# Why pay for advice?



## Marc (16 Feb 2011)

We have had a few calls recently from askaboutmoney users with questions around the common theme of why should they pay a fee for advice. 

This is a potentially huge question which i hope will promote a healthy debate.

In summary some points to consider before dismissing the benefits of paying a fee for advice:

An adviser has to have professional indemnity insurance. Therefore if they give advice which turns out to be negligent or incompetent you as a client of that adviser are protected by that insurance policy.

Advice provided by a regulated adviser is covered by both the investor compensation scheme and the ombudsman service.

Many products on sale in ireland cost the same if you use an adviser as if you approach the company directly. If your adviser rebates some or all of their commission then the cost can be lower using an adviser.

Some advisers have access to unique products or services which are not generally available to the retail investor. An example would be institutional class investment funds which are not offered directly to the public.

For example in the last 12 months the I shares msci world index ETF has increased by 23.82% to close of business on 16th feb 2011. The etf has a low Total Expense Ratio (TER) 0.5%pa

The institutional class global core equity fund we recommend has increased by 27.05% over the same period net of the 0.54% TER.

The lesson here is that the lowest cost fund isn't always the best. Equally we are able to justify charging an annual advice fee where we are clearly adding value that is greater than the cost of our fee. 

Equally for investors who are able to take slightly more risk a global small and value fund has appreciated by 32.63% over the same 12 months and net of fund management charges. 

Since risk and expected return are related helping investors to work out what kind of a risk return trade off they wish to take is a huge value add that a competent adviser can bring to the investment process.

Understanding investor biases is another area where a good adviser can help investors. The field of behavioural finance has highlighted a number of biases that cause investors on average to make bad decisions examples such as overconfidence, regret avoidance familiarity bias, loss aversion and mental accounting are all examples of biases which have been observed. 

In the USA dalbar Inc have studied the performance of an average investor compared to simply buying the s&p 500 over 20 year periods and consistently find that investors can underperfom the market by up to 5%pa. On average investors chase performance and end up buying high and selling low.

A good adviser can ensure that investors remain disciplined and capture more of the Market return that is there for the taking rather than being excessively influenced by short term factors or the media.

By paying a fee for advice you free yourself from the risk of product bias that can occur when your adviser receives a commission payment from a product provider. Commissions are an inducement to sell a product, the greater the commission the greater the inducement. Wheras a fee-only adviser works on behalf of their client and has no incentive to recommend one course of action over another and simply offers the most appropriate recommendation for that client. Although a commission-based adviser must offer advice on products which are "suitable" but they do not have to operate in a fiduciary capacity. They do not have to do what is in the best interests of their client but rather simply ensure that the product they recommend is suitable. A tracker bond may well be a suitable investment for a client, but if they have a debt might it not be more appropriate to use capital to repay that debt rather than invest it? A commission based adviser who recommends a client repay debt is simply not getting paid at all. 

A good adviser is more than just a product salesman. A financial planner can help with gaining clarity around your financial goals and working with a team of expert professionals can solve problems of taxation, insurance, retirement provision, estate planning and even charitable giving. 

When looking to employ a true wealth manager look for the designation certified financial planner (CFP) and also someone who operates on a fee basis and who offers a true wealth management service such as I have described and you should find the fee charged is worth every cent. 

As John Ruskin said "it's unwise to pay too much, but it's worse to pay too little"


Finally to quote Red Adair "if you think it's expensive to hire a professional, try hiring an amature"

(source of performance data bloomberg 16/2/11)


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## 149oaks (17 Feb 2011)

Very good post Marc. 1 very relevant area not covered is what actually are the fees i.e. the range one might expect to pay. I expect there may be different options but I'm sure you can give similiar detail to the thread.
Thanks


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## ballyb100 (19 Feb 2011)

Good post marc. I agree with 149oaks above regarding fees. What would a typical charge be?  It is also not that easy to get a list of independent fee based advisors. Such a list would be helpful. One rarely sees testimonies from satisfied customers. Of course it occurs to me that most people on this site are more interested in managing their own investments.
Overall though a thought provoking post and a topic well worth raising


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## Marc (20 Feb 2011)

A very good question guys and not that easy to answer. 

Our short answer is that our fees are typically negative. Unless we can add substantial value to a client's financial affairs we will help them to find a firm that can.

Sometimes our fees are literally negative as in the case of commission paid on bank deposits. We are currently paid .35% commission on bank deposits and we offset this against our fees on behalf of our clients. 

If we consider an investment portfolio we charge .85%pa. This is considerably less than a discretionary management service in ireland. Each month we publish the performance of our strategic portfolios here [broken link removed]

We backtested these portfolios over the last 40 years and compared to the available options for the diy retail investor we would have added at least 1.5%pa typically for less risk than the alternatives after deduction of advisory fees.


That said we do not provide our service based on market performance over which we have no control.
A comprehensive wealth management service includes investment planning relationship management and advanced planning such as tax and estate planning. Since we cannot add substantial value to someone who does not require a comprehensive wealth management service, the subject of fees is rarely a concern for our clients.

I accept the point that some people on askaboutmoney may wish to go it alone and for simple commodity purchases like a mortgage or life assurance the services of a qualified, experienced and regulated financial planner would be excessive. 

However when it comes to the "big rocks" in your life like planning for retirement or investing a significant lump sum then not paying for competent advice is foolish. 

We work with a select group of financial advisers who are working to move their business away from commission based transactions to a fee based wealth management service.

The minimum investment through these advisers can be as low as €50,000 and would provide access to portfolios of institutional class index funds such as in the link above.

Examples would include 
[broken link removed]

John Traynor QFA FLIA in Dublin 
Ross Curran in Galway 
Simon Thompson


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## ringledman (20 Feb 2011)

My view from the UK is that the financial advisory industry has for too long put it's own interests before its clients. 

Trailing commission can never put the client's interests before the advisor's. This is shown in the UK by numerous cases of the advisor selling the same old funds that pay him/her the most. 

Likewise in the UK FA's hardly ever propsed to their client's to buy investment trusts (closed end funds) over open ended unit funds, despite investment trust's lower fees, independent boards, abilility to not have to sell stock during a market panic, etc. 

Clearly investment trusts are better suited for the long term investor by FA's over here would never sell them as they got zero commission off them! 

Fortunately the Financial Service Authority will be banning trailing commission from 2013 after which FA's will need to find a new model of real independence which can only be good over the long term.

The other issue I see with many FA's is that they often like to peddle yesterday's overpriced asset class. There doesn't seem to be much independent thought about asset allocation and which classes are overvalued and undervalued. They perhaps worry about going away from the crowd and being contrarian, much rather sell what everyone else is selling despite any notion that it may be a crowded and overpriced asset class.

I remember starting a pension in 2006 and my company advisor saying to go 75% into commercial property as it was 'safe' despite my view of it being overpriced and that I wanted to be much more allocated to equities was in his eyes was 'high risk', despite my age of 27 at the time. 

Luckily I didn't take his advise, but he clearly had no clue about the yield cycle and the fact that commercial property yielding 3-4% represented a market top for this asset class and that its price could only go one way. 

Few financial advisors that I have met take a historical view of value and understand the business cycle against the asset valuation.

What I want is a financial advisor who understands asset allocation and the long term returns that one can expect from both overvalued asset classes and undervalued asset classes. 

Someone who doesn't believe wholeheartedly in the efficient market hypothesis or that it is ok to have negative relative returns because everyone else is in the same boat! 

The type of FA I would want is someone in the mould of Jeremy Grantham, Marc Faber, John Mauldin. People who can set up your asset allocation based upon undervalued asset classes. 

I dont believe in diversifying into all asset classes simply because it is diversification. Diversification is good but diversify across undervalued asset classes don't just buy one cheap asset class and then match against an overvalued asset class.

What you want is an advisor who says the likes of; bonds have been on a 29 year bull run you want to go light on government bonds and if you really want fixed income then go overweight on corporate or EM debt. Or; Japanese equities are now at 1980 valuations its a really hated asset class, may be good to go overweight. Or large cap defensives are now priced at historically low valuations, go overweight against the cyclicals that are on lofty P/Es and P/B. 

This is the type of advise I would look for. An advisor who looks at the long term view and truely understand the concepts of: valuation, regression to the mean, the history of bubbles, where we are in the secular trend, where we are in the cyclical trend, the net inflows and outflows, what asset classes are loved and unloved and advise me to buy more into the unloved sectors. 

I don't get this impression with the financial advisors I meet. Emerging markets were the hot selling funds last year despite stretched valuations in many EM countries. FAs and retail investors in general seem to like to sell and buy respectively yesterday's story. I am sure that few FA's were telling their clients to buy emerging markets following the 1998 Asian crisis or commodities when they hit 70 year lows back in 2000.


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## Marc (24 Feb 2011)

Some interesting points made by ringledman and as I have nearly 20 years experience in the UK I would agree with some of the criticisms of UK advisers.

This post shows that not all advisers ignore investment trusts 
http://www.askaboutmoney.com/showthread.php?t=148858

Although they are certainly not an investment panacea

I also agree that a value bias in an equity portfolio has a higher expected return but would argue that this is due to a risk factor (value stocks are more risky than growth stocks in much the same way that small companies are more risky than large companies)

But investors should not attempt a Market timing strategy


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## ringledman (24 Feb 2011)

Marc said:


> I also agree that a value bias in an equity portfolio has a higher expected return but would argue that this is due to a risk factor (value stocks are more risky than growth stocks in much the same way that small companies are more risky than large companies)


 
Marc I don't believe value stocks can ever be more risky than growth. 

I follow the James Montier view that risk decreases the less you pay for a stock. Once a stock is trading at a low price in relation to its value then risk is reduced. 

I can't see how a growth stock on a high multiple trading at nothing more than the promise that they will make more earnings and greater market share the next year can ever be less risky than a stock trading at perhaps half its P/E and offering the immediate return of capital in the form of a dividend yield. 

Growth stocks are risky because many firms are priced to perfection. One hickup in earnings and everyone drops the stock. Value has a margin of safety and the first point of investing is not to lose money. Granted there are some value traps on low P/Es and high dividends that are priced to go bust but generally not. 

There are some world class mega cap value plays out there now on decent yields and P/Es.

I believe that value stocks generally produce better returns than growth because the markets are inefficient and driven by herd mentality. Growth stocks are sexy and draw punters in. Value is dull, old school and often hated and out of fashion. Hence the lower pricing, better potential for returns and lower risk.


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## Marc (25 Feb 2011)

By that logic bank of Ireland and aib would be virtually risk less investments. 

No, it's to do with the cost of capital to the firm. Healthy companies are viewed by the Market as a safer investment and so investors accept a lower return. In order for investors to be indifferent between stocks unhealthy companies have to trade at a discount to reflect the higher risks.

Remember that risk is risk to capital not risk or poor relative performance.


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## Bronte (25 Feb 2011)

What is 'trailing' commission?


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## ringledman (25 Feb 2011)

Bronte said:


> What is 'trailing' commission?


 
The dubious practice of financial advisors earning fees off the asset manager for promoting the asset to the financial advisor's client. These fees can go on well into the future.

A huge conflict of interest. This practice is going to be banned in the UK from 2012 or it may be 2013 onwards. However evidence is now arising of some FA's now promoting to their client's those funds that will pay them the most well after the ban comes into force.


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## ringledman (25 Feb 2011)

Marc said:


> By that logic bank of Ireland and aib would be virtually risk less investments.
> 
> No, it's to do with the cost of capital to the firm. Healthy companies are viewed by the Market as a safer investment and so investors accept a lower return. In order for investors to be indifferent between stocks unhealthy companies have to trade at a discount to reflect the higher risks.
> 
> Remember that risk is risk to capital not risk or poor relative performance.


 
It's like me arguing that all growth stocks are totally flawed as during the tech boom of 1999-2000 many 'growth' stocks were trading on huge P/E multiples of 100+ and subsequently went bust.

The Irish banks were flawed investments from the point of view of lending to businesses and individuals to buy property yielding 2-3%, ie a multi decade high price for the properties concerned, following which the market had to crash. It's all to do with the business cycle, regression to the mean, lending out tens of multiples more than the capital in the banks concerned and possibly fraud. It has nothing to do with BoI or AIB being a 'value' stock or for that matter a 'growth' stock.

Likewise what do you mean by healthy? Is the growth stock Apple on a high multiple and offering no dividend yield 'safer' than a value stock such as Johnson and Johnson? Is J&J more likely to go bust simply because it's P/E and P/B is lower and it offer a dividend yield? Obviously no.

Value is less risky than growth. Please read page 57 onwards of 'Value Investing' by James Montier. Google Books Link - 
http://books.google.co.uk/books?id=...#v=onepage&q=montier value less risky&f=false

Markets are inefficient, value is less risky and produces better returns for the long term investor.


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## Marc (25 Feb 2011)

In selecting the common stock portfolio, do you advise careful study of and selectivity among different issues?


In general, no. I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. This was a rewarding activity, say, 40 years ago, when our textbook "Graham and Dodd" was first published; but the situation has changed a great deal since then. In the old days any well-trained security analyst could do a good professional job of selecting undervalued issues through detailed studies; but in the light of the enormous amount of research now being carried on, I doubt whether in most cases such extensive efforts will generate sufficiently superior selections to justify their cost. To that very limited extent I'm on the side of the "efficient market" school of thought now generally accepted by the professors.

Ben Graham in conversation with Charles Ellis just before his death


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## Jim2007 (26 Feb 2011)

ringledman said:


> I don't get this impression with the financial advisors I meet. Emerging markets were the hot selling funds last year despite stretched valuations in many EM countries. FAs and retail investors in general seem to like to sell and buy respectively yesterday's story. I am sure that few FA's were telling their clients to buy emerging markets following the 1998 Asian crisis or commodities when they hit 70 year lows back in 2000.



I'm of the opinion that most FAs would prefer to fail conventionally that succeed in an unconventional manner!  They worry about their indemnity insurance, about loosing the client and what not, in the end they take the safe root for them - tell the client to follow the crowd - that way at least the won't be sued!

I do believe that people can benefit from financial advice from time to time, but paying fees year in and year out is over kill.  And when it does come to seeking financial advise I think people benefit more from a broad financial review of their total situation undertaken by someone with nothing what so ever to sell, but their advice!

Jim.


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## Jim2007 (26 Feb 2011)

Marc said:


> In selecting the common stock portfolio, do you advise careful study of and selectivity among different issues?
> 
> 
> In general, no. I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. This was a rewarding activity, say, 40 years ago, when our textbook "Graham and Dodd" was first published; but the situation has changed a great deal since then. In the old days any well-trained security analyst could do a good professional job of selecting undervalued issues through detailed studies; but in the light of the enormous amount of research now being carried on, I doubt whether in most cases such extensive efforts will generate sufficiently superior selections to justify their cost. To that very limited extent I'm on the side of the "efficient market" school of thought now generally accepted by the professors.
> ...



Marc,

I think Graham is right when he speaks about of the techniques he promoted when running his own firm in the old days.  However most of the value investors I know these days follow more of what I'd call a "growth at a reasonable price" strategy and that a pure value strategy and that does produce very good results and a lower risk level that a pure growth strategy.

However this is a labour intensive activity and it is doubtful that many FAs could offer it at an attractive fee level to their clients.

Jim.


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## Marc (27 Feb 2011)

Jim 

I agree the scale of operation necessary to be able to effectively trade securities on numerous exchanges around the world is beyond the ability of most stockbrokers although they nearly all try none the less.

That is why we use a major institutional fund manager with specific expertise in both trading strategies and style investing with particular expertise in size and value investing.

Unique benefits such as stock lending revenue being paid to the nav of the fund rather than to the fund manager allows the investor to benefit from the additional income created. 

We are therefore able to deliver strategies which earn the Market rate of return after allowing for the cost of investment.


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## ringledman (27 Feb 2011)

Marc said:


> In selecting the common stock portfolio, do you advise careful study of and selectivity among different issues?
> 
> 
> In general, no. I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. This was a rewarding activity, say, 40 years ago, when our textbook "Graham and Dodd" was first published; but the situation has changed a great deal since then. In the old days any well-trained security analyst could do a good professional job of selecting undervalued issues through detailed studies; but in the light of the enormous amount of research now being carried on, I doubt whether in most cases such extensive efforts will generate sufficiently superior selections to justify their cost. To that very limited extent I'm on the side of the "efficient market" school of thought now generally accepted by the professors.
> ...


 
If the markets are efficient why don't we just buy trackers which charge 0.1% to 0.25% and not bother with a financial advisor at all?

I can invest in the UK, Europe, US, Asia Pacific, Japan and track the market for less than 0.25%. Rebalance every couple of years. 

Where does the advisor add value to justify an addition to these low charges?


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## ringledman (27 Feb 2011)

Buffett's view on the EMH:

_It may have some meaning to you if you’re still being taught efficient-market theory, which was standard procedure 25 years ago. But we’ve had a recent illustration of why the theory is misguided. In the past seven or eight or nine weeks, Berkshire has built up a position in auction-rate securities [bonds whose interest rates are periodically reset at auction...] of about $4 billion. And what we have seen there is really quite phenomenal. Every day we get bid lists. The fascinating thing is that on these bid lists, frequently the same credit will appear more than once._
_Here’s one from yesterday. We bid on this particular issue - this happens to be Citizens Insurance, which is a creature of the state of Florida. It was set up to take care of hurricane insurance, and it’s backed by premium taxes, and if they have a big hurricane and the fund becomes inadequate, they raise the premium taxes. There’s nothing wrong with the credit. So we bid on three different Citizens securities that day. We got one bid at an 11.33% interest rate. One that we didn’t buy went for 9.87%, and one went for 6.0%. It’s the same bond, the same time, the same dealer. And a big issue. This is not some little anomaly, as they like to say in academic circles every time they find something that disagrees with their theory._
_So wild things happen in the markets. And the markets have not gotten more rational over the years. They’ve become more followed. But when people panic, when fear takes over, or when greed takes over, people react just as irrationally as they have in the past._​


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## 149oaks (28 Feb 2011)

Guys are we going way off track here? In response to Marks 1st post I asked on Feb 17 "what actually are the fees i.e. the range one might expect to pay. I expect there may be different options but I'm sure you can give similiar detail to the thread".
This still hasn't been answered.


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## Jim2007 (28 Feb 2011)

Marc said:


> I agree the scale of operation necessary to be able to effectively trade securities on numerous exchanges around the world is beyond the ability of most stockbrokers although they nearly all try none the less.



I'm referring to the required effort for the advisor to a detailed analysis of the companies selected for a "growth at a reasonable price" strategy.  Most platforms offer sufficient access to markets to actually implement such a strategy.



Marc said:


> That is why we use a major institutional fund manager with specific expertise in both trading strategies and style investing with particular expertise in size and value investing.
> 
> Unique benefits such as stock lending revenue being paid to the nav of the fund rather than to the fund manager allows the investor to benefit from the additional income created.
> 
> We are therefore able to deliver strategies which earn the Market rate of return after allowing for the cost of investment.



So if I understand correctly, what you are saying is that for a fee you will advise clients on how to get the same return as that of a given benchmark, only after your fees???

Jim.


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## Jim2007 (28 Feb 2011)

149oaks said:


> Guys are we going way off track here? In response to Marks 1st post I asked on Feb 17 "what actually are the fees i.e. the range one might expect to pay. I expect there may be different options but I'm sure you can give similiar detail to the thread".
> This still hasn't been answered.



I think Marc's post of the 20th does in deed refer to some fee figures...

Jim.


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## Jim2007 (28 Feb 2011)

ringledman said:


> If the markets are efficient why don't we just buy trackers which charge 0.1% to 0.25% and not bother with a financial advisor at all?
> 
> I can invest in the UK, Europe, US, Asia Pacific, Japan and track the market for less than 0.25%. Rebalance every couple of years.
> 
> Where does the advisor add value to justify an addition to these low charges?



Assuming that you are disciplined and have a good understanding of asset allocation, I doubt you'd benefit from paying regular fees to a FA.  At the same time you may still find value in having a FA review your portfolio from time to time, as they might offer insights that you have missed out on...

I'd also suggest that the fact that you are on this board makes you different to most investors - your interested in the topic, most are not, they are happy to have someone else deal with that stuff, even if they could do it themselves.

Jim


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## pbyrne (7 Mar 2011)

*Fixed cost asset allocation review*

Hi Marc,



> Assuming that you are disciplined and have a good understanding of asset  allocation, I doubt you'd benefit from paying regular fees to a FA.  At  the same time you may still find value in having a FA review your  portfolio from time to time, as they might offer insights that you have  missed out on...



I am wondering whether you offer a service similar to what Jim2007 outlines or whether you know of any providers that do. 

I am looking to get a review done on a pension scheme and I am probably moving down the self-directed road. My plan at the moment is to buy a portfolio similar to [broken link removed]. 

I understand that there are many permutations of asset allocations - I am looking for something simple and low cost (I am a wannabe BogleHead) 

I'd like an advisor to confirm I am on the right or wrong track and possibly do some backtesting for me to confirm my thinking. 

pbyrne.


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## Marc (7 Mar 2011)

Hi 

Lots of interesting questions raised in your post. 

We don't really offer an ad hoc service where people can run ideas past us and then self direct their pensions. 

The reason for this is simple - it doesn't really work. 

The link you provide is a classic example of this. The article mentions dimensional funds which are not available directly to retail investors working without an adviser.

So the DIY investor trying to self direct their pension misses out on access to investment funds which are some of the very best in the world. 

Vanguard is another example of a good fund range which is outside of the reach of the DIY investor. 

These are classic examples of the real value that an adviser can add to the retirement planning process.

If you are interested in working with an adviser who can give you an asset allocation model like the merriman example but from a European perspective please feel free to send me a private message with your contact details and if we can't help I can put you in touch with several advisers who can provide this kind of service.

All the best


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## Jim2007 (7 Mar 2011)

Hi Marc,



Marc said:


> The link you provide is a classic example of this. The article mentions dimensional funds which are not available directly to retail investors working without an adviser.
> 
> So the DIY investor trying to self direct their pension misses out on access to investment funds which are some of the very best in the world.



I'm sorry I really don't accept this!  Seriously for a fee you are going to provide access to some "secret funds" that out perform the market!  What happened to all that efficient market theory you come out with........ 



Marc said:


> Vanguard is another example of a good fund range which is outside of the reach of the DIY investor.



Vanguard funds are not suitable for European investors period - I think we both know that!!!




Marc said:


> If you are interested in working with an adviser who can give you an asset allocation model like the merriman example but from a European perspective please feel free to send me a private message with your contact details and if we can't help I can put you in touch with several advisers who can provide this kind of service.



I expect that the OP is well capable of coming up with suitable European models and that was certainly not the kind of thing I was suggesting he pay for!

Jim.


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## Marc (8 Mar 2011)

Jim

You are entitled to your opinions but Vanguard manages 1.4 trillion US dollars and DFA 208 billion US dollars. 

The markets clearly disagree with you.

Both companies have a European UCITS range domiciled in Dublin. 

Please check your facts before posting on askaboutmoney again.
http://www.askaboutmoney.com/showthread.php?t=151983


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