competent Financial Planners typically add around 3% a year

Nobody is talking about beating the market!

The aim should be to achieve decent results relative to the market.
 
Gordon Gekko said:
Nobody is talking about beating the market!

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

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

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"
 
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.
 
Gordon Gekko said:
Have you considered that you might not be an “average investor”?
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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 .
 
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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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
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 
I am unaware of the syllabus for the current QFA and other professional advisor examinations. Ìs "behavioural coaching" a major element?
 
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?
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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.
 
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.
 
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.
 

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