Fee Only, Low Cost Investment Advisors

Critical Stuff:  You need determination, time and knowledge to manage your own investments. If you lack any of those three, then fee-only might be your best bet.

In This Chapter: ADD vs. Senility. Why Fee-only advisors are smarter but poorer. How much handholding to expect. Paying for mahogany. 

 

Doing it yourself often seems like the only choice worth making for managing your retirement investments. Unfortunately, DIY requires intestinal fortitude that few people really have. When the market is moving dramatically (when does it not??) it’s very hard to avoid buying yesterday’s winners and selling yesterday’s losers. But those “investors” are buying and selling history. Ironically, one the most consistent things history teaches us is that chasing the market in that manner is a really lousy strategy.

If you don’t trust your ability to resist emotional investment, or you simply don’t feel up to the technical challenge, then low cost, fee only advisors are an interesting alternative to either doing the work yourself, using robo advisors (discussed next), or the traditional fee-based investment advisors that charge 1 to 1.5% of your assets under management and collect commissions or back-door payments to sell you expensive products that don’t work well. Well, they’re a lot more than just an alternative to that last choice.

In a nutshell, these advisors provide basic services and evidence-based investment strategy, generally built around modern portfolio theory with some possible refinements. Their natural competition is not the legacy high fee investment advisor, it’s the robo advisors and/or you. If you’d like someone to answer the phone and give you a little broader strategy than the robos will, then this might be your ideal choice.

It works for me. It’s what I do with the lion’s share of my investments. I’ve been very happy with my choice, to the degree that I’ve recommended them to close friends–not something I would generally do.

One potential advantage of this flavor of advisor is access to DFA funds. Dimensional Fund Advisors is a fund that builds indexes differently than Vanguard does, adding their own analysis to the indexes they build, and offering differently targeted families of indexes. These academically researched factors may improve the performance of DFA funds. Historically they have done a little better in many categories, though lately their performance has seemed about the same as basic Vanguard and similar low-cost index funds. Maybe the secret sauce needs some added relish. Or maybe it’s just the part of the cycle that puts them in the barrel–good old Regression to the Mean.  You can’t buy DFA funds directly, they are available through a limited number of advisors, though the criteria seems to have loosened. DFA had some premise of ethical behavior in the past, but they’ve been willing to sign up shysters like Matson Money, so it’s buyer beware as always.

Low-cost advisors generally charge either a fixed fee or a much smaller percentage, something on the order of .25% or less. I prefer the fixed fee to minimize conflicts of interest. What you generally don’t get at that rate–except perhaps in the form of something cookie-cutter–is detailed financial planning beyond basic goal setting . But the planning required to construct an appropriate portfolio, assistance with the mechanics of moving your funds from wherever they are to a custodian that they recommend (most have relationships with the common custodians like Schwab, Ameritrade, Vanguard, etc.), reporting, rebalancing, and advice on the progress and health of your portfolio is all included. In the process of planning the move or taking over management where your funds are currently parked, they will also usually help with the calculations and assessment of where you are today and where you should be in the future. If they are recommending liquidating some funds they should provide an economic justification for when and how the switching costs will be regained. Some low-cost advisors will provide additional services for a fee, which is certainly much better than paying every year for something you used once–or maybe never.

Assuming the low-cost advisor you select has the mathematical chops, what they will probably do for their money is build you a factor-based or factor-loaded (same meaning, different terms) portfolio that should yield optimized returns for the kind of risk you accept. This will likely be a more complex portfolio than simple indexing but it will be broadly diversified in the fund areas selected. Most advisors go through a goal planning exercise, and build the portfolio according to that result. The outcome of the planning effort should also include an understanding of any special tax issues.

In selecting a low-cost advisor you should look for:

  • A general philosophy of investment similar to Modern Portfolio Theory, applying well-researched factors and asset allocation to manage risk and return. They should be able to explain any “tilt” or “slant” they are adding to your portfolio and it’s connection to your expectations and risk profile.
  • Low turnover and therefore tax efficiency
  • Clear explanation of the liquidity of the recommended investments
  • Clear explanation of diversification, international exposure, and market targets of stock and bond funds
  • Regular reporting with performance metrics
  • Clear explanation of custodial arrangements

You can find some very useful Bogleheads discussion of DFA-specific advisors here.

There are not a large number of these low-cost advisors, at least not good ones. The simple reason is that there isn’t much demand for them, and it’s easier to make money as a fee-based hack. In general, people looking to invest their retirement savings want to sit down in a nice mahogany conference room and sip coffee while the advisor takes care of everything, including budgeting, financial planning and estate planning. This degree of handholding, which most people want, does not fit the fee-only model. On the other hand, the amount of assets under management of many of these low cost advisors is impressive. While $100 million would be a very successful fee-based advisor, some fee-only advisors manage well over $1 billion.

An advisor starting a practice like this will have a long haul before they start seeing serious money. Managing ten clients for $6K to 10K a year is not a lot of money to run a business with. These low-fee advisors often need a hundred clients to start approaching a million in revenue–unless they provide other services, which many do. The nature of a startup using this model presents a substantial barrier to entry that the high-cost advisor doesn’t face. Some traditional advisers do very well with a dozen or so clients with a million in assets under management. My advisor has more than 200 clients and manages over 1.5 billion in assets.

Most fee-only advisors have remarkable credentials. Far better than some fee-based salesman. You find people with advanced mathematics degrees, years of experience in financial markets, degrees in economics and finance instead of some bullshit certification that sticks letters behind bubba’s name. And yet they often work from home or in a modest office instead of on the twentieth floor of a skyscraper with fab views, lots of mahogany, and support staff. The reason is simple–they’re selling only expertise, not babysitting. And they’re geeks, not salesmen. Salesmen usually make more than geeks.  If you prefer the skyscraper and the secretary bringing you coffee or a glass of white wine, remember that you and others like you are the only sources of income. You’re going to be paying for those trappings. That could be the most expensive crappy box wine you’ve ever drunk.

Here are a few low-cost advisors to consider. I have limited experience with most of these advisors based on my own efforts to select one to work with (I choose Cardiff Park,  and I’m delighted with the work so far). But they pop up repeatedly in my web research on this topic with positive comments. In no particular order:

  • Alitora
  • Cardiff Park
  • Portfolio Solutions
  • Evanson Asset Management
  • Index Fund Advisors
  • Buckingham Asset Management (note: Fee information is hard to find on BAM’s sophisticated website, which triggers my bullshit detector, but the highly regarded financial advisor and writer Larry Swerdroe is their director of research)
  • FPL Capital Management

I’ll add both detail and other firms to this list as I encounter more firms with positive recommendations. As I said, I selected Cardiff Park to manage a significant portion of my investments. I also intend to manage a portion myself, using all the stuff I’m learning. As time slides by I’ll report what happens in this book. The version on the website, or on retirement.pressbooks.com (assuming it continues to exist that long) will be kept up to date with my findings for as long as I remember to update the sites. A footrace perhaps between rampant ADD and senility.

 

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The Retirement Trap Copyright © by Bill Babcock and Babcock, William. All Rights Reserved.

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