Investment advice is one of comparatively few fields where the quality of it available at $50 million in net worth is indistinguishable from $50k [+], but the price is 1000x higher.
Use a roboadvisor (or a moral equivalent like a target age retirement fund from Vanguard). If you need someone to talk to, the magic words are "fee-only financial planner" -- should cost on the order of $100 to $200 a year for a sympathetic ear that can tell you "Yep you're still on track and not doing anything insane."
Edit: forgot the jargon here -- some fee-only planners still charge a percentage. You want someone quoting a flat fee or hourly rate.
[+] No financial planner has predictably better-than-market advice regarding investment choice than any other planner -- though heaven only knows how many intimate they do. To the extent they provide a valuable service it is similar to an accountant's: they can hear the totality of your situation and tell you about options/factors you may not have considered, allowing you to sleep better.
A representative question: "What's a good way to save for college given we have a 5 year old? What type of account? What general plan? Ballpark how much?"
>>> available at $50 million in net worth is indistinguishable from $50k [+], but the price is 1000x higher.
I cannot disagree more. At 50m you have a totally different perspective in this day and age. Investment for profit is often not the primary concern. Wealth protection, transfer from one generation to another, access control, family members, lawsuits ... lots of things that are not relevant with 50k in the bank but become big deals with 50m. The investment advice sought and offered to those with 50m to protect is altogether a different product than that offered to those with 50k.
If you have 50m in the bank, "saving" for your kid's college expenses is a radically different question than if you only have 50k. Protection is far more a priority than any 'saving' concept.
And taxes! That tiny amount of interest on 50k won't be taxed at nearly the same rate as that from 50m. Therefore an expensive but "tax efficient" scheme based on expensive lawyer advice, not robots, is worth the money.
> And taxes! That tiny amount of interest on 50k won't be taxed at nearly the same rate as that from 50m.
Actually, it will probably be taxed at a lower rate. Interest on a savings account is taxed as ordinary income, while investment income on a $50m portfolio will likely be taxed at the 15% (or perhaps 20%) capital gains rate.
That's what the advice does, it makes sure your interest is gets investment treatment. Ideally, it isn't taxed. Ideally, the attorneys setup a structure whereby gains aren't treated as any sort of income until one decides to realize them.
What use is that? If you never sell them then you cannot spend the money. The goal is to get cash money into the client's pocket without them having to pay taxes.
I have < $50k of savings but most of my money is still in Betterment being taxed as capital gains. If you're using a savings account as an investment strategy the tax on your tiny interest payments is the least of your problems.
The only difference is the 50m makes profit with little or no risk. And the consequence of this is consistent inflation, lowering of the purchasing power of dollar, quanitative easing and military keynesianism, along with other things.
One example is if you had $10m in real estate, infinitebank with loan you super low interest rate and then you invest it in a limited $200m fund which had some quasi-guaranteed rate. I can't remember the details but the risk was zero or low. Can't remember the fund name.
However, the advisor to the 50k person probably knows more than the advisor to the 50m person. The high networth advisor is even more of a salesman with no real knowledge.
But at the world's largest wealth management firms, 50m clients are not so encouraged. Wouldn't want to be a threat to the Managing Director or CEO.
I don't think this is true at all. If you consider "investment advice" to be as simple as "here is what your target allocation should be based on your risk tolerance, so let me just call up the trading desk and have them execute the orders to get you there", then sure.
When you pay for "investment advice" at the $50 million net worth price tier, you're paying for access to private equity deals, real estate investment opportunities, a tax advisor who can tell you how to be structure a deal abroad, etc. It's not as simple as plugging in your salary and age into a webpage and having a robot buy and sell stocks for you.
You're not getting much "access to PE deals" when your portfolio has only ~$5 million to allocate to "everything in the world which is not publicly traded stock or bond fund" but I'm sure someone will happily represent that they can arrange that for you if you want to pay $500k per year.
You'll get a pretty nice report of your portfolio and (market) returns. Spiral bound and everything.
If you want an accountant for international issues, I question the wisdom of doing that unless life/business naturally throws them your way, but $500k buys an awful lot of hours from someone who knows the transaction and localities involved, which your investment advisor does not. (Will every investment advisor in the Chicago phone book happily take a $50 million client who wants to spend $5 million on a modestly nice house in Tokyo? Yes. Do any add value to that transaction? Well, maybe one does. Could you find much better advice? Oh heck yes.)
Speaking as someone who has worked in this industry, you appear somewhat misinformed about how high net worth individual (HNWI) typically invest. Large multi-family office firms pool investments from multiple wealthy individuals (usually investable assets of at least $5M or more) and can access private equity, real-estate deals, commercial mortgages and more. These firms manage multiple billions of dollars, which doesn't make them huge by any measurement, but they are more than large enough to access investment opportunities like these as well as create sufficient liquidity for their clients.
Wealthy individuals have access to investment strategies that resemble far more the philosophy of large pension funds than that of robo-advisors. (You can also check out Tiger 21, a sort of investment club for Wealthy people, they post their recommended asset allocations on a regular basis.) They also tend to be more focused on capital preservation and minimizing volatility than strictly beating the market. Their portfolios are typically highly diversified outside of publicly traded assets to accomplish that.
Finally, the firms that work with them offer significantly more for their money. Detailed estate planning and legacy planning, tax planning, corporate tax planning, and advice on charitable foundations and more.
While I do agree with some of what you are saying about how "advice" is priced, particularly when it comes to the mass market, there is definitely a point in the wealth of an individual where there couldn't be more points of difference between what people get in terms of financial advice.
Source: I've worked at a wealth management firm that dealt with HNWI for quite some time.
Edit: Just to add a bit on the different this makes for HNWIs
At the firm I worked at their client's biggest losses throughout 2008 were no more than 6-7% (after fees were considered), while at the same time being invested in assets that yielded nearly that much in cash flow through dividends, interest, etc. that same year. Since a portion of the portfolio was also invested in public equities (around 30%) and because these client's could easily stomach the markets considering their personal performance they were able to ride it back up without fleeing to cash like so many others did.
One of the problem smaller investors face is that in major market crisis situations almost all publicly traded assets take a hit as the mass market migrates to cash. If you follow the herd (as most obviously do or they wouldn't be the herd) you regularly miss out on the benefits of these market movements.
> Wealthy individuals have access to investment strategies resemble far more the philosophy of large pension funds than robo-advisors.
I know these are naive questions, but here goes: do those pension funds differ greatly from large university endowments? How do those differ from what one can achieve using a combination of cheap index funds? Ramit Sethi famously recommended an allocation based on David Swensen's experience managing the Yale endowment. You can find index funds to match that reasonably well. How different will that be from what Yale or a pension fund actually does?
They have similar goals, capital preservation, consistent cash-flow so they don't deplete the principal. I'm in Canada so examples we often cite are the Canadian Pension Plan (CPP), Ontario Teacher Pension Plan (OTPP) and the Ontario Municipal Employees Retirement System (OMERS). All of these do a lot of private equity investing and OMERS in particular has invested in a number of Canadian tech companies and IPOs, incuding recently Shopify and Hootsuite. All of them have had quite impressive and consistent results as well.
The problem with using public index funds to mimic these managers asset allocations is the higher volatility of publicly traded assets. For example in 2008 widespread panic caused people to sell their mutual funds and flee to cash which widely hold a variety of assets, so all of them suffered. This included publicly traded Real Estate Investment Trusts (REITs). At one point they were selling for 80% of their on paper asset value, which was entirely irrational. Many money managers that typically invested privately in commercial real estate because of that volatility took that opportunity to buy public REITs at a discount.
That being said, you can definitely do a decent job of adding asset class diversification with modern ETFs (and the market for these keeps growing). There are now infrastructure ETFs, REITs (Vanguard's REIT is really well priced), covered call ETFs, etc. Just don't expect to get exactly the same results of these managers and expect to have to handle larger volatility.
That being said, if you can weather these market movements, and you are saving regularly, volatility can be a good thing, if you can take advantage of lower asset prices with ongoing contribution then that is great.
Taking advantage of big market crashes is difficult when your whole portfolio tanks. I've been wondering about keeping ~10% of my funds in reserver in safe cash-like assets in order to be able to move in when the whole market tanks.
That still counts as timing the market and is Known to be ineffective. What if the market doesn't tank and you sit in cash for a long time? If it does tank, how will you know when is the true bottom for you to invest your last 10% in? Etc.
Generally speaking, when stocks fall bond prices rise. In this regime. So if you have a mixed portfolio of assets and bonds, in your scenario you can sell treasury bonds for a profit, and use the proceeds to buy up stocks. If you automate this transaction when your portfolio deviates from a target mix, you will automate a 'sell high, buy low' strategy.
30% of the overall portfolio was invested in equities in 2008, and losses were no more than 7% including fees when the market (S&P 500) lost 50% of its overall value? That's some extremely impressive diversification, especially considering how many asset classes in the world lost value in the 2007-2008 due to their correlation with the real estate/equity markets.
I have never worked as a financial advisor, but I did work for a while at a large buy-side firm. If I had $50 million, my biggest concern would be keeping that money safe and lowering volatility.
In the case of $50m, you can fully invest it in the stock market, but you need to be ready for wild fluctuations in your wealth. You also need to make sure the brokerage you gave the money to is reputable, or multiple brokerages. (SIPC only covers up to $500,000). You also may accidently buy overly correlated products without knowing it or may think you are buying low risk (bond funds) only to find out that they had super high duration (risk from insurance rates changing).
You can always put it in banks, but even that can be risky in times of extreme turmoil. During the last crisis, there were about 6 months when people were genuinely unsure whether all major banks would stay solvent. You are only insured to FDIC limits which will not come close to $50m.
You could go with real estate, 100% cash purchase, where you have no debt. (no leverage). As long as you pick a liquid asset class, that is likely safe, but you still need to insure the property and make sure your management team is running it properly which requires a lot of hands on work. You could still lose a lot of money if rates go up etc.
Having $50m is really a mo money mo problems scenario. A robo advisor can't fix it if you don't want 100% stock market exposure. I also don't think expensive advisors fix it either.
For me, the opposite. $50m is about 100x more than I could ever need, so I'd just stick it in $SPY until I die. Volatility is irrelevant as there is no actual risk to life or limb, only the "risk" of numbers going up or down.
Agreed, it's super weird to see that keep getting mentioned, that you need to minimize the volatility of your extreme fortune. Why? Are you planning to liquidate the extreme fortune in the next 1-5 years? ...
Definitely agree. IIRC, the biggest yearly loss for the Dow was 52% in 1931. While I would HATE to lose 50% of my wealth, the point is that with $50m I can EASILY ride that loss out and give it time to recover in a few years. Now, if I only had $50k in the market and was planning on using all of it on a big purchase that particular year (e.g. home down payment, child's college tuition), a 50% loss could be devastating.
Volatility doesn't seem to have as much power when the potential losses are not great enough to cripple you.
That's precisely why wealthy investors want to minimize volatility. They don't need their wealth to grow (they already have more than they need), but they definitely don't want it to disappear.
Also, I must say that $500k really isn't that much money—it's not even enough to retire.
Just remember that by doing that, you're betting on the US economy's perpetual growth, as diluted by outside influences (like China...) If increased globalization stands to average global wealth (which it seems to be, except for the 1%) then I'm not sure growth is a good bet, over the long term.
SPY, QQQ, etc only go up as the economy goes up...
Access to that tier is why a lot of (ex: sports, inherited wealth, lottery, etc) people who earn a millions, but are not savvy investors end up broke. The financial industry is very good at separating people from their money and unless that's your background it's best to stay the @$%^ away.
Most accountants will steer clear of producing any advice, their m.o. is more of "here're scenarios A, B, and C, portfolios D, E and F, and 9 projected behaviors of those portfolios in aforementioned scenarios. Let us know what you would like to execute." and a five-digit bill 30 days later.
You are right that you should be, but in practice, a lot of advice at that level is still standardized. Where I agree with you is the wrapper fee on a 50m account ($250-500k/year) is not enough to build a personal advisory staff as diverse and specialized as a good firm should be providing you for that sum, and your personal staff wouldn't have enough to do all year anyway.
I agree with Patrick's top point, but I think many people mistake the role of the financial advisor. (I used to work at FutureAdvisor, which was bought by BlackRock last year and is now providing robo-advice through institutions, so I know a little about the space, and have learned from others who know more.)
One of the main roles of a financial advisor, for people with $50MM or more, is to act as a relationship broker. They put very wealthy people in touch with other very wealthy people; e.g. "If you're going to be in Hawaii, you might want to look up X, who's doing some really interesting things in this sector..."
Brokering relationships is more than facilitating interesting conversations. It helps the FAs' clients build their businesses. For example, if you happen to be a venture capitalist who already made your first fortune, and you're looking to raise from LPs, then a financial advisor might introduce you to their other clients, such as Family Y, which lives off the rents created by their 19th-century match-book empire.
A lot of people don't realize that FAs are doing a lot more than running your numbers, and insofar as that's all they do, they will be replaced by robo-advisors.
This comment is true and helpful, but I worry that someone reading this comment might conflate "approximately all financial advisors offer similar advice, regardless of cost" with "no one can beat the market, it's always superior to put your money in an index fund" due to prevailing socio-political opinions surrounding Wall St. Those are two very different statements.
To add a little nuance: I always recommend a flat fee financial advisor too, but there are people and funds capable of consistently beating the market. They are just so exceedingly rare that it's difficult to separate them and their results from the crowded noise of people who either think they can or who know they can't but will claim they can anyway.
Still, most investors ("retail investors") should use an index fund.
In a large field of funds, some small sample will do better than others. That is just statistics.
Is there any objective evidence that there are people who consistently beat the market, over the long term? (And let's factor out those who use insider information)
The one that immediately comes to mind is Renaissance Technologies, which averaged a nearly 72% annual return between 1994 and 2014.[1] This is a 20 year term, during which the S&P 500's average annual return was 7%.
Seth Klarman's Baupost Group averaged a 20% return between its founding in 1982 and 2015.[2] This is a 33 year term, during which the S&P 500's average annual return was 8.8%.
Average annual return is not the whole picture (i.e. it is theoretically possible to have a phenomenal single year and mediocre performance for 9 years and thus beat the S&P 500 over a 10 year period) and there are other examples, but these should suffice.
To expand a bit on Renaissance - it's a quant fund, which means computers trade. As such, they make hundreds, thousands of trades per day, so the fact that they possess alpha (i.e. superior performance, rather than blind luck) is a statistical fact. Furthermore, this performance has been consistent over decades.
Of course, this doesn't mean that this performance will necessarily continue indefinitely; knowledge diffuses, and their strategies will eventually become public, turning from "alpha" into "beta" (like trend following has in the past). They need to keep innovating to continue beating the market.
Also, the biggest issue of strategies like this is that they are severely constrained - you just can't put more than a certain amount of money into them. In contrast, some other strategies are much less constrained; like trend following (CTAs manage tens of billions of funds), and global macro (Bridgewater manages 50bn).
your comment is utter nonsense. quant funds are defined by the reliance on (i suppose, good) algorithms, not computers - literally everybody trades with computers. the number of trades you make doesn't determine alpha, which is a measure of relative performance given a particular risk level (beta). there is no statistical fact to any of that, and certainly no sense to 'alpha becoming beta.' there is no a priori reason that their strategies must or will become public (the fear of replication risk is a common bogeyman but is already priced in). everyone needs to keep innovating in their strategies, but mostly because markets change.
the only half-true statement you made was about scalability. like, theoretically every strategy has a limit to its effectiveness and i guess you can argue that algo-based trading funds should be limited in size and scope. but compare that to seriously unscalable fields such as venture capital, where the constraints are in lack of investment targets, need for GP's to consult/manage, domain expertise more important for companies w/o sec-standard accounting, covenants blocking investments in previously funded companies - in essence, high human capital costs. implementing an extra algo strategy is much less human-intensive, which might suggest easier scaling (though nowhere near mutual funds, etc)
Quant funds don't trade with computers - in fact, computers trade instead of humans.
> the number of trades you make doesn't determine alpha
No, but it does determine how statistically significant your alpha is. If I make 1 good trade, it might be alpha or it might be a lucky guess. If I make 10000 good trades, it's unlikely to be just a lucky guess.
> certainly no sense to 'alpha becoming beta.'
Trend following used to be "alpha", but now it's considered "beta" - in the sense that everybody can replicate it, and there is no specific "alpha"-based fee warranted for a fund executing trend-following strategies.
> there is no a priori reason that their strategies must or will become public
the more people know about it, the easier the math behind it, and the more broadly it applies, the more chance there is that it becomes "public" knowledge (public in the sense that many industry practitioners working for different funds know about it)
> but compare that to seriously unscalable fields such as venture capital
Well, given that quite a few venture funds are bigger than $10bn [1], I wouldn't call that "seriously unscalable". But in any case, my comparision was to trend following (Winton has about $30bn), global macro (Bridgewater's Pure Alpha has about $50bn), and passive index investing (SPDR S&P 500 ETF is > $100bn).
I think you misunderstood much of what tomp said, and willfully misinterpreted some of the rest.
The number of trades does not determine alpha, but it means that you can be much more certain about whether someone has alpha or not. For example, John Paulson made billions on (essentially) a single trade in 2007 and early 2008. Does he have alpha? It's hard to say, because all of those profits were from one trade, and he could have been lucky. Virtu Financial generates millions of dollars each year, by making tens of millions of trades. Do they have alpha? Absolutely - you can be certain of it, because it would be statistically impossible to get lucky tens of millions of times.
The idea "alpha becoming beta" is an extremely relevant one for many hedge funds today. As strategies become well known, they become commodified, and are often offered at a lower fee, both by hedge funds, ETFs and investment bank products. Frequently, they are offered for little or no performance fee, so they cannot be called "alpha" and are often referred to as "smart beta". For example, AQR Capital Management offers many low-fee funds giving exposure to value investing, momentum investing, managed futures, the FX carry trade and others. It sounds like you are using a very narrow definition of beta (exposure to the stock market) whereas the usage in the industry is much broader.
Pointing out that quant funds use "algorithms" to trade rather than "computers" is pointlessly picking holes. It's clear what he means.
I think there are a few implied questions though. First, does alpha exist? Second, can alpha reliably be separated from beta? And third, can future alpha be predicted from past performance?
I think Renaissance's track record only answers the first question. But apparently the last few years have been really tough for quant funds, some strategies actually lost money on average. And I'd have no idea how to separate well run quant funds that like Renaissance that can withstand changing market conditions and funds that will fail when market conditions change. Also, I'd be a little nervous assuming that a well run fund will stay well run.
I think that some managers do have actual skill, and would provide value. But I think that trying to find those managers would usually be really difficult.
Medallion Fund appears to be a front running quant fund.
Their reported returns relied on being a millisecond ahead of large orders. They charge a hefty chunk of that "return".
It would be very risky to assume that their advantage will continue in the next 20 years.
I certainly meant it in that sense.
I'm not accusing the Medallion of illegal front running.
I think people like Brad Katsuyama and fixing the "early information" problem are the answer to this kind of behavior. Katsuayama is working on a system to make the fight between high frequency traders and other investors more fair. Good write up is here : http://www.nytimes.com/2014/04/06/magazine/flash-boys-michae... ...
"Coil the fiber. Instead of running straight fiber between the two places, why not coil 38 miles of fiber and stick it in a compartment the size of a shoe box to simulate the effects of the distance. And that’s what they did."
Buffett? Look up the Superinvestors of Graham and Doddsville; addresses your 'just statistics' issue. On the general investment management industry, in aggregate they are the market so why would they outperform it? There are funds that outperform; most people can't buy in though.
He is much more than an investor. He takes a large enough position in his investments so that he has control (or major influence) in how his companies are run.
"The subsidiary chiefs also believe their companies’ performances are better under Berkshire (and even better than if they were stand-alone companies). Respondents point to Berkshire’s brand value and financial strength. Another reason? Berkshire lets CEOs focus on a longer performance horizon than they would expect under other ownership. Although each CEO varied on what that horizon would be, with estimates ranging from three years to 50, they all said Berkshire management encourages a long-term focus."
That's not a management philosophy? Berkshire Hathaway is notorious for being hands off. The corporate HQ has 20 people working in it. Buffett controls the money but the CEOs are free to run the business as they see fit.
> Is there any objective evidence that there are people who consistently beat the market, over the long term?
This is narrowing the problem to growth investing. Most high-net worth individuals care about growth investments only tangentially, the agenda is usually income generation.
With income generation one can consistently beat the market year over year over long term. Simplest examples would be a cash-flowing real estate investment at an attractive entry price.
If you believe that public markets are efficient, then it also implies that by the time you're on the buying side, any inefficiency and pricing discrepancy has been squeezed.
Over a shorter term, there's the famous example of Scion Capital, which handily beat the market during its eight-year existence. And not just by a little bit; the S&P saw 2% total return over those eight years whereas Scion saw around 490%, primarily but not entirely due to the fund manager's foresight of the 2008 subprime mortgage crisis.
Scion is more of an example for the opposite point; the fund manager didn't consistently beat the market, he made one big bet that turned out to be correct; furthermore, even if this was skill, rather than luck, it still doesn't mean that this skill would apply to any other market situation.
That's not quite true. Scion was up in 2001 and 2002 (when the market was down) and they beat the market in 2003 and 2004 - in each of those years, they were primarily a long-only equity fund.
I'm not sure what the performance was in 2005. In 2006 they were down 16% (because of premiums on their CDS positions) which they then recouped in 2007 and early 2008.
That is why patio11 was careful to say that you cannot find one who will predictably beat the market. Yes, those supermen do exist, but you can't determine beforehand who they will be, or if you can, whether they will be one of the diminishing few that will beat it next year (or for the next 10 years).
I thought it was interesting that roboadvisors like Wealthfront also charge a percentage of assets, instead of a flat fee. I have Vanguard funds already, and the free tier of Wealthfront. If Wealthfront seems to be doing a better job, I would be tempted to just echo their portfolio balance in my larger account, rather than paying them to do it.
Given how much fees can affect returns, I might pay for Wealthfront's services, but I wouldn't pay a lot, and "$250/year per $100k" seems like too much.
While I understand (and agree with) the sentiment, I'm not sure it's 100% true. $50 million might be in the range where complicated tax minimization maneuvers start to become tenable, and you won't get help doing that from a $200 fee-only adviser.
Most of the maneuvers at that level aren't that complicated. Harvested long-term capital gains on equities side, municipals on the income side, depreciation on the real estate side.
The crazy income optimization schemes you hear about mainly circle around windfall earnings in areas like finance and private equity. US already taxes investment proceeds at favorable rates, and there's no inherent tax on wealth, if the recipient doesn't start working, his income picture won't be too complicated.
Tax loss harvesting doesn't have that big of an impact for most people, and has little to do with the detailed tax planning that high net worth individuals expect from the firms they work with.
It also only impacts non-tax advantaged accounts and investments and provides much less value than advertised. In fact iirc Betterment's own white paper on this demonstrated it's expected savings to be far less than what Wealthfront was marketing at the time.
Why giving advice has become a field where you are allowed to charge a wealth tax is beyond me. It cannot last. 1% of your wealth every year, year after year. Just imagine if the government tried that on. "We're having a 1% wealth tax to fund education and health for the very poor." And yet if you do it fund luxury property and porche consumption, that's ok somehow. No doubt there will be a bunch of people commenting here who are stupid enough to have bought the con or have a vested interest arguing that 1% wealth tax is value for money...
This creates an incentive to severely ramp up the portfolio risk in the hopes of striking it big. Sure, almost all client portfolios will go broke, but the winning one will pay off for the losers.
Such wealth management firm would have an issue surviving past year 1.
It's about them extracting some of the value they create. If you're not the most rational of decision makers, paying 1% of your wealth per year for 10 years to save you from losing 30% of it in a panic by selling at a low when the market crashes, then it's worth it. Now from that perspective think of all the people you know who may make stupid decisions like that (or just not investing in the most efficient way). The value to those people would surely be 1% per year. The question is how low can we drive the cost of those services via competition (of which robo advisors is one)?
Can someone give you good financial advice at $200 a year? That is maybe 1-2 hours worth of advice including reviewing your portfolio and meeting up with you. Some plumbers charge more than that rate. If they are any good, they could probably make more money with better use of their time.
Patrick's numbers seem way off from my knowledge of what is typical in the industry. Typically a fee-only who deals with smaller clients will be around $150-$200 a month for people under $1m[1]. At the higher level of assets someone will likely charge in the thousands for a single session. It is not flat across the board. A $50m nest-egg is often much more complex compared to someone who wants advice at the $50k level.
It is not unusual for someone with $50m to pay $10-30k just for an initial session with a firm they are considering working with and then more ongoing. Many of these people wouldn't even consider working with someone who doesn't charge that as they will immediately assume you are not experienced or skilled enough to handle their needs.
As with any business, customers often expect to get what they pay for, and pricing to your market is important.
No one is disputing that are plenty of expensive advisors out there. The question is whether they actually provide any additional value over a 2 hour meeting with a financial planner and a computer-managed index fund.
I get the sense that there are many in this thread who are either in the industry or have been convinced to drink the koolaid themselves. I'm seeing lots of handwavey talking points but no substantial data-supported explanations for why the high priced advisors are anything more than gifted salespeople.
What I'm saying is that even "inexpensive" fee-only advisors, as Patrick is suggesting to, are closer to $1-2k/year not $150. I said nothing about the relative value of a 2 hour meeting with a financial planner, I am only stating the fact that you are unlikely to find any "fee-only" planner who will work with you for $150. I'd be happy to be proven wrong by someone who is actually doing it.
As my own counter example I know someone who did exactly as you suggested. A one time meeting with an advisor to review his portfolio and asset allocation but invests for himself online. It took about 2 hours and cost $500 and didn't include any detailed financial planning (e.g., taxes, retirement projections, etc.) it was simply a portfolio review.
So even using the lowest and simplest example I could find the cost is much higher than suggested. Additionally, I was also told this advisor was fairly reluctant to even offer this. This, generally speaking, just isn't their model. Even in the fee-only market they are typically looking to work with people on an ongoing basis, not one off.
As a more general example, in Canada some people work with "money coaches" who focus more on financial planning, saving habits, debt consolidation, retirement income planning, etc. They charge around $1-2k for a four meeting package. My understanding is that these prices are similar in the US but I could be wrong.
The bottom line here is that I'm just not aware of a market of financial advisors charging one time fees anywhere near $150. That's just how it is.
>> I get the sense that there are many in this thread who are either in the industry...
I suppose finance must be the one industry where people outside of it know much more than those in it.
Sure they do, lots of people beat the market and make more money than the market. Lots of people claim to predict and do better, there are services that measure it: https://www.tipranks.com/analysts/top
Just briefly looked at tipranks. For the "Adjust how ratings are measured over a time period of:" the max they give is 2 years. This is a ludicrously small sample size at which you can't distinguish skill from luck.
That measures for how long holdings are held (without the analyst reiterating them) before being automatically sold by the system. The analysts are tracked since 01.01.2009 according to their FAQ.
As you note, even "robo-advisors" are unnecessary. Just go with Vanguard target/lifestage funds (for the bulk of your portfolio)(after paying off credit cards and maxing out your 401k).
There is legitimate value added by robos that aren't accessible from target date funds. As to how valuable, it is up to the individuals to decide.
- tax-sensitive allocations (i.e. munis in taxable account, reit, total bond in tax advantaged account)
- Continuous tax-loss harvesting
- Continuously adjustable allocation
- forecasting and allocation advice
- "goal based" accounts
Also user experience is worth something for some people:
- UI/Apps
- statements, trade confirms, tax forms
- electronic only (no reams of paper sent to you)
- ease of transferring funds in/out
Also note that it can be cheap. WiseBanyan is presently free (charging 25bp to turn on TLH). Betterment at 15bp ends up being only 10bp more than Vanguard's Target date funds funds at 18bp.
> Investment advice is one of comparatively few fields where the quality of it available at $50 million in net worth is indistinguishable from $50k [+], but the price is 1000x higher.
Completely false. With $50 million you have access to all sorts of investment vehicles that you don't have access to with $50K. Hedge funds for example. Also, with $50 million you have more worries - the bank won't insure $50 million cash, so you need to be invested in something, with the aim of wealth preservation while paying as few taxes as possible.
Most also charge a fee based on assets under management. Regardless of performance. So if you have $50m in invested assets, they will charge you (0.)x% on that in a good year (the ones where you make 20-30% in the stock market) and in a bad year (the ones where you lose 20%).
Fee-only advisors still charge fees for assets under management. It's just that they don't get paid commissions for selling you products. What it seems you're looking for is to pay hourly fees only.
It's marketed as a platform that facilitates competition for the best trading algorithms but really, algos can be as complex or as simple as you want. A simple monthly portfolio rebalancer takes ~5 lines of code (handle_data is boilerplate required by the platform):
Plug that in, backtest it (it has a pretty comprehensive backtesting and research suite) and add your Interactive Brokers or Robinhood account details and you're off.
It's all free as well.
Note: I have no ties to Quantopian, I just discovered them after being disappointed by how little flexibility Wealthfront and Betterment offered me.
What I would love is an open source implementation of the daily tax-loss harvesting strategies increasingly being offered. In addition to saving on fees, it would allow you to specify your own basket of stocks (and weightings among those stocks).
I'm far from an expert but as I understand it, the maximum deduction you can get from tax loss harvesting is $3000 (per the IRS: https://www.irs.gov/uac/Ten-Facts-That-You-Should-Know-about...). Does tax-loss harvesting actually increase performance significantly?
3,000$ per year for say 15 years is a good chunk of money saved, especially if you put those savings back in the market. Of course if your portfolio is huge you probably won't notice, but the average investor will definitely benefit.
you can claim at most a 3000 loss in a single year.. BUT
* you can offset unlimited gains with as many losses as you have - so that's the real value.
* you can carry forward losses greater than 3000 to future years. so its not use it or lose it
Rebalancing your portfolio requires buying and selling shares. In most countries that will attract capital gains taxes, often affected by when you bought those shares.
If you care about tax efficiency -- which can severely deplete your on-paper returns -- then it's not really ~5 lines of code at all.
If you're looking for dumb-and-good-enough, delegating the fiddly rebalancing problem to someone with economies of scale isn't really so bad.
Rebalancing does not necessarily require selling shares - a different strategy is to rebalance at the same time that you want to add money to your portfolio by buying the shares necessarily for rebalancing. This would prevent the taxable event of selling.
Quantopian won't be free forever. It seems the fees they are thinking of charging going into the future will mean that it only makes sense for active traders who derive value from Quantopian's market research and backtesting facilities.
I recommend using Interactive Brokers and coding your algorithm against their API directly, skipping the Quantopian middleman.
Quantopian's revenue model is to build a hedge fund and charge the fund investors returns/management fees. The algorithms in the hedge fund come from the Quantopian community. We work with the best algorithm writers on our platform, negotiate compensation, and then put their code to work.
We would be crazy to charge people to use our platform. We need thousands of algorithms, and charging for the platform would be one of the faster ways to kill our business.
Yes, you can code to Interactive Broker's API. But where would you get your free minute historical data for backtesting? Or corporate fundamentals data? Or the free IPython research environment? Or the community of 60,000 quants giving each other mentoring and advice?
I work at Quantopian, so you can imagine my answer to all of those questions.
In fairness, your (commendably candid) FAQ states the precise opposite "In the future we plan to charge for live trading, when you trade your algorithms through your brokerage account"
Is Quantopian free?
Quantopian's community and backtester is free for everyone to use. There will be a charge for connecting your algorithm to your brokerage. Pricing isn't finalized, but we're considering a flat monthly fee.
Does it take into trading fees? I pay $9 per trade. Can you have fixed income instruments in your portfolio? Foreign stocks? Does it handle exchange rates? Does it account for dividends?
It's a platform, not a broker. At the moment it's totally free, and supports Interactive Brokers and Robinhood as backends (both very low commission).
It only supports equities at the moment, with futures on the way. It only trades the US markets at the moment, exchange rates aren't relevant and dividends depends on how you want them "accounted for".
The reason I mention fees is that if you rebalance frequently and have high fees the fees can kill your profit. Therefore when back testing any strategy one would want to account for fees. Similarly if you try do diversify using individual stocks you have to take trading fees into account and if you use ETFs there are also fees.
What you do with dividends also matters so ideally any algorithmic strategy you come up with takes that into account. For me not being in the US (Canada) currency exchange rate can at times dominate the returns.
There are a lot of newer ETF products on the market so it's going to be difficult to back test a strategy that uses ETFs.
At any rate, it looks interesting, I might play with it a little, but I don't think it works for me right now for investment purposes. I do my rebalancing yearly on a spreasdsheet :)
Does the market still function as a market if everybody uses index funds or robo advisers? The market should reflect the opinions of participants about individual companies but with automated tools the market seems to get disconnected from economic reality.
It's an interesting question that has been covered a lot in the media lately. I've posted here before about an interesting letter that Nevsky Capital, a successful hedge fund, sent to its investors describing the reasons it was shutting down and returning investor money [0]. Among other reasons for shutting down, here is what the letter had to say on your question:
- The unintended consequences of those new regulations introduced as a result of the GFC, which have largely removed the market making role of investment banks from global equity markets, has coincided with the recent massive increase in market share of both ‘dumb’ index funds and ‘black box’ algorithmic funds to create a situation where equity market volumes have fallen sharply and individual stock volatility has risen dramatically. An initially badly executed order can now inadvertently create a price trend (because there is no longer the cushion to price moves which was in the past provided by market maker inventories) that, as algorithmic funds feast on it, can create a market event even if the initial order was a simple innocent error. Truly – to mix metaphors – butterflies flapping their wings now regularly create hurricanes that stop out fundamentally driven investors who cannot remain solvent longer than the market can remain irrational.
- In such a world dominated by index and algorithmic funds historically logical correlations between different asset classes can remain in place long after they have ceased to be logical. More butterflies.
- Index and algorithmic fund manoeuvrings also make it very hard to ascertain what the markets ‘clean’ positioning is at any given time. All of which pushes up the cost of capital.
The market isn't losing valuable insights from people who are investing in index funds. Even if they were confident enough in an individual stock to buy shares, that doesn't mean they have any real insight about the company. For example, thinking RHT is a good buy at 63 doesn't demonstrate any insight about Red Hats business, management or market.
I suspect the opposite is true: the market would be better if people invested in index funds rather than individual stocks when they didn't have any insight about the company. I don't have definitions to separate company "insight" from the more speculative information, but the distinction seems real enough.
> The market isn't losing valuable insights from people who are investing in index funds. Even if they were confident enough in an individual stock to buy shares, that doesn't mean they have any real insight about the company.
Well, but index funds and individual stocks aren't the only things that retail investors can buy. A lot of money is moving out of actively-managed funds too.
> Does the market still function as a market if everybody uses index funds or robo advisers?
The more people forego seeking alpha the more of it that is available. So even if 50% of the market is passive, the pricing signals will all come from the 50% that's being actively managed.
Traders aren't investors. They don't create valuations, they mediate between others who offer valuations. Traders make their money interacting with investors (and dumb traders).
How do index funds typically vote on hiring/firing ineffective management, executive compensation and other controversial issues? Doesn't management basically get a free run to milk the place dry with no active shareholders in charge?
Note bene: Please don't downvote these kinds of comments. I have no ties to AndrewKemendo, his friend, or his friend's venture, but I greatly appreciate that HN is one of the few forums where users are generally encouraged to promote personal projects or projects of friends/acquaintances as long as they are 1) on topic, and 2) tastefully done (ie, don't spam a post with multiple promotional comments) and 3) any ties disclosed.
This post observed all 3 of these general guidelines, and as a result, I got to learn about a very interesting project.
So particularly if you're relatively new to HN, and just got the downvote button, please let these posts stand as is, and don't downvote. HN isn't like many online communities in that moderate amounts of self-promotion are OK here.
How is a link to an "AI hedge fund" not relevant to a discussion about "Robo-advisers"? Seems like nitpicky semantics to me. I was genuinely interested anyway.
It's not nitpicking. The two are very different. Hedge Funds (and other proprietary firms) using AI-training software to automatically trade are attempting to generate Alpha, are run as a separate fund, and are available only to the rich. Robo advisers generally attempt to manage a diversified portfolio that performs in line with the market, trade in the customer's own account, and are available to everyone.
I would have preferred some sort of comment by the poster as to how they relate, for background. Or perhaps, how one is better than the other. But just throwing a link out there because it's semi-relevant to the topic being discussed, even with full disclosure, seems like a very spammy thing to do.
Good point. I threw it out there cause I was multi-tasking, and busy but thought it would be interesting.
I can see how it would be spammy, though considering that it's not a product available to people it wouldn't really benefit them in the same way as other products.
Either way, the relevance is that "robo-advisory" services will likely fall to AI systems sooner rather than later. That these "robo-systems" are taking off at all, means that people are comfortable handing over those decisions knowingly to machines. As they get better, it would be irresponsible to have a human managed fund - in the same way it will be irresponsible to get into a human driven car.
There are engineers working on improving Google Search. There will be engineers working on improving self-driving cars. There are also people working on making improvements to chess-playing bots and Go-playing bots that play the game far better than they could.
Similarly I expect there will always be people looking for ways to improve trading performance in the stock market, even if the strategies are automated and they're making optimization decisions multiple steps removed from the actual buy or sell decision. The nature of the job changes, but the goal remains the same.
But that's professional trading. The kind of trading needed for personal finance seems much less technical and could more easily be automated, since most people aren't looking to try out experimental stock trading strategies with their own money. If machine learning gets applied I think it would be more about understanding and communicating with the customer better.
Artificial general intelligence certainly exists --that just means a learning model that doesn't have specific rules for any domain--, it just isn't very good in every area yet.
Yep, this is what I meant by my (now downvoted) post.
The foundation exists, what is/has been promised does not yet exist. If this group actually had an AGI, we'd be having an entirely different conversation (about the societal ramifications, mostly likely).
If AGI exists, it isn't on par with human level yet. No AI has reached the human level of intelligence yet. I think that is the argument that was made on it.
Many people define AGI as human level intelligence, and we're supposed to get there by 2020 or 2030 or so on when computers reach faster speeds.
The data says most managers will not out perform the index. So instead of trying to beat the market you should just find the lowest expense index fund and put your money in there. Lower your risk by risk pooling. Avoid the Fees. Profit.
I think a lot of people have the attitude that they need to beat the market, once you accept that just following it provides a good rate of return index funds make a lot of sense.
My understanding of robo advisors (and I'm super willing to be corrected on this if I'm wrong) is that they mostly allocate your money to lowest expense index funds, which is what you recommend and most smart people already do. So why do you need robo advisors at all? Two reasons that I can see:
* daily tax loss harvesting exists, so you can make more money if you are selling daily the funds that lost value so you don't have to pay taxes on the ones that gain value. Not sure how much this actually does, which is the main reason I'm not sure if robo advisors are worth it!
* keeping a balance between national low-cost index funds and international low-cost index funds is desirable so you can decrease volatility without decreasing expected returns. This is not all that hard to do on your own but it is an advantage of robo-advisors that you don't have to do it yourself.
Wrong. Even if everybody invested in index funds, you would still be subject to the market fluctuations and the very important decision of when to buy/sell. For example, for the period of 1999/2012 the gains in an index fund are very small or negative. So, although reducing your fees is a smart move, it doesn't automatically translate into profit as you imply.
Do you know if this is actually very different from one of Vanguard's target retirement funds? Taking a brief look at Betterment's portfolio make it seem like the distribution is almost identical. Did I look at the wrong offering at Betterment?
The only advantages that I see in Robo advisors are that:
1) They reduce the human impact on the portfolio: If the stock market is crashing you want to regularly rebalance your bonds into stocks to keep your original target allocation. If you need to do this yourself manually there are probably lots of people who won't do this when the market is crashing.
2) You don't need to take care of TLH yourself. But then again TLH is pretty simple to do yourself.
However some disadvantages are:
1) Those Robo advisors are quite expensive. Wealthfront charges an annual rate of 0.25% on top of what the ETF charge themselves. So if you have a $500k portfolio you're paying $1250 per year to Wealthfront.
2) There's a lock-in: Wealthfront's feature to trade individual stocks instead of ETFs sounds nice, but it won't be easy to move these stocks somewhere else and to manage them yourself. And selling all of those stocks won't be an option either, if this incurs capital gains taxes.
The TLH part is a good point - I manually did that twice last year, and making sure you're doing it properly is a pain.
Unfortunately there aren't any roboadvisors (at least that I have found) that take your company 401k into account as well. I really want a roboadvisor that sits on top of all of my accounts (similar to mint), and either makes the trades for me, or emails me a list of trades to make (if the automation part is too hard to start).
So the investment strategy by the robo advisor is in essence just a automated lazy portfolio? I expected/was hoping for some fancier AI than just a dumb balancing script that I currently have in an Excel spreadsheet...
This should be easy to (mostly-)automate for much less than 0.25% per year. Something like a website where I enter the funds that I have and whenever it's time for TLH or re-allocation I get an email.
The main issues that I can think of are wash sales and the task of finding other funds that match your original fund.
Not the OP, but I like the 4 fund and it is the basis of my tax advantaged account. I have been debating on cutting a lot of Intl exposure though. There is an argument to be made that an S&P fund is already heavily exposed Intl because the companies sell world wide.
The robo advisors charge an extra 0.3-0.4% on top of Vanguard's expense ratios. So at the very least, from a cost perspective, they're more expensive than just using Vanguard.
(Side note: The target date funds have slightly higher expense ratios than just rolling your own with the same underlying funds and "Admiral" share classes.)
The question is, what is the value you're getting out of Betterment/Wealthfront? I don't recall where, but I've seen one or the other say that its estimated value-add was 0.7-1%. So less their fees, that's net positive (if you trust that).
Automated tax-loss harvesting is a big deal for workers. It saves you a little income tax at your marginal rate.
Automated rebalancing removes some of the annual work associated with maintaining your own portfolio (but so does a target-date fund).
At the end of the day, I'm not sure they're worth the fees... I still manage my own (simple index-fund portfolio). But they're pretty close to worth it.
There is little difference. Betterment is just trying to exploit the mentality of millennials, who believe that because something has a slick web interface then it must be good or better than the alternatives.
I would really like to see some transparency on these portfolios. It is really hard to find performance data on these funds. Has anyone benchmarked these on their own?
They tend to pick an asset allocation and stick to it (plus some automated whizz-bang stuff like rebalancing or tax-loss harvesting). Once picked, the asset allocation is a bunch of index funds. In general index funds are very good at tracking their benchmark indices.
So it's mostly a question of, do they do a good job of picking asset allocation from the start?
This was bound to happen because fees for an in person advisor are astronomical. Robo-advisors or target funds are great for the fire and forget it investor. If you want to spend a small amount of time, you can save the .25% many of the robos charge and just reallocate on your own every quarter. A broker like TDA offers commission free trades for 100s of ETFs. Just so happens, most of these ETFs are the same ones Wealthfront and Betterment use.
I had a project I wanted to do that analyzes the books of public companies and finds the stocks with the best debt to equity ratio to find good ones to invest in.
The problem is that data is hard to access, and sometimes you have to pay a company to get access to it. There is this Edgar system but it is mostly XML files and I don't know how to navigate it to find the right one. I'd need an API that lets me pick each stock and return the values I want to store in a database so I can do analysis on them to find the best debt to equity ratios. When a company has a lot of debt it is usually a sign that it will struggle in the future.
But yeah Robo-Advisers are very popular right now, and banks should be scared as it takes away chunks of their business. There used to be Excel spreadsheets that did Candle Stick charts and other stuff to find stocks to pick. Stuff like that got automated into AI routines.
The schwab one, "Intelligent Portfolios", has been criticized for keeping a large(up to 7%) cash position, and stacking the allocation with some high cost "Fundamental" schwa index funds.
Betterment and Wealthfront, would be the biggest players. WiseBanyan is interesting becuase there is not fee. Sigfig is interesting becuase it trades at your existing brokerages.
Use a roboadvisor (or a moral equivalent like a target age retirement fund from Vanguard). If you need someone to talk to, the magic words are "fee-only financial planner" -- should cost on the order of $100 to $200 a year for a sympathetic ear that can tell you "Yep you're still on track and not doing anything insane."
Edit: forgot the jargon here -- some fee-only planners still charge a percentage. You want someone quoting a flat fee or hourly rate.
[+] No financial planner has predictably better-than-market advice regarding investment choice than any other planner -- though heaven only knows how many intimate they do. To the extent they provide a valuable service it is similar to an accountant's: they can hear the totality of your situation and tell you about options/factors you may not have considered, allowing you to sleep better.
A representative question: "What's a good way to save for college given we have a 5 year old? What type of account? What general plan? Ballpark how much?"