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Author: ResN Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75890  
Subject: Re: Wade Pfau: 3% is the new 4% SWR? Date: 3/2/2014 9:48 AM
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Almost all people who use a FA don't understand this, and will yank their money away when the FA inevitably has a year or two of underperformance.
The only type of FA that survives is the type that sticks close to the index -- which means that he does *not* add value, and therefore his fee is a deadweight loss.


Yes, absolutely. Managers of stock mutual funds are under tremendous pressure to at least match the relevant market index, or get very close to it. Otherwise, many of the folks in the fund will move their money elsewhere. With a very small stock fund with little track record, it's possible to beat the market by picking a single stock that happens to do better than the index. On the other hand, who wants to invest in a mutual fund that has only been in existence for two years and only has $25M in it. Once a fund gets larger, the only way it can come close to matching the index is to actually match it by having the same basic holdings. If the manager can pick a sector to overweight, then he might beat the index by a little bit, but rarely by much. This is why smaller hotshot funds usually blow up after they get larger, because the manager actually begins to believe his own PR department that advertises him as an expert stock picker. Fees are everything when it comes to investing, particularly over time. I don't want a financial advisor to take as a fee 25% to 50% of what should have been my yearly withdrawal, leaving me with only half, and that's exactly what happens. Since most advisors won't even be around 10 years or 20 years down the road, there isn't a day where the client can truly look at the advisor's long-term record. What many folks don't realize is that most financial advisor (not all) are know little or nothing about investing. They use basic asset allocation charts, then invest the money in expensive mutual funds that kick back a part of the fund's expense ratio to the advisor who steered the client to the fund. Added to the 1% annual advisor fee, the so-called financial advisor sits back and gets rich, while his clients get lower returns and lower annual spending, or worse yet they overspend until they run out of money prior to death. It's a scam, plain and simple, at least most of the time. There are some decent advisors, but they are the ones who have very low fees and invest their client's money in low cost funds like Vanguard or many of Fidelity's funds. However, most advisors play on the clients' fears, which makes those advisors the scum of the earth in my opinion.
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