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We recently had another meeting with my wife’s financial advisor. At our previous meeting I’d been fairly open about my opinion that he hadn’t delivered meaningful investment gains compared to my own self-managed Vanguard portfolio, and at considerably higher fees. I suspect he wasn’t thrilled about that.
He came prepared. He presented a multi-sheet analysis of how his firm had managed my wife’s investments in the lead-up to the 2022 bond crash: aggressively de-risking into ultra-short duration bonds and cash-like instruments, alongside a pivot into commodities. It was clearly designed to make a point.
And to give credit where it’s due, the preemptive bond pivot worked a treat.
What I hadn’t fully appreciated was that this wasn’t a one-shot defensive call. The firm subsequently rotated back into short and medium duration bonds at an opportune moment, catching most of the subsequent rally from an already positive position — a position only achievable because they’d avoided the crash in the first place. A passive 60/40 investor meanwhile took the full 13% drawdown on their bond sleeve and has only nominally recovered that ground three years later.
When I pushed back on fees, his response was disarmingly straightforward: they only need to make that level of macro call once a decade to justify a significant portion of the cost. When I worked through the arithmetic on a portfolio of meaningful size, it’s hard to entirely disagree. Protecting and then capitalising on a dislocation of that magnitude can represent many years of fee differential in a single cycle.
Worth noting: the ground had already shifted before he opened his laptop. At our previous meeting I’d secured a meaningful fee reduction and a more joined-up view of our combined accounts, he now has to advise with my Vanguard holdings firmly in the frame. His 2022 performance is history. He’s essentially restarting from a lower cost basis, tasked with proving that even at a discount, his macro calls can add value alongside my set-and-forget indexing.
His broader point — one I’ll concede deserves more credit than I’d previously given it — is that investment management is only part of what my wife is paying for. Bespoke tax planning, account optimisation, and estate planning can add real and recurring value year on year, not just in a crisis.
I’m far from ready to declare the debate settled. I’d want a multi-year picture across the whole portfolio, and I’d like the tax planning value quantified rather than assumed. But the arithmetic on the bond crisis alone suggests the outperformance likely covers a decade’s worth of fees, a harder number to argue with than I’d like.
What started as a fairly straightforward challenge to active management fees has become a more genuinely interesting question about where active management actually earns its keep. On this singular case, I’m rather annoyed I don’t have a clear answer…at the moment.
This (a possibly lucky guess) reminded me of a scam I once read about.
The scammer sends out letters to a lot of people predicting that some stock will rise or fall. A week later another letter goes out only to the people where the first prediction was correct. And so on.
After 10 week the scammer offers an investment “opportunity” to the small subset where all 10 predictions were correct.
even the blind pig occasionally finds an apple.
I’ve read about that myself. You have to grudgingly admire the cunning.
Mark, I would say your wife’s (and now yours?) advisor got somewhat lucky, though at the time, with bond funds yielding under 1%, many folks did realize that bond fund returns were going to be challenging starting in the fall of 2021- If I recall, Jonathan wrote a few pieces about the ultra low yields of bond funds at the time, which woke me up to consider changing my approach with bonds, which I did. Whether you should continue the relationship with the advisor is a tricky one- it seems he wants all of your business (dropping his fee for AUM), and if you pre-decease your wife, she already knows him for better or worse, which isn’t a bad thing.
I’m slightly older than you, and have a wife that is somewhat savvy figuring things out, but has left me to do all things financial in the household due to my background in finance when working. I will likely transition to a flat fee advisor in the next 3-5 years so she/we have a relationship with an advisor/team she/we can trust as we age, and possibly have a better partner in making financial decisions than our future selves. The challenge will be finding someone like minded in our financial approach. Just last week, I had an assigned advisory team at Fidelity make a pitch to manage our taxable account and invest it in a direct indexing scheme, in spite of having to pay a nearly 7 figure capital gain on the holdings in the account. They felt the taxes would be offset in a few years by tax loss harvesting, and superior returns than a straight indexing approach. I told my wife to never/ever let Fidelity advisors manage our taxable account (and likely any other account).
Anyways, it seems like you and your wife are on some sort of stable path with an advisor- the main issue would be is the advisor significantly younger than you so you don’t face the prospect of a significant change in personality/approach should your current advisor retire just when you need him most.
Bill. That’s the rub really. In practice he’s become something of an unofficial free advisor to me, since he factors my portfolio into his thinking — even though his fee comes solely from my wife’s AUM. I’m happy enough with him as it goes, and at maybe fifteen years younger than us, he’s got plenty of runway left. There’s also the not insignificant point that if I bite the dust first, there’ll be virtually no onboarding required as my assets fold into my wife’s portfolio — which, from where I’m sitting, is a rather elegant arrangement.
Financial advisors ultimately earn their living by investing other people’s money. That’s the core of the profession and where they try to build credibility. But if all they’re doing is implementing a passive portfolio, it’s difficult to justify their fees because those strategies are inexpensive.
That’s why judging an advisor purely on investment returns can be misleading.
Where advisors tend to justify their fees isn’t by consistently beating markets — something very few managers do over long periods — but through the surrounding work: tax planning, asset location, withdrawal strategies, estate coordination, and helping clients avoid costly behavioral mistakes.
So, he just timed the market successfully. How many times has he done that in the past? How likely is he to do it in the future?
If you need tax advice, wouldn’t it be cheaper to pay a tax accountant directly? How often do you need estate planning? And what, exactly, is “account optimization”?
Interesting take on active management Mark.
I have always felt that the holistic approach is where the value comes in for active mgmt advisors. Asset allocation, risk mgmt, tax planning and estate planning are all important. It is not just who performed best last year. Good ones can earn their keep but there are also a bunch who talk better than they perform.
I think it is especially important to have an advisor for a spouse who has limited knowledge of financial mgmt. If you have a good one who is honest (easier said than done), they can do well for your spouse in your absence.
Jerry, here is a case in point regarding my wife and her advisor. Last year, Suzie purchased a very simple ten-year term annuity—all well and good. However, I pointed out to her that because the annuity acts as a bond substitute in terms of risk, she should increase her equity allocation to compensate.
My suggestion fell on deaf ears. Yet, at the very next meeting with her advisor, he raised the exact same point. She agreed immediately to his suggestion to up the equity allocation! Extremely annoying.
Good article to think through the financial advisor/client relationship. I am happy with my investments, look to the appropriate mix for my risk tolerance, desire to optimize taxes but continue to simplify my investments. What role does my advisor play? He is a sounding board and a source of ideas. He will step in when I am unavailable or incapable of executing, so he (and my wife) needs to know the direction we are headed. We don’t do active management or market timing. We talk 2 or 3 times a year to keep in synch.
Suzie’s advisor is a formidable foe in your quest to determine the efficiency of paying for financial guidance. I have known many advisors whose depth of knowledge is too shallow to do what her person does.
However, a quick internet search of the subject reveals studies that suggest people with advisors do better than we DIYers. Advisors tend to protect us from ourselves. Even those who are less hands-on than Suzie’s person, keep their clients from making mistakes such as panic selling, chasing hot tips, being too conservative, and etc.
Problems arise when commissioned salespeople try to pass themselves off as advisors. So to me the burning question isn’t ‘do advisors add value’, it’s ‘how do regular people tell the difference’.
Dan. The strange thing is, Suzie could actually have been a partner in the very advisor firm she now uses as a client. When Peter left the bank — where both he and Suzie worked — to start his own business, he asked her to come on board as the mortgage broker partner. She had a large, loyal client list and years of experience in the industry, so it made obvious sense. But the full-time commitment and long hours weren’t something she wanted at that stage of life, with our daughters being young.
Buffett said the game is not won by those who are the smartest, but rather those with the necessary emotional discipline. Those who lack it, or who are not interested in finance are probably better off working with a good advisor.
But DIYers are a diverse group, and those of us who are emotionally suited and who have learned the basics will do fine. A caveat however, is that among some married couples, one manages finances and the other is not involved. Should the first one pass, the survivor might prefer to hire an advisor.
100%, Jack. When reviewing a tax return with a client, I always tried to engage with the ‘passive’ partner, so they would have a clue if they ended up alone. I think it’s even more important for financial accounts.
I know, I know, everyone hates that TV guy who shouts too much; but his simple advice, “No one ever made a dime by panicking,” has saved my bacon countless times. In the crash that led to the Great Recession, I resisted the temptation to sell out, and stood pat all the way down and all the way back up. In the 2020 Covid crash, I did lighten a few funds, but basically did the same thing. And in the current Iran imbroglio, I have made sure I’ve got enough cash to cover my bills for a fairly long period of time — but that’s it. The small investor tends to be emotional and reactive, and that’s a hard trait to overcome. That TV guy is “for entertainment purposes only,” in that his “buy-buy-buy” and “sell-sell-sell” riffs are not to be taken seriously — but the overall philosophy is sound.
I have been a DIY investor since just before the 21st century and have seen the market drop significantly multiple times, and have done nothing except buying on the dip (mostly by rebalancing). What I have also seen is an overall up and to the right market performance over that time. If that were not continue from one decade to the next going forward EVERYONE will be in a heap of trouble.
That dude is entertaining, and if that’s how you learned to keep your composure during bad times, I’d say watching him was time well spent.
He catches huge flak – mostly because he says no one needs a financial advisor – but if you actually do what he recommends, not what the carpers think he recommends, it’s pretty sound. He says, “Your retirement nest egg should be in index funds — this stock-picking is basically just for bling on the side, with a few dollars you can afford to lose.” He also says, spend an hour a week doing homework on each of the stocks you currently own. AND be able to explain, to any layman who asks, why you own that stock. Does anyone do that? The rapid-fire segments where he says buy this and sell that, he is not really saying “go click the BUY button right now.” He’s saying do some homework on the stock, but that he likes (or hates) the sound of it. The showbiz is just showbiz; the substance is really not far away from what any prudent investor would do. But I don’t watch him these days, because he’s friends with a certain high-up individual who will remain nameless, but you know who I mean.
Nice piece Mark. My first article for HumbleDollar was about the need to think broader about personal financial planning than just investment management. In my circles most people thought that financial planning equaled investment management. My real world experience with family clearly demonstrated the need to be on top of all the facets of our financial lives. Many of us are comfortable, or partially comfortable, with taxes, estates, insurance, … But many people aren’t. If your wife’s planner is providing help in areas that are challenging for you and her, that has at least some value.
Rick, I’d definitely agree that the holistic approach is the financial advisor’s strongest card. The problem, I think, is that for the very people who would benefit most from it, the concept can be quite nebulous — and that makes it hard for them to grasp the potential value.
Keep probing Mark. It’s good that Susie’s financial advisor knows that someone is looking over his/her shoulder.
David. If I’m being honest, I think he finds me a bit of a pain in the backside 😄
Good!
My view is that “active mgt” of fixed income may be better than passive mgt, but historically “active mgt” of stock/equities has a poor performance record against just indexing. So, the value of the FA probably lies in the tax planning, asset location and maybe active mgt of fixed income. And there’s the psychological aspect for your wife of having a FA which is hard to monetize.
Hey Mark, if this is your wife’s advisor and your wife’s investment portfolio, why do you go to the meetings?
I don’t get the hers and mine and mine and hers concept for a married couple as opposed to ours.
How do you really feel about that?
I’ll tell you why “hers and mine and mine and hers” works so well, for a married couple (since 1997, in my case). I’ve got my money and she’s got hers — and as a result, we don’t fight about money! Unlike both sets of parents, who spent their whole lives arguing, my wife and I keep it separate. Sure, we own our home (that is, condo) jointly, and we share expenses — in a rather haphazard fashion; I pay the taxes and utilities, she pays the condo fee, buys groceries, and the phone bill. But “upstream,” there are no joint checking, savings, or investment accounts. Hence, no “we can’t afford that,” or “why do you always buy what you want but I never get to buy what I want?” To say nothing of “We’re overdrawn again, what did you do?” That’s what my parents — and my wife’s — were doing their whole lives, and we wanted to avoid that. So, she’s got hers and I’ve got mine. (We finally got around to having our lawyer do us a will, so whoever dies first, the other gets their assets.) Keeping our money separate isn’t a financial decision; it’s a relationship one — and for us, it’s worked really well. We always advise our younger friends to follow our example… but they never do!
urbie – that’s a great answer and approach. My wife and I are in our second marriages. We have kids, but not together. We keep finances separate, but unlike you we do maintain a joint account for bill paying. We have wills and trusts to manage our future demise (I will likely be the first to croak) to take care of each other and our kids.
I find that sad. We have been married over 57 years and never argued about money. Never did one of us lobby to spend money we didn’t have to spend, never overdrew a bank account, neither of us ever charged what we couldn’t pay off immediately. We saved for every major purchase.
I think you nailed it though, it’s a relationship thing.
Ya — definitely some self-knowledge was needed! Before we even got married, it was clear that we had very different financial personalities — she’s awful at keeping track of anything and tends to be a spender; I’m “so cheap, he squeaks,” as she puts it. And that was even before I went back to college and got a degree in accounting! So we had to figure out a system that would work, and quickly settled on, no joint accounts! In the end, it works out about the same, because, I as I note, we do share expenses and own our home jointly. (We also used to live in a community property state, so like it or not, we legally owned the car jointly — but it was her car, and I knew better than to pretend otherwise). We just don’t share bank/investment accounts. We grew up with parents who fought about money and didn’t want to do that… so we don’t!
Morning Richard.
As a couple, we treat everything we own as one shared pot — what’s mine is Suzie’s and vice versa. The administrative reality in the UK, though, is that everyone is taxed as an individual, which means joint retirement portfolios or joint tax filing simply isn’t possible. That said, it does work in our favour: we can effectively double up on tax allowances by making full use of both our separate entitlements and transfer assets between each other without tax implications to manage tax band smoothing.
As for joining Suzie when she meets her financial adviser — it’s a perfectly natural thing to do. We manage all our finances together, even if the legal framework doesn’t reflect that. Basically, in the UK, tax entities can’t get married or cohabit, only people do that…from a tax position, we’re forever separate 😉
Interesting, that wasn’t the case when I lived there (a quick check says it dates from 1990). Is it your impression that this results in British women paying more attention to their finances than seems to be the case with the spouses of many HD contributors? I do wonder how much of the latter is due to the complexity of the portfolios – my combination of index funds and benign neglect requires very little management. IRAs (and 401ks) are individually owned here and spousal IRAs are possible for stay-at-home spouses.
I feel the answer is yes. A few weeks ago I found myself drawn into a conversation between my wife and two of her friends. They were discussing one of them using up her personal tax free allowance by withdrawing from her investment portfolio before the allowance reset at the start of the UK tax year in April, then moving the money into a tax-free account that mirrors her existing asset allocation. These women would probably not have sought out that kind of knowledge unless they were the ones managing their own money. My gut instinct is simple…if you own a personal investment portfolio you’re going to engage with it to the best of your ability, gender is irrelevant.
Your wife’s planner was lucky. He performed a fixed income version of market timing. For every one like him who made the right call at the right time, there are 10 or 20 who did not. His chance of continuing the hot streak is very low. Having said that, tax planning and asset location are very important and probably worth the money.
Tax planning yes, but asset location? That doesn’t seem worth the money to me. Yes it’s important, but it’s a fairly simple decision, certainly compared to tax planning.
Agree on the assessment of the bond move too.
Maybe we’re talking at cross-purposes. In the UK, asset location is one of the main drivers of tax implications and planning. Is it not the same in the US? One personal example: I concentrated far too much on tax-advantaged accounts on the way in, and once I eventually start drawing from those funds, I’m going to hit tax issues on the way out. In hindsight, I should have taken a more balanced view around my asset location during the accumulation phase… maybe a financial advisor would have pointed that out lol