure some of our contributors will confirm.



A lot of the single premium contracts (pension, ARF or investment) contracts with insurance companies all have early exit penalties in the first 5 years as they are offering allocations over 100%. Whether an advisor transfers to another provider after that period depends on the advisor. A policy holder can also transfer to another provider themselves and get the extra allocation themselves. 

The Central Bank are all over this, getting lists of contracts that have transferred out from providers. looking where they are going to. They are particularly interested in seeing the justification from moving a policy out of a contract that was early exit penalty free into a new contract that now has another 5 years early exit penalties. 

It would be far simpler if allocation rates were just done away with and the penalties, massive commissions etc. 



Steven
www.bluewaterfp.ie


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## Bob2018 (15 May 2018)

SBarrett said:


> A policy holder can also transfer to another provider themselves and get the extra allocation themselves.



Hi Steven. Can you explain more what this means please? For example, if I need to buy an ARF are you saying that I can go to any of the insurance companies and that they will give me details of their various pricing options and so on? The reason I ask is because I was told before that I needed to go through a broker to place money with an insurance company. Thanks in advance for any clarifications.


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## Steven Barrett (16 May 2018)

Bob2018 said:


> Hi Steven. Can you explain more what this means please? For example, if I need to buy an ARF are you saying that I can go to any of the insurance companies and that they will give me details of their various pricing options and so on? The reason I ask is because I was told before that I needed to go through a broker to place money with an insurance company. Thanks in advance for any clarifications.



Yes, insurance companies all offer their products through an agent. If you go directly to the insurance company, they get one of their direct sales team to deal with you. They are tied agents of the company and will set up the product for you. They get a commission for this payment. 

But how the allocation rate works, you have €500,000 in an ARF, there may be 3 different charging structures available (some companies have 8 different charging structures!)


Allocation 101%, AMC 0.5%
Allocation 102.5%, AMC 0.75%
Allocation 104.5%, AMC 1%
In the 3rd case, that is €22,500 in additional funds. There is no reason in the world that an advisor should be paid that much money for the advice in implementing an ARF, even with financial planning, investment strategy, behavioural coaching. The majority of that €22,500 should be invested back into the clients ARF and they should get the benefit of it. They could agree a fee with their agent and have the full amount paid into their policy (doesn't make sense from a tax point of view as a fee would be paid from their earned income while a portion of the enhanced allocation is paid by the insurance company). 


Steven
www.bluewaterfp.ie


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## Bob2018 (16 May 2018)

Thanks Steven. So one can't go directly to the company and get full whack - you need to go through an agent of some description.


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## Duke of Marmalade (17 May 2018)

I see Donald Trump's secret of investment is out - he invests a lot in mutual funds.


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## Steven Barrett (18 May 2018)

Bob2018 said:


> Thanks Steven. So one can't go directly to the company and get full whack - you need to go through an agent of some description.



No, you can't. Insurance companies are built around the broker model so they won't cut them out of the loop. Also, most people need advice on financial products, which can be very complex. We are also heavily regulated, so there is a lot of paperwork to be completed in order to implement any financial product. It is not the insurance companies role to provide this to clients. 

You can always negotiate a decent slice of the extra allocation from an advisor but don't expect the whole pie AND the cherry on top 

Steven
www.bluewaterfp.ie


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## Bob2018 (18 May 2018)

Thanks Steven. You have just confirmed what I understood all along. The reason for the confusion is the way you worded what I quoted in post 44. Thanks again.


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## Steven Barrett (22 May 2018)

Bob2018 said:


> Thanks Steven. You have just confirmed what I understood all along. *The reason for the confusion is the way you worded what I quoted in post 44*. Thanks again.



Could you explain?


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## LoveTrees (4 Jun 2018)

The 2 times I decided to follow advice were times in which savings went down also because a crisis took place (2000, 2008).

So I decided to go on my own... So far so good and I am enjoying the freedom of not having to cope (for example) with the hidden fees that funds seem to have...


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## Marc (4 Jun 2018)

.


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## LoveTrees (4 Jun 2018)

Marc said:


> I think that’s missing the point



I am sorry, each time I dealt with an advisor there were hidden fees in their funds and I didn't like their excessive optimism in my 2 experiences...

Now if the same advisor has got access to the "Aladin" algorithm of Blackrock Investments I would start listening more carefully... Otherwise my experience just contradicts the report sorry...


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## Marc (5 Jun 2018)

.


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## Bob2018 (5 Jun 2018)

Marc

This is a reference to me and I don't like it. It's a bit much. I purposely did not reply previously to your "offer" but given your post, I feel compelled to reply. Your assumption for my reasons for not replying is wrong. Speaking personally and frankly, I find your communication style very confusing and it just does not do it for me.

For example, in this thread, the Duke of Marmalade and Colm Fagan clearly presented contrary arguments to your thesis which you have simply ignored. I find both these posters to be extremely intelligent and clear in the presentation of their ideas.

In my case, I simply set out what I meant by a fee only adviser - you have a different opinion which I don't agree with. That's fine but just don't dismiss my opinion as wrong. I think it's completely reasonable to wish to pay a fee for a professional service. Also, I really have no idea what "professional standards are at stake" means - it makes absolutely no sense to me. If I met a CFP and I found his capability to be poor and I meet another CFP and I find him to be good - it is clearly not the professional qualification that determines the quality or "standard" of the adviser.

I will give another example, there was post at the weekend about ARF investment strategy - at my age a subject close to my heart. Again I don't think you answered the real question that was asked - this can be compared with the poster called Sarenco. People may agree or disagree with what Sarenco said but at least it's clear what he is saying. I feel that apart again from not clearly answering the question at the heart of that thread, you also did not, in my opinion, answer Sarenco's point about how on an individual basis no one knows how long the ARF needs to last for.


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## LoveTrees (5 Jun 2018)

To Marc's defence: an advisor typically adds 3% value to the average saver... But that's just an average... People in this forum though are quite experienced and brave in my opinion so it's hard to sell the 3% value to them... And I have to say that in AAM I found an incredible source of knowledge for which I am very grateful...


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## Bob2018 (5 Jun 2018)

LoveTrees,

That's fair enough and I'm sure that Marc has many happy clients. I was simply explaining why I will not be one of them in response to what I perceived to be a provocative statement. To me, working with an advisor is about trust and connection. This is a personal view but I simply do not see how he can increase, as implied, my ARF return by 3% p.a. for a similar level of risk (trust) and I don't get his style (connection). That's probably all I should say on this.


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## Marc (5 Jun 2018)

.


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## Sarenco (5 Jun 2018)

Marc said:


> I'm writing a book


What will it cost us?


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