Mum and Dad Investors vs. the Professionals

[Kremmen]

Financial advisers are nothing better then commission based salesmen.
...
FA's are going out the same way as scum travel agents and all other middle men who promise the world but when you need them......

There are two problems with such sweeping statements:

1) Some people are stupid. I agree with you about travel agents, but that's because I travel a lot and I know the fare classes, fare rules, upgrade rules, etc, for routes I care about better than they do. However, there are people who simply won't cope with working all that out for themselves, or don't want to. Some people, like these need a travel agent. Similarly, even a below average financial advisor will be better for some people than doing it themselves, which would mean leaving their money in their cheque account forever.

2) There are good financial advisors. Those few who have obtained the qualifications in their own right are a good place to start. The majority of financial advisors are indeed salesmen, but they're also mostly just hanging off the coat-tails of a major corporation's licence and have no qualifications in their own right, so they're not hard to spot.

 

[Julia]

This may be a bit off topic, but I've realised there are so many people out there (mainly "mum and dad" investors) who invest in shares when they don't have a clue what they're getting into. It absolutely shocks me that people can plough their life savings into a company with out doing research. And when it all goes wrong, they dont grasp the knowledge that there isn't any money left for them! (e.g. ABC, Alco, B&B, etc etc)

It's really time to wake up.

Even more broadly, it has been really surprising how many people didn't understand what was happening (or weren't interested) in the last two years, and subsequently find themselves working years longer because they didn't consider temporarily moving their Super or managed funds to the cash option.
"Super" is probably a whole other subject.

 

[rbourne1]

Then when we come to the woeful performance of financial advisers, let's remember that most of these had their own interests in mind when they advised clients to 'just hold on: it will all be just fine'. Had their clients moved out of managed funds to cash, whacko, there would go their trail commissions. So let's not have that!

From many of the posts I have read I think there is a general misconception about what a financial adviser's role actually is. To blame them for not being able to forsee the GFC and cash every client's investments out shows that the public and Mum and Dad investors need more education on what a financial adviser's role actually is.

If you are talking about ethical advisers (and yes, there are many out there), then it has nothing to do with working on a commision model or fee for service. How many fee for service advisers do you know that recommended cashing out to all their client base?

If the public's perception of advisers is that of day traders and able to forecast every market movement, then they have been badly misguided. An adviser's role is rightly focused on long term strategies, because they, nor anybody else cannot predict short term movements in the markets. It's not just about investment performance. The good advisers should be looking at all the issues that contribute to making a person's life complete by providing them with an understanding of investments, estate planning, insurance, retirement planning and even how to lead a healthy life.

The adviser's limitations are not set by the fee model but more by the restrictions of the legislation. The FSR Act requires an SOA everytime advice is given. If advisers were to become short term investment advisers then what mum and dad investor could afford the cost of preparing such advice, particularily on a fee for service model.

I'm not advocating a commission model is any better, that's another debate. I just believe the public need to be better educated about a financial planner's role. If the public understood the limitations placed on advisers through legislation, restrictive APL's, biased dealer groups and research houses then they would understand the need to take control of their own finances through appropriate education programs.

 

[Taltan]

Does that mean a system that has a 80%+ accuracy is just pure blind luck, despite hundreds of successful trades??

brty

What are you calling accuracy? Yes a syatem that 80%+ knows if the stock will be up or down by the end of the week does not exist. If anyone had such a system and a year 8 level understanding of statistics they would be richer than Gates & Buffet so obivously no-one has such a system.

 

[skyQuake]

What are you calling accuracy? Yes a syatem that 80%+ knows if the stock will be up or down by the end of the week does not exist. If anyone had such a system and a year 8 level understanding of statistics they would be richer than Gates & Buffet so obivously no-one has such a system.

That 80% accuracy is curve fitted and only works in specific time periods...
Or it averages down so it doesn't "lose" as often.

 

[Mr J]

What are you calling accuracy? Yes a syatem that 80%+ knows if the stock will be up or down by the end of the week does not exist. If anyone had such a system and a year 8 level understanding of statistics they would be richer than Gates & Buffet so obivously no-one has such a system.

You're not considering the risk-to-reward ratio or the possibility that none of these systems scale that well, or that none of them have had enough time in the market or enough trades to rival Buffet.

 

[Taltan]

Maybe I'm misinterpreting risk to reward ratio but take any stock you like. If it were possible with an 80%+ accuracy to know whether it will be lower or higher at the end of the week than one could easily through the use of CFD and other derivatives make a lifetime of fortune in a maximum of approx 8 weeks. Even on a longer month by month timeframe you could make a killing if you knew anything with 80% certainty. This is my point no-one has that level of certainty (apart from insider trading instances)

Investment managers usually do slightly better than average (although this gets gobbled up in their fees) because they have more insider information, more access to management etc.

 

[prawn_86]

I think the difference between what Taltan and brty and Mr J are saying is that brty and Mr J's comments are to do with systems that have 80% accuracy, in hindsight. That is to say that the system has performed at a 80% win rate so far, but may change in the future. Just because it has performed like that in the past, does not mean it will if market conditions change.

What Taltan is saying (imo) is that is you knew 80% of the time if a stock would be higher or lower in the future, then you could make a fortune.

 

[Mr J]

No, I'm talking about hitting 80% going forward. Taltan is saying that 80% going forward would make a fortune, but then states it can't be done since it is obvious nobody has done it. I'm saying that is not necessarily true - just because we don't know about it doesn't mean it doesn't exist. I'm sorry, but I don't like statements of certainty in situations where there can be no certainty.

 

[Julia]

From many of the posts I have read I think there is a general misconception about what a financial adviser's role actually is. To blame them for not being able to forsee the GFC and cash every client's investments out shows that the public and Mum and Dad investors need more education on what a financial adviser's role actually is.

If you are talking about ethical advisers (and yes, there are many out there), then it has nothing to do with working on a commision model or fee for service. How many fee for service advisers do you know that recommended cashing out to all their client base?

Thanks for your comments. Presumably you're a financial adviser or have a close connection to same?

I stand by what I said about cashing out being a sensible strategy for the GFC. To say that it's unreasonable to expect FA's to have understood what was happening is simply unrealistic imo. Many of us who have no formal qualifications in finance didn't have any trouble appreciating the seriousness of the situation. There were daily reports on most media about the deterioration in the American, British and European economies every day from the collapse of Lehman's on.

How many fee for service advisers do I know who recommended anything?
None. I don't know any fee for service advisers. I have known several commission-focused advisers.

My remarks were based on the frequent public assurances by people like Noel Whittaker, et al who - as people worried about their falling Super balances - continued to promise that it wouldn't be too serious and to hold on.

That might be fine for young people who have many years of saving ahead, but to include people close to retirement or already retired in that advice has imo caused them considerable distress and in many cases necessitated their having to work longer than they'd planned.

Had the funds been moved to cash early in the downturn, and when interest rates were still quite reasonable (7 - 8%), the capital would have been largely protected, and the funds moved gradually back to equities as the recovery became evident.

If the public's perception of advisers is that of day traders and able to forecast every market movement, then they have been badly misguided.

I haven't suggested at all that advisers should adopt day trading strategies for their clients. Simply the protection of capital for people within a few years of retirement.

An adviser's role is rightly focused on long term strategies, because they, nor anybody else cannot predict short term movements in the markets.

Depends on how you classify 'short term movements in the markets'.
I don't think a two year (and possibly much longer) fall of the proportion we've just had can be so classified.

It's not just about investment performance. The good advisers should be looking at all the issues that contribute to making a person's life complete by providing them with an understanding of investments, estate planning, insurance, retirement planning and even how to lead a healthy life.

Agree absolutely, but I'm not sure how often this happens. I'd say, though, that protecting their financial situation should be pretty high on the list when it comes to the responsibilities of financial advisers.

The adviser's limitations are not set by the fee model but more by the restrictions of the legislation. The FSR Act requires an SOA everytime advice is given. If advisers were to become short term investment advisers then what mum and dad investor could afford the cost of preparing such advice, particularily on a fee for service model.

Again, as above, I don't think protecting a client's capital when they are nearing retirement should be neglected because the adviser is required to issue a new SOA, and if the relationship is on a fee for service basis, then I'd guess most investors would happily pay a few hundred dollars to save many thousands, or in some of the cases I've known, hundreds of thousands.

I'm not advocating a commission model is any better, that's another debate. I just believe the public need to be better educated about a financial planner's role. If the public understood the limitations placed on advisers through legislation, restrictive APL's, biased dealer groups and research houses then they would understand the need to take control of their own finances through appropriate education programs.

Well, we certainly agree about people needing to take control of their own finances - no argument there.

Thanks for making the points you have. It's a discussion worth having.

 

[Temjin]

I stand by what I said about cashing out being a sensible strategy for the GFC. To say that it's unreasonable to expect FA's to have understood what was happening is simply unrealistic imo. Many of us who have no formal qualifications in finance didn't have any trouble appreciating the seriousness of the situation. There were daily reports on most media about the deterioration in the American, British and European economies every day from the collapse of Lehman's on.

I would like to correct this on my experiences in the events leading to the GFC and the aftermaths.

While I'm not defending those financial planners, I think it is inappropriate to lay the blame on them for failing to predict the GFC and did not advise their clients to cash out just before the market crash. This is despite to the number of "warnings" out there.

The signs may have been obvious to those who have been "listening" to the right sources, but certainly not if most financial planners, or even the general public, have been listening to the mainstream news. The potential crash was actively made understated prior to the events. This is clearly evident, the subprime crash would not affect global markets, blah blah blah, etc. Mainstream news were largely biased in being extremely optimistic about the future (and still is!) and to most people, they would have never foresee the crash with any certainty.

Exceptions of course, if their financial advisors were the only few economists/bloggers, who predicted the crisis and actually did GAVE FIRM ADVISE to get out on a particular date or else.

However, very few financial planners would have the ability to take heed to those advises (let along actually FIND THEM) and then actually advise their clients to take actions. My opinion is that it's quite unfair to blame them for their incompetence with the amount of misinformation and massive amount of media biases out there. This along with all other corporate requirement of selling approved product lists, maintaining sales target, etc, etc, would have certainly hinder them from making such good advises.

At the end, it may have been obvious to some of us, but it certainly wasn't to a lot of people including ultra rich investors / high profile economists. Some of them never saw it coming. How do you expect a common financial adviser to do the same?

How many fee for service advisers do I know who recommended anything?
None. I don't know any fee for service advisers. I have known several commission-focused advisers.

I've already posted in another thread stating the fee for service advisers will eventually be made compulsory by 2012. Hopefully that would improve the "bias" problem by slightly.

Had the funds been moved to cash early in the downturn, and when interest rates were still quite reasonable (7 - 8%), the capital would have been largely protected, and the funds moved gradually back to equities as the recovery became evident.

As I said previously, no one could have, with absolutely certainly, predicted the timing of the crash, or the recovery, and the magnitude of it. It's certainly not the role of a financial adviser to make such predictions. They certainly wouldn't do it either even if they have been sourcing from the right information. Fear of litigations if their predictions were not correct would have deter more advisers from making such predictions.

This is as simple as, if my financial advisers asked me to cash out just before the crash, but buy back in half way down and suffered lost, then should I held my adviser's liable for misleading me? Yes, in the current laws, you can and have been done. This probably even true when the lost of income/profit opportunities is extremely large.

I haven't suggested at all that advisers should adopt day trading strategies for their clients. Simply the protection of capital for people within a few years of retirement.

That I agree, and my understanding of what financial advisers do is that they generally recommend asset allocation for retirees to be in the income area and less in capital speculations. Preservation of capital and focus on income. Of course, human greed bypass that. The clients could easily override their advisers' decisions, and corporate need to sell financial products (growth funds) also affects it.

Well, we certainly agree about people needing to take control of their own finances - no argument there.

Thanks for making the points you have. It's a discussion worth having.

No argument there, we all agree on this.

Take your own control and blame no one else but your own.

 

[Wysiwyg]

Advice is right or wrong in hindsight. We seek to pay for right advice and complain when (in hindsight) it is wrong. As if there is no thought that wrong advice is indeed a real possibility.

 

[ROE]

Keep your inner score card

who care what people called you or classified you ...
I'm a mum and dad investors and I take on the Market and the fund managers every day.

they can called me Mr mum and dad investor or Joe average investor or un-sophisticated investors.
simple is best when it comes to money .... the simplier you are, the more money you makes

 

[Krusty the Klown]

I've noticed that financial planners cop a pasting on this site, but never any mention of "stock brokers" copping any flak.

Or are they just included in the "financial adviser" catch all?

Considering that financial planners can allocate assets in to cash, mortgage, and property funds etc, a stock broker would be using mainly direct equities.

Therefore personal broker portfolios should have performed even worse than a planner who has the diversification of other asset classees.

Anyone come across any broker fallout through the GFC?

I know of one stock broker in a regional town who was afraid to leave his house for fear of being shot or beaten up.

 

[rbourne1]

Thanks Julia for your detailed response. Yes, I make it too obvious that I'm a fa but I agree with many of your concerns.

Hindsight is a wonderful thing and cashing out for the GFC makes sense after the event. You infer from your comments that many informed investors (not using a fa) would have used this strategy. I wonder how many did. It would make a good comparison.
Let me ask you a question to perhaps put the issue into more perspective.

If you were the adviser, at what point in the GFC would you have told your clients to 'cash out'? Using the ASX 200 index as a guide and given it was at its high around 6800 sometime in October 2007 (was it that long ago?!) and reached a low aound 3100 in early march this year?

You are right in that the media was not short in providing all types of warnings and news about the events (sub-prime) leading to the GFC but I'd be interested in knowing if there was any particular news item or movement in the market which would have persuaded you to make the call to 'cash out'

And assuming you did cash out, would you still be sitting in cash now or would you have entered back into the market at some stage? Again, You infer that you would be back in the market but I'd be interested in the reasons (I'm always learning!)

I agree with you that anyone close to retirement has probably been more affected but I would also argue that they should of had an appropriate investment strategy in place. For anyone approaching retirement (within 3 years) I would suggest a conservative approach of always having at least 3 years of income set aside in 'defensive' assets. If the balance of their investments are in 'growth' assets then they have 3 years before they have to draw down on those investments. History shows that most markets recover in this time frame. The GFC will probably not fit this scenario but we'll have to wait another 12 months to see.

Many of my retired or soon to be retired clients using this strategy would be down 5 to 15% on the highs of October 2007 which under the circumstances is not a disaster.


My definition of short term is 12 months or less and in the context of the point I was making I believe it unreasonable to expect fa's or anyone to be able to time market entry and exit points when investing long term.

There is a need for ethical fa's in this world but only because many people choose not to take responsibility for their own decisions or finances. Those that don't are usually the first to point blame when things go wrong. Nicolas Cage is a fine example of that.

Good discussion. Thanks Julia.

Rob.

 

[Kremmen]

I stand by what I said about cashing out being a sensible strategy for the GFC.

Only in hindsight and only if you knew how deep the slump would be.

If the slump had been less and the rebound had been sooner, people who cashed out could have simply been left worse off than they started, because of massive capital gains tax bills. ... And then they'd have been abusing their financial advisor for wrecking their investments!

 

[rbourne1]

That's a good point Kremmen. There are also those clients (I had some) who voluntarily cashed out near the bottom (3500) and are still sitting in cash. Who knows, maybe the market will fall below 2000 so they can justify their decision.

 

[Gordon Gekko]

I fired my Financial adviser in Aug 07 after a meeting in which he told me that I had a 28% return for the previous year.
I did this because I finally figured out exactly how much I was paying for the service.
4% contribution fee as well as 1.75% MER as well as all the other money he was being paid in yellow envelope payments from fund managers or who ever.

When I asked for a breakdown in fee's he wouldn't give it, so I figured it out on my own.

I also figured out that my managed funds were index huggers, where is the added value to justify a FA over an index fund or ETF?

At the end of the day I was learning and expected the FA to meet me twice a year and be in regular contact with regard to my investments. After I signed on the dotted line I never heard from him again.

Fee for service will be no better.


Best
G

 

[gooner]

I fired my Financial adviser in Aug 07 after a meeting in which he told me that I had a 28% return for the previous year.
I did this because I finally figured out exactly how much I was paying for the service.
4% contribution fee as well as 1.75% MER as well as all the other money he was being paid in yellow envelope payments from fund managers or who ever.

When I asked for a breakdown in fee's he wouldn't give it, so I figured it out on my own.

I also figured out that my managed funds were index huggers, where is the added value to justify a FA over an index fund or ETF?

At the end of the day I was learning and expected the FA to meet me twice a year and be in regular contact with regard to my investments. After I signed on the dotted line I never heard from him again.

Fee for service will be no better.


Best
G

If you were paying 4% upfront and 1.75% ongoing for an index fund then you were being seriously done over. Given the weighting of the top 20 companies in the various indexes, all you have to do is buy the top 20 shares according to weighting and you are very very close to having a ASX 100 index fund. All for the price of small brokerage upfront and occasional reweighting if you so choose.

 

[alphaman]

Given the weighting of the top 20 companies in the various indexes, all you have to do is buy the top 20 shares according to weighting and you are very very close to having a ASX 100 index fund. All for the price of small brokerage upfront and occasional reweighting if you so choose.

Why not just buy STW?