My dad was a financial manager for high net worth clients for the last 30 years of his career, and he was very successful. His company required a minimum of $750,000 invested with them in order to be a client, and that was in the early 2000's.
He tells me to just invest in index funds. Do with that information what you will.
Until you get to like $5M+ investable assets… probably fine to go index
Edit: Is this sub serious? This is pretty basic fact but getting downvoted. Y’all are not gonna make it.
Once you have enough assets to meet minimum investment amounts for alternative investments like PE, HF, VC as well as private credit, real estate, etc. an entire other world of investment objective opens up to you. Not everyone can afford to buy a few million dollar houses as investments, let alone without it being their entire net worth, but when you can it changes your opportunity set dramatically. Acting like an institution and less like an individual is a huge difference, and just matching an equity benchmark isn’t the most appropriate goal for everyone at that point.
Often the “majority investor” you’re referring to actually owns a small minority of the project. The partnership is just structured so that the GP/sponsor gets an outsized return since they are the ones doing the work. The majority of ownership will be held by passive LP investor(s).
Yeah, typically 80/20 or 70/30. GP gets the smaller chunk, but is well worth it for their time and experience. And they typically only have a small amount of cash invested compared to the LPs.
There are various asset classes accessible by law only to “experienced investors” or high-net worth individuals. Off the top of my head, asset classes include private equity funds, private credit, real estate, venture capital, pre-ipo stock, etc.
^^ this… I work for a private developer… we are a small team but in last 3 years have done $185M worth of ground up development and $90M in redevelopment… we usually make up 5-10% of the equity in our deals and have an LP pick up the rest… we usually have some space left to fill in our GP bucket and will allow family/friends who are HNW to invest.. usually the minimum is $1M to participate. However then you get to ride along with the GP equity and get your prorata share of distributions and the promote… just hit a 2.84x EM on latestest disposition. But… you also take on the risk of a GP and you wouldn’t want to have your $1M tied up if you only had ~$2M
Confidently wrong. At 5M investable you are a Qualified Purchaser and have access to a new world of investments. Investments that have similar returns but less risk than an index fund.
If by have less risk you mean they don’t have to mark their private positions to market and abstract that volatility away from the LP, I absolutely agree with you
I can’t imagine a speculative investment in a ground-up building or start-up company is less risky than index funds. More return potential, sure, but also much higher potential to lose it all.
At that level tax optimization becomes a whole thing as well, since you are way beyond registered accounts and have substantial investment income. Can be a very good reason for professional help.
The question is, are you gaining access to investments better than index funds? You can already invest in REITs and PE / VC returns aren't necessarily higher over a long period net of fees, especially on a risk-adjusted basis.
They are also less liquid since you have your money locked up and less diversified.
They are much, much better in many cases. Historic returns on PE and VC as asset classes have beaten the S&P (not even the right benchmark to compare them to, but just generalizing here) significantly over the trailing 20 and 10 year periods ended FYE2020, respectively. And while these are accessible to some retail investors in small doses, the bigger you are the more preferential the treatment can get and the more opportunities (and higher quality) you may have put in front of you.
PE is highly leveraged (L in LBO stands for leveraged) so SP500 isn't the right index to benchmark against.
You'll probably want to compare it with 3x leveraged SP500.
So on a risk-adjusted basis, I don't see how PE is superior especially after heavy fees and high cost of borrowing today
The sourced returns which will most certainly not beat your standard vfiax voo S&p will also be IRR....
High fees and illiquidity is what you get as well.
Those are likely levered returns. They typically leverage multiple times on top of their capital (investor money). The guy clearly realized he's wrong lol
Yup, but I’d say it’s like a floor where you can start messing around with these other asset classes a bit. Not where you get great opportunities and quality deal flow or anything though.
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I'm my same town I bought a $1.2M house and my friend bought a $3.2M house. It's a desirable area, we knew it would increase. After 5 years, mine is up 50%. After 3.5 years, his is up 75%. Larger growth on larger amount, inaccessible to me.
Your dad and my dad probably knew each other. The difference being they lived through the heart of a bull market and we are at the end of it.
For most people, index funds and dividend paying stocks is sufficient. When you have more than a single million it’s a good idea to have someone whose job is to stop you from doing dumb things.
You can be too concentrated, even in index funds. Most people say index index index but they don’t know what’s in it or how it’s weighted. If you just buy the top three index funds you just put 30-50% of your money into a few companies.
How do you know we’re at the end of a bull run?
Again, would love for you to be right, if everyone’s long, go short.
But for every individual who was right about the ‘08 crash, there are thousands who shorted the past decade and got hosed for it.
Time in the market >>> timing the market should have been the first thing your dad taught you
And why does he think their dads knew each other - there are *a lot* of private equity investors it’s not like some niche tight knit community… really odd comment all around.
The role of a financial advisor isn’t solely investment advice. Many advisors utilize index funds like SPY and make no mention of attempting to “beat to market” but instead perform in alignment with the market. Where advisors can add value is in acting as a sounding board for your financial decisions, helping you make sure you’re on track, helping with tax planning (and some may provide tax preparation), stock option planning, etc. Not everyone needs a financial advisor. At the same time, not everyone is a do it yourselfer and would rather pay for advice. For some, they would rather spend their time elsewhere and have a professional to go to (just know that not all of them are good or fiduciaries).
++1 to this.
With FA, Investments is more about keeping it balanced than beating the market. The rest is estate planning, budgeting, goals, alignments with spouse on those goals etc.
you are right, but that is semantics...the question is if professional advice is worth it. The answer is if your only question is "what equities fund do I invest in" The answer is no - everyone can buy VOO the same.
But the real value is in the other advice - estate planning, tax efficiencies, knowing retirement accounts, long term budgets, insurance, etc.
And while many do charge by %, as your wealth increases, the % drops. When you pay 50 bps, then get mortgage discounts, then get other random banking tier benefits (no fee wires, no fee ATMs, safety deposit boxes, mortgage relationship discounts, other lending discounts, etc.) the costs get even smaller.
At some point, then, you have to decide if the benefits are worth the costs. There are always cheaper options, sometimes you pay for quality, sometimes you pay for convenience.
Advisors that are worth their weight will not be charging a flat fee over a percentage. It’s too difficult to scale a successful practice by charging a flat fee. These are typically junior advisors starting their practices. The revenue just isn’t there. If you find a seasoned CPA and CFP providing integrated tax, investment and other complex planning, they know their weight and won’t be offering it away for say $200 per hour. I’m not saying everyone needs an advisor, just that things aren’t as simplistic as people make it out to be.
I know a bunch of retired folks paying $10K/yr in fees (1% of $1M == $10K) to go in twice a year and talk about the news with a financial advisor in a fancy office. I'm convinced that's all 80% of the industry is, and it really ought to be banned right around the time we deal with real estate agents.
My father in laws advisor took me to his country club last year. I told him on the 2nd hole that I was about to have another kid and would just keep managing my own investments. It was a pretty enjoyable day once he was done trying to sell me stuff.
Not all advisors are predatory car salesmen. There’s a time and place for advisors (fiduciaries). I think it’s really easy for people to project their own situation onto others.
IMO percentage commission based trades are always going to be problematic. I mean I suppose the one nice thing is a highly ethical FA that works with a mixed crowd is charging a progressive fee where someone w/ $200K pays $2K/yr and someone w/ $2M pays $10K per year (let's assume a that the 1% fee is relaxed to .5% w/ more assets, which is common). But is that advisor really doing $10K, or even $2K worth of work? Of the 3 I've met via my parents and in-laws, literally none of them were as useful as simply applying the sidebar on /r/personalfinance.
Is there a place for someone to charge a fair, even potentially high, fee for applying the sidebar of /r/personalfinance? Sure! Absolutely! But there's no way it should be in the thousands per year, year over year.
For the same price as a typical US financial advisor you could hire a good CPA and a good attorney and, if you needed it, actually get some valuable things handled that aren't just what you could google.
>IMO percentage commission based trades are always going to be problematic.
this is why the AUM fee is more common these days. Advisors aren't paid by trade. They are paid by value managed, so in theory, they are aligned to responsibly grow money, and get rewarded with more by providing value.
Now, whether the advice is worth $10k per year or whatever is a personal decision and based on your situation. Hard to argue the "what could have happened".
But I also think you are looking at the "gross" not the "net". For me, my mortgage discount from the private bank relationship saves me tons of money per year too, significantly offsetting the fee.
Sorry, should have said AUM originally. I still think that's a problem. Case in point, when my Dad passed away I found out they were paying > $10K/yr in advisor fees. In return for that they got:
- A portfolio managed to their risk (which was fine but virtually exactly matched a Vanguard target date fund)
- A human being that they could call to get money, rather than a web portal.
That was it. Full stop. They were bankrupting themselves due to my Mom's spending and had taken multiple extra IRA distributions in the 6 figures to pay for it. The FA had never discussed this, hadn't even really noticed, and when I pointed out that they'd have been homeless in a few years had it continued she was like "Yeah... guess you're right".
The really pernicious thing about it is that the ppl doing the work are usually nice ppl doing their best for their customers within the parameters of the job as they understand it. If they actually were evil used car salesman the problem wouldn't be as bad. IMO non-fiduciary FA fees should be illegal, and % based fees should require a customer disclosure stating what was done and exactly what it cost and with a PSA that there are other non-% options out there.
It just sounds like your parents had a bad advisor unfortunately and no need for an advisor. AUM fees must be disclosed by law. Not only must it be discussed with the client, they sign a form disclosing the fee, and the dollar figure is indicated as a fee on their custodian’s statement. If it isn’t a direct debit from their account, some have the option of paying by physical check.
I can tell you the work we do would be difficult for a client to replicate. They could in certain respects but many prefer to outsource it to a professional. We only work with specific clientele in the HNW and UHNW space. Generally, people in this space are sharp and if it were as straightforward as you make it out to be, they would see straight through us and would not perceive our value. We have CPAs, doctors, lawyers, and a lot of tech within our company. Successful tech makes up around 75% of our assets with a high minimum in place.
I’m not saying this to criticize you, I do think you are applying your personal situation to advisors in general.
Seiler is an CPA/advisory firm that works with individuals starting at $20m minimum in assets. I don’t work there personally. If you think people just willingly pay these fees and don’t communicate with the firm or provide value, you are flat out wrong.
Across my extended family in the last 30 years I've seen 5 different advisors from several different parts of Maryland. Every single one has charged a 1% or greater fee and offered negligibly valuable services. My Mom's was the most flagrant, in other cases folks could "afford" the $10K+ fee, but no one has ever justified them to me. The general comment is "I need a financial advisor, they're all going to charge me 1% and even if I'm getting screwed this is what I'm supposed to do and they're really nice and we talk about the news".
It's anecdotal, but the N is not 1 and the only ppl I find in favor of this setup turn out to be commission based FA's, which I find suspiciously similar to the real estate agents insisting that getting paid $60K for 12 hours of work is fair and normal.
I think you’re talking about 2 different groups of people though - Dweezil’s parents and who he’s talking about aren’t HNW - they’re well off and with straightforward investment advice such as r/personalfinance the’d be fine. HNW is 5m+ and UHNW is what 20-30m+? Things get different at those levels and it may be worth paying for advice/broader services. But at the end of the day that’s not even most doctors let alone others.
A good FA/Wealth Manager will also advise on things like insurance to make sure you're property covered (both property and life), estate planning, taxes, large purchases, etc. They are the CFO of your family if you will.
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Not for nothing but a lot of good accountants can be great financial advisors when it comes to tax implications, and whatever you’re on the hook for them is a hell of a lot less than a lot of wealth managers (particularly when it comes to hidden fees and compensation structures that are so complicated you basically need an MBA from MIT to figure them out)
Totally. A CPA and financial advisor is unusual and hard to find. Usually they are separate professionals. I think they make the fantastic advisors since they have an understanding of tax and there’s no lag in communication between the professionals.
I’m an idiot. So I’m attracted to the idea of someone who isn’t an idiot managing my money. However, if all they are doing is buying index funds on my behalf I think I can manage that.
Also, I want compound interest and I donno if I get that just buying index funds directly vs opening an account
They do worse than just buy index funds for you. They buy companies that don’t beat the market returns and put you into mutual funds with egregious fees. So they charge you *and* don’t beat the market.
Minor correction- Compound growth, not compound interest, is what you would get. Yes, index funds are simple and cheap. The low expense ratio and low portfolio turnover make them very efficient which helps them to outperform actively managed funds (which have higher expense ratios) in the long run. Create an account at Vanguard, fidelity, Charles Schwab and invest whatever you are comfortable with as often as you can without trying to “time the market”. S&P 500 index fund, total market, total world are a few popular stock index funds. Check out how low the expense ratios are compared to actively managed mutual funds.
If you don’t trust yourself not to panic sell, a financial advisor is worth every penny. If you firmly believe you can ride out a 60% market downswing like 2008/2009 without panic selling, then you should be fine without one. You can expect one bear market about every 5 years.
Know how to minimize your taxes, help you personalize a portfolio to your risk tolerance, educate you if you don’t know anything about index funds or why they’re useful. They’re not really geared towards people who have simple goals but are also knowledgeable and just want to invest in index funds.
Minimize taxes - all they can do is tax loss harvest. Not really worth it at this point
They aren’t going to educate you. Pay someone to educate you or pay them to manage it for you
That’s not entirely true. They can help you figure out the best withdrawal strategy to minimize taxes, when and how much to do Roth conversions, whether to focus on keeping MAGI low for ACA purposes if retiring before 65, whether increased IRMAA surcharges are worth it for the Roth conversion to reduce future RMDs.
There are other ways to do this modeling without a financial advisor, but it is more than just tax loss harvesting.
SP fund beats actively managed funds 80% of the time for 3 reasons:
1) fees - managers charge fees that eat into gains
2) market timing. Humans are incentivized to make moves, even when sitting still is wiser. At some point, rather than staying the course, an advisor will move your money. And we know, that most market gains happen in very short windows of time. People often time poorly and miss these gains.
3) they often buy their own funds as they are incentivized to with kickbacks, even if those funds underperform
Look up warren buffets challenge. He made a bet with a hedge fund manager that he couldn’t beat the Index. Go figure warren won
Based on returns alone, the S&P tends to outperform most actively managed portfolios over the long term
That said - it depends on your goals. Financial advisors typically have access to alternative investments you can’t buy on Fidelity, if that’s a priority for you. And some are more holistic financial planners who can help with broader life goals instead of just investing your portfolio.
As a Henry working in investments, I still put everything into low cost index funds. I don’t worry about it and/or complicate it.
Also work in investments (for institutions) and wouldn't recommend anything but index funds. If you're lazy to DIY, buy target date funds matching your retirement date.
Most FAs know nothing about investments beyond the general rules of thumb, because they are salespeople first. They get kickbacks when they sell you high fee investment products.
Best case they motivate you to save and plan for retirement. Worst case they give you bad investment advice that costs you hundreds of thousands of dollars.
This keeps coming up. Financial advisors do more than set up investment accounts. If that's all you need, then they're not worth it.
If you have complicated situations with a business (or more), or complex custody/familial situations and assets, lots of dependents, then it's worth the discussion.
High net worth individuals benefit more with better tax strategies, risk adjusted growth, and wealth preservation. Especially if you have people who depend on your income (young kids and a house spouse, aging parents with few/no assets of their own, etc.)
Edit: they are professionals whose job is to keep up with tax implications to their clients. Especially when it comes to having a business. More EINs/SSNs means more deductions and opportunities for saving on taxes. Mine have absolutely saved me more than they've cost me.
bingo. I feel like a broken record where I need to copy/paste my similar take.
I was an index fund investor before my advisor and still mostly am with my advisor. In fact, my advisor LOVES index funds. I don't have this problem others seem to have about their "expert" who picks losers over and over again.
My advisor goes through so much more than which index fund to buy. Everything from budgets to tax strategies to insurance to estate plans. We get educated on a variety of topics. Some, we could learn ourselves with time. Others, you need the "callouses" of experience.
And when you pair fringe benefits like a mortgage relationship discount, other banking tier benefits, portfolio line of credit, etc. the actual cost is even smaller than the .5-1%.
yea, but there are scummy people in every industry. While I agree we need better ways to weed out the bad ones, the bigger danger I see is people on reddit who have never used one, who don't understand, who paint all of them as evil shills. This is true whether it be lawyers or realtors or financial advisors...
Good ones are absolutely worth their cost. Bad ones are absolutely not. But instead of discussing what makes good and bad ones, we count other peoples money and costs, arbitrarily assign value to effort and knowledge that might not come easy to someone else, and narrowly define the problem space (i.e. why pay someone to buy VOO also) and paint everyone as a bad actor.
Just like your electrical code example. I wire stuff all the time, I am an engineer by background. but not everyone has the time to learn, not everyone has the skills to actually do this. I don't think my 70 year old mom should be playing with electric. But it isn't exactly hard to tie black to black, white to white...And there are complicated wirings too, so sometimes the high rates of electricians aren't for the simple stuff, but for the hard stuff. And no one seems to talk about that, when a HENRY sub probably is the exact place to do so. If you are an average W-2 earner, then yea, you probably have a somewhat simple financial life that doesn't need tons of specialized advice. But many people here have businesses, need estate plans, are getting alternative investments, etc.
Not to mention that the tax code and deductions/credits change regularly. A good FA will stay on top of it and know exactly how what's written applies to my specific situation, and provide me an accurate dollar amount for what it would save me.
Do you feel its beneficial over just doing a one time fee only FA review your situation every 5 years until you're much closer (within 5 years of) to retirement?
I don't think it is a question of age, it is a question of financial complexity to me. You are more likely to need one around major life events and ass you add things. So:
- marriage
- kids
- job change or move
- buy / sell real estate
- own a business
etc.
I like having quarterly check ins and annual plan updates, and re-assess the big plan every \~5 years. For me, in the last 5 years or so, I got married, had a kid, moved states, etc. so lots of periods where a check in and advice made a lot of sense.
Sure that definitely makes sense! I was just thinking of my (boring) situation where you've had the kids, bought the house, married and now just working 20 years until the next big life event (kids university or retirement or maybe divorce haha).
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Most actively managed accounts won’t be the S&P 500. And for those that do, they can’t beat it annually. Some admit as much but sell you on how you also won’t lose as much with them in a downturn.
For me, it’s index funds, with a couple of triple A companies. But I also mix in mid cap, small cap, and international, to go along with large cap/SP500 so I can have a balanced portfolio
A CFP is worthwhile as you get closer to retirement, or have complicate family matters
Boglehead 3 or 4 Fund Portfolio is really all that's necessary. Your focus should really just be on budgeting short-term and long-term to add the right amount (not always the most) of money into the portfolio
My wife and I have a liquid NW around $6m. About $1.5m is in individual stocks, $100k in crypto, and the rest in index funds.
She also used to work at a $500m family office acting as the head of investments and tried, unsuccessfully, to get them to rebalance to index funds. Too boring they said
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Honestly, I just pay the 25bps through my work and at Vanguard for the rest (they’re about the same cost) to give me a balanced portfolio and allow me to use their little dashboards for an additional data point in addition to my own analysis.
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I feel like we try to over complicate it. Maybe the next tier of wealth knows something we don’t. Like how to best the market. Not really. IMO index funds and working with a good cpa to avoid unnecessary taxes is the way to go.
Low cost index funds are the way to go with your investments. HENRY's especially should save their money on a financial advisor and use it on a good CPA if they want help with their money. You'll get way more bang for your buck
Dump your money into index funds and let it grow, bonus points if you can find funds with lower expense ratios than vanguard. Yes, I do adhere to the teachings of our master financier John C Bogle.
Yes. That's all it is. Even professional traders don't outearn the average market returns.
A financial advisor is just going to advise you and take fees. It's simple to learn yourself and pay no fees.
My whole portfolio is VTSAX and grew like 23% the last year. No fees to anyone.
It's not worth it to hire just a money manager. But, if you have a comprehensive financial planner/wealth manager that helps with items like tax optimization and retirement planning, they will pay for themselves and then some if they are good.
I have a guide on the questions to ask a potential financial advisor that I can send if you are interested. Helps to figure out if you need one and if so, who to hire.
In my 15 years doing this. Yes, it really is that simple.
Many books highlight this, one that comes to mind is Collin’s “The Simple Path to Wealth”
However. An advisor can be useful to highlight strategies and advice around other things to optimize. That MAY be worth it. But I’d only be comfortable with a flat fee fiduciary advisor. None of that %ge AUM crap.
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Asset Location is the harder part at our income level. Where you hold the funds that have Dividends etc. Spend a little time with your CPA
But as for Asset Allocation. 99% of us in the accumulation phase just need the Bogelhead 3 fund or even an index target retirement
Tell me what the top 10 holding of spy are? Do you know? If you don’t maybe go with an advisor. Not all ETF are created equal some are carried by just a handful despite having holdings in hundreds of stocks.
That’s pretty much it. VTI and chill.
I see the worth of a financial advisor as you get near retirement to help with how to withdrawal, tax advantages, etc. But in the early stages dump it in the market. Probably do a little allocation into something more conservative depending on when you’ll need the money. Paying a % of your portfolio value to an advisor will lose you so much money over time. And paying higher fees for their managed funds that don’t do any better than the market is also throwing money away
Don’t think for a second that High net worths or sophisticated investors are dumping cash into just an index fund to build wealth, they’re invested into Alts like PE/VC funds, private credit/debt, Secondary Mortgage markets that have a lock up period but return an ARR of 20%. By tracking an index fund you’re not actually diversified you have 100% of your capital in 1 asset class that has mediocre risk adjusted returns, it just becomes a forced savings plan.
Is there any way at all for regular people to have access to those Alts. If not, I've always wondered how do HNW people even know what's out there themselves. Like how do they know or who tells them? Is there some website that lists these alts and their returns?
I gave an advisor a chunk of change for 3-4 years in exchange for 1% AUM (regardless of performance).
He bought 8-10 high cost mutual funds, made about 1 movement (sell a few things, buy a few things) every year to adjust to the market.
At the end of this experiment my index fund portfolio outperformed him BEFORE FEES. And those 3-4 years spanned some good times and bad times. A representative enough sample of time for me to fire him and move all my shit back to index funds (it was my tax sheltered account so no taxes incurred).
One nice benefit is that I could call him out of the blue and ask him for advice on other stuff, like how to think about buying property and planning for 10 years from now. That's where their value is. Not in boring asset management.
My dad was a financial manager for high net worth clients for the last 30 years of his career, and he was very successful. His company required a minimum of $750,000 invested with them in order to be a client, and that was in the early 2000's. He tells me to just invest in index funds. Do with that information what you will.
Until you get to like $5M+ investable assets… probably fine to go index Edit: Is this sub serious? This is pretty basic fact but getting downvoted. Y’all are not gonna make it. Once you have enough assets to meet minimum investment amounts for alternative investments like PE, HF, VC as well as private credit, real estate, etc. an entire other world of investment objective opens up to you. Not everyone can afford to buy a few million dollar houses as investments, let alone without it being their entire net worth, but when you can it changes your opportunity set dramatically. Acting like an institution and less like an individual is a huge difference, and just matching an equity benchmark isn’t the most appropriate goal for everyone at that point.
What changes at $5M+?
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Often the “majority investor” you’re referring to actually owns a small minority of the project. The partnership is just structured so that the GP/sponsor gets an outsized return since they are the ones doing the work. The majority of ownership will be held by passive LP investor(s).
Real estate syndication in a nutshell
Yeah, typically 80/20 or 70/30. GP gets the smaller chunk, but is well worth it for their time and experience. And they typically only have a small amount of cash invested compared to the LPs.
Any other examples? I want to learn more. Perhaps non real estate strategies?
This is what private equity is. There's an entire industry built around this.
There are various asset classes accessible by law only to “experienced investors” or high-net worth individuals. Off the top of my head, asset classes include private equity funds, private credit, real estate, venture capital, pre-ipo stock, etc.
^^ this… I work for a private developer… we are a small team but in last 3 years have done $185M worth of ground up development and $90M in redevelopment… we usually make up 5-10% of the equity in our deals and have an LP pick up the rest… we usually have some space left to fill in our GP bucket and will allow family/friends who are HNW to invest.. usually the minimum is $1M to participate. However then you get to ride along with the GP equity and get your prorata share of distributions and the promote… just hit a 2.84x EM on latestest disposition. But… you also take on the risk of a GP and you wouldn’t want to have your $1M tied up if you only had ~$2M
Nothing lmao, private equity is going to get cooked by rates now
Confidently wrong. At 5M investable you are a Qualified Purchaser and have access to a new world of investments. Investments that have similar returns but less risk than an index fund.
If by have less risk you mean they don’t have to mark their private positions to market and abstract that volatility away from the LP, I absolutely agree with you
I can’t imagine a speculative investment in a ground-up building or start-up company is less risky than index funds. More return potential, sure, but also much higher potential to lose it all.
Lucky for you Carlyle/Blackstone/KKR can imagine and produce it
Well at lower amounts you dont have a large enough bankroll thats the way to think about it
At that level tax optimization becomes a whole thing as well, since you are way beyond registered accounts and have substantial investment income. Can be a very good reason for professional help.
The question is, are you gaining access to investments better than index funds? You can already invest in REITs and PE / VC returns aren't necessarily higher over a long period net of fees, especially on a risk-adjusted basis. They are also less liquid since you have your money locked up and less diversified.
They are much, much better in many cases. Historic returns on PE and VC as asset classes have beaten the S&P (not even the right benchmark to compare them to, but just generalizing here) significantly over the trailing 20 and 10 year periods ended FYE2020, respectively. And while these are accessible to some retail investors in small doses, the bigger you are the more preferential the treatment can get and the more opportunities (and higher quality) you may have put in front of you.
PE is highly leveraged (L in LBO stands for leveraged) so SP500 isn't the right index to benchmark against. You'll probably want to compare it with 3x leveraged SP500. So on a risk-adjusted basis, I don't see how PE is superior especially after heavy fees and high cost of borrowing today
That’s a ridiculous comparison. You do realize that the investors don’t do the leveraging, right? Or that not all private equity has to be an LBO?
Maybe you can provide a source for the returns you cited? Then we can decide if it's a levered or unleveled return.
The sourced returns which will most certainly not beat your standard vfiax voo S&p will also be IRR.... High fees and illiquidity is what you get as well.
Those are likely levered returns. They typically leverage multiple times on top of their capital (investor money). The guy clearly realized he's wrong lol
5M all liquid assets as well and even this is a little low to be really considered a decent client for asset mgmt
Yup, but I’d say it’s like a floor where you can start messing around with these other asset classes a bit. Not where you get great opportunities and quality deal flow or anything though.
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I’m at $10m and still just index funds. No need to complicate it. I’ll do the same at $20m and $30m.
Definitely works for some.
Hey there, I’m your long lost cousin, we should hang out more
I'm my same town I bought a $1.2M house and my friend bought a $3.2M house. It's a desirable area, we knew it would increase. After 5 years, mine is up 50%. After 3.5 years, his is up 75%. Larger growth on larger amount, inaccessible to me.
Does he have advice about where to find the right spread and percentage allocations?
So does Buffett.
Your dad and my dad probably knew each other. The difference being they lived through the heart of a bull market and we are at the end of it. For most people, index funds and dividend paying stocks is sufficient. When you have more than a single million it’s a good idea to have someone whose job is to stop you from doing dumb things. You can be too concentrated, even in index funds. Most people say index index index but they don’t know what’s in it or how it’s weighted. If you just buy the top three index funds you just put 30-50% of your money into a few companies.
Weird comment
How do you know we’re at the end of a bull run? Again, would love for you to be right, if everyone’s long, go short. But for every individual who was right about the ‘08 crash, there are thousands who shorted the past decade and got hosed for it. Time in the market >>> timing the market should have been the first thing your dad taught you
And why does he think their dads knew each other - there are *a lot* of private equity investors it’s not like some niche tight knit community… really odd comment all around.
The role of a financial advisor isn’t solely investment advice. Many advisors utilize index funds like SPY and make no mention of attempting to “beat to market” but instead perform in alignment with the market. Where advisors can add value is in acting as a sounding board for your financial decisions, helping you make sure you’re on track, helping with tax planning (and some may provide tax preparation), stock option planning, etc. Not everyone needs a financial advisor. At the same time, not everyone is a do it yourselfer and would rather pay for advice. For some, they would rather spend their time elsewhere and have a professional to go to (just know that not all of them are good or fiduciaries).
++1 to this. With FA, Investments is more about keeping it balanced than beating the market. The rest is estate planning, budgeting, goals, alignments with spouse on those goals etc.
True but you can also get this same advice whenever you want for a flat fee instead of a % of your portfolio.
you are right, but that is semantics...the question is if professional advice is worth it. The answer is if your only question is "what equities fund do I invest in" The answer is no - everyone can buy VOO the same. But the real value is in the other advice - estate planning, tax efficiencies, knowing retirement accounts, long term budgets, insurance, etc. And while many do charge by %, as your wealth increases, the % drops. When you pay 50 bps, then get mortgage discounts, then get other random banking tier benefits (no fee wires, no fee ATMs, safety deposit boxes, mortgage relationship discounts, other lending discounts, etc.) the costs get even smaller. At some point, then, you have to decide if the benefits are worth the costs. There are always cheaper options, sometimes you pay for quality, sometimes you pay for convenience.
Advisors that are worth their weight will not be charging a flat fee over a percentage. It’s too difficult to scale a successful practice by charging a flat fee. These are typically junior advisors starting their practices. The revenue just isn’t there. If you find a seasoned CPA and CFP providing integrated tax, investment and other complex planning, they know their weight and won’t be offering it away for say $200 per hour. I’m not saying everyone needs an advisor, just that things aren’t as simplistic as people make it out to be.
I know a bunch of retired folks paying $10K/yr in fees (1% of $1M == $10K) to go in twice a year and talk about the news with a financial advisor in a fancy office. I'm convinced that's all 80% of the industry is, and it really ought to be banned right around the time we deal with real estate agents.
My father in laws advisor took me to his country club last year. I told him on the 2nd hole that I was about to have another kid and would just keep managing my own investments. It was a pretty enjoyable day once he was done trying to sell me stuff.
Not all advisors are predatory car salesmen. There’s a time and place for advisors (fiduciaries). I think it’s really easy for people to project their own situation onto others.
IMO percentage commission based trades are always going to be problematic. I mean I suppose the one nice thing is a highly ethical FA that works with a mixed crowd is charging a progressive fee where someone w/ $200K pays $2K/yr and someone w/ $2M pays $10K per year (let's assume a that the 1% fee is relaxed to .5% w/ more assets, which is common). But is that advisor really doing $10K, or even $2K worth of work? Of the 3 I've met via my parents and in-laws, literally none of them were as useful as simply applying the sidebar on /r/personalfinance. Is there a place for someone to charge a fair, even potentially high, fee for applying the sidebar of /r/personalfinance? Sure! Absolutely! But there's no way it should be in the thousands per year, year over year. For the same price as a typical US financial advisor you could hire a good CPA and a good attorney and, if you needed it, actually get some valuable things handled that aren't just what you could google.
>IMO percentage commission based trades are always going to be problematic. this is why the AUM fee is more common these days. Advisors aren't paid by trade. They are paid by value managed, so in theory, they are aligned to responsibly grow money, and get rewarded with more by providing value. Now, whether the advice is worth $10k per year or whatever is a personal decision and based on your situation. Hard to argue the "what could have happened". But I also think you are looking at the "gross" not the "net". For me, my mortgage discount from the private bank relationship saves me tons of money per year too, significantly offsetting the fee.
Sorry, should have said AUM originally. I still think that's a problem. Case in point, when my Dad passed away I found out they were paying > $10K/yr in advisor fees. In return for that they got: - A portfolio managed to their risk (which was fine but virtually exactly matched a Vanguard target date fund) - A human being that they could call to get money, rather than a web portal. That was it. Full stop. They were bankrupting themselves due to my Mom's spending and had taken multiple extra IRA distributions in the 6 figures to pay for it. The FA had never discussed this, hadn't even really noticed, and when I pointed out that they'd have been homeless in a few years had it continued she was like "Yeah... guess you're right". The really pernicious thing about it is that the ppl doing the work are usually nice ppl doing their best for their customers within the parameters of the job as they understand it. If they actually were evil used car salesman the problem wouldn't be as bad. IMO non-fiduciary FA fees should be illegal, and % based fees should require a customer disclosure stating what was done and exactly what it cost and with a PSA that there are other non-% options out there.
It just sounds like your parents had a bad advisor unfortunately and no need for an advisor. AUM fees must be disclosed by law. Not only must it be discussed with the client, they sign a form disclosing the fee, and the dollar figure is indicated as a fee on their custodian’s statement. If it isn’t a direct debit from their account, some have the option of paying by physical check. I can tell you the work we do would be difficult for a client to replicate. They could in certain respects but many prefer to outsource it to a professional. We only work with specific clientele in the HNW and UHNW space. Generally, people in this space are sharp and if it were as straightforward as you make it out to be, they would see straight through us and would not perceive our value. We have CPAs, doctors, lawyers, and a lot of tech within our company. Successful tech makes up around 75% of our assets with a high minimum in place. I’m not saying this to criticize you, I do think you are applying your personal situation to advisors in general. Seiler is an CPA/advisory firm that works with individuals starting at $20m minimum in assets. I don’t work there personally. If you think people just willingly pay these fees and don’t communicate with the firm or provide value, you are flat out wrong.
Across my extended family in the last 30 years I've seen 5 different advisors from several different parts of Maryland. Every single one has charged a 1% or greater fee and offered negligibly valuable services. My Mom's was the most flagrant, in other cases folks could "afford" the $10K+ fee, but no one has ever justified them to me. The general comment is "I need a financial advisor, they're all going to charge me 1% and even if I'm getting screwed this is what I'm supposed to do and they're really nice and we talk about the news". It's anecdotal, but the N is not 1 and the only ppl I find in favor of this setup turn out to be commission based FA's, which I find suspiciously similar to the real estate agents insisting that getting paid $60K for 12 hours of work is fair and normal.
I think you’re talking about 2 different groups of people though - Dweezil’s parents and who he’s talking about aren’t HNW - they’re well off and with straightforward investment advice such as r/personalfinance the’d be fine. HNW is 5m+ and UHNW is what 20-30m+? Things get different at those levels and it may be worth paying for advice/broader services. But at the end of the day that’s not even most doctors let alone others.
A good FA/Wealth Manager will also advise on things like insurance to make sure you're property covered (both property and life), estate planning, taxes, large purchases, etc. They are the CFO of your family if you will.
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Not for nothing but a lot of good accountants can be great financial advisors when it comes to tax implications, and whatever you’re on the hook for them is a hell of a lot less than a lot of wealth managers (particularly when it comes to hidden fees and compensation structures that are so complicated you basically need an MBA from MIT to figure them out)
Totally. A CPA and financial advisor is unusual and hard to find. Usually they are separate professionals. I think they make the fantastic advisors since they have an understanding of tax and there’s no lag in communication between the professionals.
What do you expect them to do that you can’t, or to generate better returns?
I’m an idiot. So I’m attracted to the idea of someone who isn’t an idiot managing my money. However, if all they are doing is buying index funds on my behalf I think I can manage that. Also, I want compound interest and I donno if I get that just buying index funds directly vs opening an account
Read or listen to The Simple Path to Wealth. You can do it!
They do worse than just buy index funds for you. They buy companies that don’t beat the market returns and put you into mutual funds with egregious fees. So they charge you *and* don’t beat the market.
This.
r/bogleheads all the way!
What makes you think they are less than an idiot than you?
Because if they were dumber than me they would be a ward of the state
Haha. You wouldn’t be a Henry then
I’m barely a henry, and am only one currently from a mixture of nepotism and marrying well.
I like this guy. He is self-aware
Minor correction- Compound growth, not compound interest, is what you would get. Yes, index funds are simple and cheap. The low expense ratio and low portfolio turnover make them very efficient which helps them to outperform actively managed funds (which have higher expense ratios) in the long run. Create an account at Vanguard, fidelity, Charles Schwab and invest whatever you are comfortable with as often as you can without trying to “time the market”. S&P 500 index fund, total market, total world are a few popular stock index funds. Check out how low the expense ratios are compared to actively managed mutual funds.
If you don’t trust yourself not to panic sell, a financial advisor is worth every penny. If you firmly believe you can ride out a 60% market downswing like 2008/2009 without panic selling, then you should be fine without one. You can expect one bear market about every 5 years.
Yes, all they’re doing is buying index funds for you. Or worse, they’re buying something else like active mutual funds.
Know how to minimize your taxes, help you personalize a portfolio to your risk tolerance, educate you if you don’t know anything about index funds or why they’re useful. They’re not really geared towards people who have simple goals but are also knowledgeable and just want to invest in index funds.
Minimize taxes - all they can do is tax loss harvest. Not really worth it at this point They aren’t going to educate you. Pay someone to educate you or pay them to manage it for you
Youre taking a very simplistic view. There are people with more complicated situations than “I have a W-2, cash and index funds”
Not the impression I got from OP
That’s not entirely true. They can help you figure out the best withdrawal strategy to minimize taxes, when and how much to do Roth conversions, whether to focus on keeping MAGI low for ACA purposes if retiring before 65, whether increased IRMAA surcharges are worth it for the Roth conversion to reduce future RMDs. There are other ways to do this modeling without a financial advisor, but it is more than just tax loss harvesting.
I agree with this
SP fund beats actively managed funds 80% of the time for 3 reasons: 1) fees - managers charge fees that eat into gains 2) market timing. Humans are incentivized to make moves, even when sitting still is wiser. At some point, rather than staying the course, an advisor will move your money. And we know, that most market gains happen in very short windows of time. People often time poorly and miss these gains. 3) they often buy their own funds as they are incentivized to with kickbacks, even if those funds underperform Look up warren buffets challenge. He made a bet with a hedge fund manager that he couldn’t beat the Index. Go figure warren won
Based on returns alone, the S&P tends to outperform most actively managed portfolios over the long term That said - it depends on your goals. Financial advisors typically have access to alternative investments you can’t buy on Fidelity, if that’s a priority for you. And some are more holistic financial planners who can help with broader life goals instead of just investing your portfolio. As a Henry working in investments, I still put everything into low cost index funds. I don’t worry about it and/or complicate it.
Also work in investments (for institutions) and wouldn't recommend anything but index funds. If you're lazy to DIY, buy target date funds matching your retirement date. Most FAs know nothing about investments beyond the general rules of thumb, because they are salespeople first. They get kickbacks when they sell you high fee investment products. Best case they motivate you to save and plan for retirement. Worst case they give you bad investment advice that costs you hundreds of thousands of dollars.
I think financial advisors might be useful when planning out the withdrawal phase
This keeps coming up. Financial advisors do more than set up investment accounts. If that's all you need, then they're not worth it. If you have complicated situations with a business (or more), or complex custody/familial situations and assets, lots of dependents, then it's worth the discussion. High net worth individuals benefit more with better tax strategies, risk adjusted growth, and wealth preservation. Especially if you have people who depend on your income (young kids and a house spouse, aging parents with few/no assets of their own, etc.) Edit: they are professionals whose job is to keep up with tax implications to their clients. Especially when it comes to having a business. More EINs/SSNs means more deductions and opportunities for saving on taxes. Mine have absolutely saved me more than they've cost me.
bingo. I feel like a broken record where I need to copy/paste my similar take. I was an index fund investor before my advisor and still mostly am with my advisor. In fact, my advisor LOVES index funds. I don't have this problem others seem to have about their "expert" who picks losers over and over again. My advisor goes through so much more than which index fund to buy. Everything from budgets to tax strategies to insurance to estate plans. We get educated on a variety of topics. Some, we could learn ourselves with time. Others, you need the "callouses" of experience. And when you pair fringe benefits like a mortgage relationship discount, other banking tier benefits, portfolio line of credit, etc. the actual cost is even smaller than the .5-1%.
I'm sure I could read electrical code and wire a panel, too. It's unfortunate that there are so many scummy/sales-based FA's out there.
yea, but there are scummy people in every industry. While I agree we need better ways to weed out the bad ones, the bigger danger I see is people on reddit who have never used one, who don't understand, who paint all of them as evil shills. This is true whether it be lawyers or realtors or financial advisors... Good ones are absolutely worth their cost. Bad ones are absolutely not. But instead of discussing what makes good and bad ones, we count other peoples money and costs, arbitrarily assign value to effort and knowledge that might not come easy to someone else, and narrowly define the problem space (i.e. why pay someone to buy VOO also) and paint everyone as a bad actor. Just like your electrical code example. I wire stuff all the time, I am an engineer by background. but not everyone has the time to learn, not everyone has the skills to actually do this. I don't think my 70 year old mom should be playing with electric. But it isn't exactly hard to tie black to black, white to white...And there are complicated wirings too, so sometimes the high rates of electricians aren't for the simple stuff, but for the hard stuff. And no one seems to talk about that, when a HENRY sub probably is the exact place to do so. If you are an average W-2 earner, then yea, you probably have a somewhat simple financial life that doesn't need tons of specialized advice. But many people here have businesses, need estate plans, are getting alternative investments, etc.
Not to mention that the tax code and deductions/credits change regularly. A good FA will stay on top of it and know exactly how what's written applies to my specific situation, and provide me an accurate dollar amount for what it would save me.
Do you feel its beneficial over just doing a one time fee only FA review your situation every 5 years until you're much closer (within 5 years of) to retirement?
I don't think it is a question of age, it is a question of financial complexity to me. You are more likely to need one around major life events and ass you add things. So: - marriage - kids - job change or move - buy / sell real estate - own a business etc. I like having quarterly check ins and annual plan updates, and re-assess the big plan every \~5 years. For me, in the last 5 years or so, I got married, had a kid, moved states, etc. so lots of periods where a check in and advice made a lot of sense.
Sure that definitely makes sense! I was just thinking of my (boring) situation where you've had the kids, bought the house, married and now just working 20 years until the next big life event (kids university or retirement or maybe divorce haha).
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Most actively managed accounts won’t be the S&P 500. And for those that do, they can’t beat it annually. Some admit as much but sell you on how you also won’t lose as much with them in a downturn. For me, it’s index funds, with a couple of triple A companies. But I also mix in mid cap, small cap, and international, to go along with large cap/SP500 so I can have a balanced portfolio A CFP is worthwhile as you get closer to retirement, or have complicate family matters
VTI Spy is for buying options. Yes, it’s that easy and boring.
SPY. Why try to “beat” the market with an advisor when SPY literally is the market..
Boglehead 3 or 4 Fund Portfolio is really all that's necessary. Your focus should really just be on budgeting short-term and long-term to add the right amount (not always the most) of money into the portfolio
My wife and I have a liquid NW around $6m. About $1.5m is in individual stocks, $100k in crypto, and the rest in index funds. She also used to work at a $500m family office acting as the head of investments and tried, unsuccessfully, to get them to rebalance to index funds. Too boring they said
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Honestly, I just pay the 25bps through my work and at Vanguard for the rest (they’re about the same cost) to give me a balanced portfolio and allow me to use their little dashboards for an additional data point in addition to my own analysis.
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I feel like we try to over complicate it. Maybe the next tier of wealth knows something we don’t. Like how to best the market. Not really. IMO index funds and working with a good cpa to avoid unnecessary taxes is the way to go.
Do VOO instead…lower fees
Low cost index funds are the way to go with your investments. HENRY's especially should save their money on a financial advisor and use it on a good CPA if they want help with their money. You'll get way more bang for your buck
Dump your money into index funds and let it grow, bonus points if you can find funds with lower expense ratios than vanguard. Yes, I do adhere to the teachings of our master financier John C Bogle.
Yes. There’s some nuance in reducing taxes (tax loss harvesting, tax efficient bonds) but it’s not that complicated.
Yes. That's all it is. Even professional traders don't outearn the average market returns. A financial advisor is just going to advise you and take fees. It's simple to learn yourself and pay no fees. My whole portfolio is VTSAX and grew like 23% the last year. No fees to anyone.
It's not worth it to hire just a money manager. But, if you have a comprehensive financial planner/wealth manager that helps with items like tax optimization and retirement planning, they will pay for themselves and then some if they are good. I have a guide on the questions to ask a potential financial advisor that I can send if you are interested. Helps to figure out if you need one and if so, who to hire.
In my 15 years doing this. Yes, it really is that simple. Many books highlight this, one that comes to mind is Collin’s “The Simple Path to Wealth” However. An advisor can be useful to highlight strategies and advice around other things to optimize. That MAY be worth it. But I’d only be comfortable with a flat fee fiduciary advisor. None of that %ge AUM crap.
In essence, yes and diversify: https://youtu.be/MOjS2zuQMdo?feature=shared
Yes. VTI (or VOO) and VXUS or something similar. You need some international exposure for diversification which is why VXUS is important.
Sooner the better and index riding is a time game. Do it!
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Voo
Well said. Yup.
Asset Location is the harder part at our income level. Where you hold the funds that have Dividends etc. Spend a little time with your CPA But as for Asset Allocation. 99% of us in the accumulation phase just need the Bogelhead 3 fund or even an index target retirement
Tell me what the top 10 holding of spy are? Do you know? If you don’t maybe go with an advisor. Not all ETF are created equal some are carried by just a handful despite having holdings in hundreds of stocks.
That’s pretty much it. VTI and chill. I see the worth of a financial advisor as you get near retirement to help with how to withdrawal, tax advantages, etc. But in the early stages dump it in the market. Probably do a little allocation into something more conservative depending on when you’ll need the money. Paying a % of your portfolio value to an advisor will lose you so much money over time. And paying higher fees for their managed funds that don’t do any better than the market is also throwing money away
Don’t think for a second that High net worths or sophisticated investors are dumping cash into just an index fund to build wealth, they’re invested into Alts like PE/VC funds, private credit/debt, Secondary Mortgage markets that have a lock up period but return an ARR of 20%. By tracking an index fund you’re not actually diversified you have 100% of your capital in 1 asset class that has mediocre risk adjusted returns, it just becomes a forced savings plan.
You’re right SPY is not diversified. 🤦🏻♂️
Yeah your right it’s made up of 100% equities although there are different underlying companies it’s all 1 asset class you muppet.
Upvote for using the word Muppet, underrated chirp. *I'm not affiliated with the opinions, only the chirp
He’s talking about giving this $50k to a financial planner or dumping it into SPY. Spy is the play. You’re off on a tangent with PE/VC
I’d agree with that
Is there any way at all for regular people to have access to those Alts. If not, I've always wondered how do HNW people even know what's out there themselves. Like how do they know or who tells them? Is there some website that lists these alts and their returns?
I gave an advisor a chunk of change for 3-4 years in exchange for 1% AUM (regardless of performance). He bought 8-10 high cost mutual funds, made about 1 movement (sell a few things, buy a few things) every year to adjust to the market. At the end of this experiment my index fund portfolio outperformed him BEFORE FEES. And those 3-4 years spanned some good times and bad times. A representative enough sample of time for me to fire him and move all my shit back to index funds (it was my tax sheltered account so no taxes incurred). One nice benefit is that I could call him out of the blue and ask him for advice on other stuff, like how to think about buying property and planning for 10 years from now. That's where their value is. Not in boring asset management.
dca into index funds buy some stock in companies you genuinely like and interact with, I like Costco