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Paul Merriman: 5 Ways Investors Are Just Plain Wrong
Most advisors are a waste of money. AUM based fee advisors make sense for a very small group of people who need comprehensive life planning where the income/earnings from total assets are large enough to make the fees small change and not eat into required gains. Foolish to do so for just portfolio management. Technology is completely disrupting the latter with companies like WealthFront, etc.
Flat-fee and one time fee advisors are fine for the kind of people Merriman puts up as strawmen but the value you get for one time consultation is very small. Best if done in connection with a big life event or planning need that requires a broad spectrum of life planning including taxes, children, trusts, etc.
Problem is this business is really not very viable for most advisors since they cannot scale and use large numbers to reduce fees, so either they charge a lot or do a superficial job. There isn't good enough technology to do whole life planning in a scalable fashion yet but will improve over the next couple of years that will completely disrupt the pricing model.. FP/FA business is under threat of extinction except as a niche.
These are comments in general. There are always exceptions in advisors and people who need them.
A couple of not-very-helpful observations (or, the usual). Those who most need the advice yield too little income to the advisor using an AUM approach to be attractive or can't afford to "pay up" as a percentage of assets to buy the advice if using fee only advisors. A few hundred dollars for "answers to a few questions" (that was the quote?) will seem pretty high to a lot of people, as if we know the right questions. I checked the website of a local advisor a couple of years ago, and it looked like I might have to pay $10K to start, and there would be ongoing consultations. This lady was rated as "the best in the state" by a now long-defunct finacial magazine. I think she did offer a lot of services, but geesh. Makes $2K sound reasonable, but I bet I'm getting mostly software generated advice with a few tweaks. I guess I'm from a different economy, but I think I should get a couple of days thoughtful help for that $$.
A number of fee-only RIA firms do pro-bono work, one-time consultations, 'check-up meetings', reduced or no fees for children of clients. Like some others in our area, our minimum fee is negotiable. So before people lambaste all advisors and planners, know that there a lot of us who actually work with folks who cannot afford our full-fee services. Not all clients needs high-touch services, but all clients deserves ethical, high-quality advice. There is a large national group of planners - Garrett Planning Network - that charges by the hour. They have carved out a niche with the middle-market, those who want advice but either don't have the assets to work with an AUM company, or don't have complicated planning issues that necessitate a four-to-five figure retainer fee.
The comments here are disturbing to me, but perhaps they reflect the experience of the people who made them? If so, that is too bad. But there are solutions for those who truly want and need advice.
Reply to @BobC: Hi Bob. I think the comments on this post come from people who probably have an understand personal finance, love to do it themselves and make it their hobby. What goes over their head is that they are unique. They make up probably less than 5% of the population.
Most of my friends and coworkers are just not interested in learning about different investments, portfolio construction, ect... It bores them. They know they have to save in a 401k and they religiously do so every pay check and they put their money into Target Date funds, the best invention ever made for the typical retirement saver. They only become aware that they need advise when it gets close to retirement, or in our work case, another down sizing. Then the talk at the break room table is, my adviser said this or my advisor said that.
In most cases, I think, people seek out financial advise. They wouldn't be seeking if there wasn't a need, a perceived benefit and piece of mind.
Years ago, I was one of those people who did not see the reason for an AUM advisor, although I thought it was wise to seek out hourly or occasional review from a fee only advisor. I managed my own investments, chose my own funds and etfs and thought I knew everything I am one of those people who genuinly enjoys researching and making it a part time hobby.
A year ago, after my spouse passed away, and I inherited a new portfolio of stocks, bonds, funds and etfs, I realized there was a lot more to it than just choosing good funds and etfs. Fortunately, I knew a good advisor over at ML whom I had known for years, and felt comfortable with. I was also unaware of some of the benefits that goes with paying for ongoing service. I have lowered expense ratios for many of my funds since I can buy institutional shares unavailable to me before, many times can buy a closed fund because of ML's overall relationship with the fund family, receive oversight of my holdings as to when to buy, sell or take profits. I also receive advice on tax related matters and positioning a portfolio to maximize return while limiting the downside risk. I still choose many of my own funds and stocks, but have been made aware of many others unknown to me before. I find it an equitable trade-off. Only one area that am displeased with, as Merrill Lynch is not a supermarket of funds, some funds I cannot buy through them. So far this has been more an annoyance more than a problem, since she finds alternatives that can be held there. I have told her if there was a fund I really wanted that I could not buy through them, I would reopen my TD Ameritrade account and buy through them. She is fine with that,
Thank you for all the time you have spent over the years ( I remember you from FA days), your advice and insights are always appreciated. Keep up the great work!
Another happy coincidence of postings. Only several days ago I posted on John Templeton’s 16 Rules for Investment Success. There is an amazingly tight correlation between Templeton’s affirmative rules and the 5 cautionary lessons learned summarized by Merriman in the referenced article.
In concise format, here are Templeton’s wisdom nuggets:
1. Invest for maximum total real (after-inflation) return 2. Invest – don’t trade or speculate 3. Remain flexible and open-minded about types of investments 4. Buy low 5. When buying stocks, search for bargains among quality stocks 6. Buy value, not market trends or the economic outlook 7. Diversify. In stocks and bonds, as in much else, there is safety in numbers 8. Do your homework or hire wise experts to help you 9. Aggressively monitor your investments 10. Don’t panic 11. Learn from your mistakes 12. Begin with a prayer 13. Outperforming the market is a difficult task 14. An investor who has all the answers doesn’t even understand all the questions 15. There’s no free lunch 16. Do not be too fearful or negative too often
As simple as these rules of engagement seem, they reflect a lifetime of successful practical experience absorbed by one of the investment worlds hugely recognized and praised practitioners. Paul Merriman’s negative lesson summary fits snuggly into Templeton’s accumulated positive wisdom.
Here are Merriman’s 5 nullifying guidelines contrasted against Templeton’s positive assertions.
1. Blindly following pundits. Templeton says: ” Do your homework or hire wise experts to help you”. 2. Focusing on recent performance. Templeton says: “Invest – don’t trade or speculate”. 3. Thinking mutual funds are risk free. Templeton says: “There’s no free lunch” and “Learn from your mistakes”. 4. Believing fund sellers will protect you. Templeton says: : Remain flexible and open-minded about types of investments”. 5. Thinking advisers are a waste of money Templeton says: :… hire wise experts to help you” and “An investor who has all the answers doesn’t even understand all the questions”.
In the spirit of that last Templeton quote, here is another of his memorable remarks: “If we become increasingly humble about how little we know, we may be more eager to search.”
Here are a couple of additional quotations that speak to the hazards of the investor classes’ overconfidence. From John Kenneth Galbraith “We have two classes of forecasters: Those who don’t know – and those who don’t know they don’t know”. From Henry Kaufman: “There are two kinds of people who lose money: those who know nothing and those who know everything”.
Unfortunately, it is my experience that the US is populated with folks, some very fortunate financially, who have a deficient financial understanding and/or are limited by innumeracy. I will not totally place blame on our educational system. These folks typically had opportunities to address these shortcomings but elected the easy and painless pathway. Mostly, we always have the freedom of choice.
It is for this cohort of folks that financial advisors provide a meaningful and productive service. Only a fool practices medicine on himself if he is a medical illiterate. Lucky outcomes might happen, but, overall it is a losing gamble.
Surely not all physicians or financial advisors are equally skilled. So, one must always choose wisely. Based on his years of informative and worthwhile contributions to the MFO and the Fund Alarm websites, I conclude that BobC is a trustworthy and highly skilful financial advisor who is highly flexible depending on his clients needs and fortunes. Congratulations to BobC for his distinguished work ethic.
Reply to @MJG: Ha! No shots, just compliments. Good to hear positive sides of the adviser business from you, BobC, slick and others. Perhaps there's hope after all.
As many of us can testify, you have been very generous in sharing your knowledge and experience absolutely gratis here and on FundAlarm. It's a good bet that you also do right by your clients.
Thank you for your contributions here, and a very good Christmas to you!
Comments
Like bandits, advisers gravitate toward people with money...to wealthy people that have little interest, time, or ability to manage their own money.
They are middlemen, inserting themselves between those with money and those that presumably make money, siphoning off their fees.
Best case, they have no skin in the game. Worst case, they exploit their clients. Either case, they charge too much.
Generally speaking, of course.
A. Charge and collect fees...on other people's investments.
Flat-fee and one time fee advisors are fine for the kind of people Merriman puts up as strawmen but the value you get for one time consultation is very small. Best if done in connection with a big life event or planning need that requires a broad spectrum of life planning including taxes, children, trusts, etc.
Problem is this business is really not very viable for most advisors since they cannot scale and use large numbers to reduce fees, so either they charge a lot or do a superficial job. There isn't good enough technology to do whole life planning in a scalable fashion yet but will improve over the next couple of years that will completely disrupt the pricing model.. FP/FA business is under threat of extinction except as a niche.
These are comments in general. There are always exceptions in advisors and people who need them.
I checked the website of a local advisor a couple of years ago, and it looked like I might have to pay $10K to start, and there would be ongoing consultations. This lady was rated as "the best in the state" by a now long-defunct finacial magazine. I think she did offer a lot of services, but geesh. Makes $2K sound reasonable, but I bet I'm getting mostly software generated advice with a few tweaks. I guess I'm from a different economy, but I think I should get a couple of days thoughtful help for that $$.
The comments here are disturbing to me, but perhaps they reflect the experience of the people who made them? If so, that is too bad. But there are solutions for those who truly want and need advice.
Most of my friends and coworkers are just not interested in learning about different investments, portfolio construction, ect... It bores them. They know they have to save in a 401k and they religiously do so every pay check and they put their money into Target Date funds, the best invention ever made for the typical retirement saver. They only become aware that they need advise when it gets close to retirement, or in our work case, another down sizing. Then the talk at the break room table is, my adviser said this or my advisor said that.
In most cases, I think, people seek out financial advise. They wouldn't be seeking if there wasn't a need, a perceived benefit and piece of mind.
Years ago, I was one of those people who did not see the reason for an AUM advisor, although I thought it was wise to seek out hourly or occasional review from a fee only advisor. I managed my own investments, chose my own funds and etfs and thought I knew everything
A year ago, after my spouse passed away, and I inherited a new portfolio of stocks, bonds, funds and etfs, I realized there was a lot more to it than just choosing good funds and etfs. Fortunately, I knew a good advisor over at ML whom I had known for years, and felt comfortable with. I was also unaware of some of the benefits that goes with paying for ongoing service. I have lowered expense ratios for many of my funds since I can buy institutional shares unavailable to me before, many times can buy a closed fund because of ML's overall relationship with the fund family, receive oversight of my holdings as to when to buy, sell or take profits. I also receive advice on tax related matters and positioning a portfolio to maximize return while limiting the downside risk. I still choose many of my own funds and stocks, but have been made aware of many others unknown to me before. I find it an equitable trade-off. Only one area that am displeased with, as Merrill Lynch is not a supermarket of funds, some funds I cannot buy through them. So far this has been more an annoyance more than a problem, since she finds alternatives that can be held there. I have told her if there was a fund I really wanted that I could not buy through them, I would reopen my TD Ameritrade account and buy through them. She is fine with that,
Thank you for all the time you have spent over the years ( I remember you from FA days), your advice and insights are always appreciated. Keep up the great work!
Another happy coincidence of postings. Only several days ago I posted on John Templeton’s 16 Rules for Investment Success. There is an amazingly tight correlation between Templeton’s affirmative rules and the 5 cautionary lessons learned summarized by Merriman in the referenced article.
In concise format, here are Templeton’s wisdom nuggets:
1. Invest for maximum total real (after-inflation) return
2. Invest – don’t trade or speculate
3. Remain flexible and open-minded about types of investments
4. Buy low
5. When buying stocks, search for bargains among quality stocks
6. Buy value, not market trends or the economic outlook
7. Diversify. In stocks and bonds, as in much else, there is safety in numbers
8. Do your homework or hire wise experts to help you
9. Aggressively monitor your investments
10. Don’t panic
11. Learn from your mistakes
12. Begin with a prayer
13. Outperforming the market is a difficult task
14. An investor who has all the answers doesn’t even understand all the questions
15. There’s no free lunch
16. Do not be too fearful or negative too often
As simple as these rules of engagement seem, they reflect a lifetime of successful practical experience absorbed by one of the investment worlds hugely recognized and praised practitioners. Paul Merriman’s negative lesson summary fits snuggly into Templeton’s accumulated positive wisdom.
Here are Merriman’s 5 nullifying guidelines contrasted against Templeton’s positive assertions.
1. Blindly following pundits. Templeton says: ” Do your homework or hire wise experts to help you”.
2. Focusing on recent performance. Templeton says: “Invest – don’t trade or speculate”.
3. Thinking mutual funds are risk free. Templeton says: “There’s no free lunch” and “Learn from your mistakes”.
4. Believing fund sellers will protect you. Templeton says: : Remain flexible and open-minded about types of investments”.
5. Thinking advisers are a waste of money Templeton says: :… hire wise experts to help you” and “An investor who has all the answers doesn’t even understand all the questions”.
In the spirit of that last Templeton quote, here is another of his memorable remarks: “If we become increasingly humble about how little we know, we may be more eager to search.”
Here are a couple of additional quotations that speak to the hazards of the investor classes’ overconfidence. From John Kenneth Galbraith “We have two classes of forecasters: Those who don’t know – and those who don’t know they don’t know”. From Henry Kaufman: “There are two kinds of people who lose money: those who know nothing and those who know everything”.
Unfortunately, it is my experience that the US is populated with folks, some very fortunate financially, who have a deficient financial understanding and/or are limited by innumeracy. I will not totally place blame on our educational system. These folks typically had opportunities to address these shortcomings but elected the easy and painless pathway. Mostly, we always have the freedom of choice.
It is for this cohort of folks that financial advisors provide a meaningful and productive service. Only a fool practices medicine on himself if he is a medical illiterate. Lucky outcomes might happen, but, overall it is a losing gamble.
Surely not all physicians or financial advisors are equally skilled. So, one must always choose wisely. Based on his years of informative and worthwhile contributions to the MFO and the Fund Alarm websites, I conclude that BobC is a trustworthy and highly skilful financial advisor who is highly flexible depending on his clients needs and fortunes. Congratulations to BobC for his distinguished work ethic.
Okay Guys, let me have your best shots.
Merry Christmas.
Merry Christmas to you also.
Thank you for your contributions here, and a very good Christmas to you!
Regards-
oj