Here’s an interesting discussion on DFA’s alpha:
http://www.bogleheads.org/forum/viewtopic.php?f=10&t=125633&sid=a8e631e277cc1bfabe015adde4ef7f37
Thanks for the link, S2000.
I was unaware when I first read the thread, but that discussion actually began the same day you posted the link. Do you know if the guys are who they say they are on there? (That is–is “Rick Ferri” the real Rick Ferri? Ditto Larry Swedroe.)
My pleasure.
I do, and they are.
This article reminded me of our discussion here:
One Answer to the Index Fund: Build a Better Index
http://dealbook.nytimes.com/2013/11/11/one-answer-to-the-index-fund-build-a-better-index/?_r=1
Bump, for whomever asked “Who is DFA?”
This thread made me think I had entered the twilight zone. Suggesting that you need to be in multiple funds to meet your fiduciary duty… Was that a joke? The deparment of labor feels ONE target date fund is sufficient and that in fact has become the default selection for many retirement plans. Certainly fine for non-deferred accounts that have more liberal standards.
And the idea that you have to “appear” to be “doing something” for your HNW clients…that is breaking your fiduciary duty. You do not act in a way that you think will give you the best chance of keeping your clients. You act in a way that is in the best interest of your clients. If that means losing your client, so be it. You have no choice as a RIA.
Felt a little ill reading the thread. Sounds like Greenie has some ethics. Most of the other posts sounded like a sales pitch.
^But QDIA options exist because the general public is too stupid to pick reasonable fund allocations. Naive diversification is a real problem in 401k-land. The DoL put some guidelines together (they still don’t exactly spell it out) on what a QDIA fund should look like, then strongly suggested 401k plan sponsors limit their options to these funds; or at least provide different tiers of fund options (i.e. first tier - QDIA only, second - some passive funds, third - active funds across all major categories).
If I took a few hundred thousand to any advisor and he told me I should throw it all in a global balanced fund, target date, or target risk fund, I would do this:
Great advice. Say the person with the few hundred thousand was thirty years old and didn’t plan to touch that money for 35 years. He just paid $150.00 for an hour consult. How would telling him to put it all in VFIFX be bad advice? He gets to keep most of his returns and won’t be eaten by the industry. And he’ll beat most of his peers. Probably would even beat STLs Super Duper Return Strategy. Sure, there are other options, but definitely not bad advice. If you are worried about custodial risk, buy a few different target date funds, vanguard, fidelity, etc.
^RIAs get a % of AUM, not an hourly fee. If I was giving someone advice, and had one hour to do it, target date all the way. But that’s not how RIAs work. They get paid to monitor your account to ensure it’s meeting your IPS. In turn, they get an annual fee based on AUM. There’s no reason to go to an RIA to have them put you in a single fund solution. I’m not saying your results would be better one way or another, it’s just not what they’re built for.
Your understanding is not accurate. Many do offer hourly consultations. Some charge a set annual fee regardless of AUM. Some sell hard copies of total financial plans. And, yes, a very common arrangement, some take a % of AUM. Another interesting arrangement, within the RIA setup, is running SMAs as a bunch of mini-hedge funds complete with heavy margin, options, and futures trading. With today’s trading platforms, twenty accounts can be run as one. In this case, the RIA rep is really a PM and only trades individual securities and derivatives. I personally collaborate with a few nine digit one man operations that are set up this way.
Yes, it is. While you’re correct that RIAs occasionally charge a stand-alone fee for services, that’s not how they make their living. I’ve read more Form ADVs than any human should and it spells it out right there how they make their money and who their clients are.
Bottom line is, I’ve worked with hundreds of RIAs and I’ve never run into one that recommends fewer than 8 funds/ETFs for an allocation…and that’s on the very low end. On average I’d say they have around 16 funds in their balanced model.
And I thought I was a nerd for reading tax code.
“Everybody is doing it” doesn’t make it right and it doesn’t make it good for the client.
Itl doesn’t mean that it performs better for the client than a two-fund portfolio, one being a total stock market fund and the other being a total bond market fund. Maybe they just add funds to project the fake image that they’re doing intense market research and adding value because the intricacies of asset allocation are too mind-blowing for most people to understand.
Then again, maybe 16 funds is necessary for proper asset allocation. I don’t claim to know.
We’ve already been through this so I won’t rehash, but some things have changed in the marketplace since this thread was started. For example, the old 60/40 balanced portfolio is dying a rather quicker death than I expected. Advisors aren’t so dumb as to think a 60/40 portfolio will perform similarly to what it’s done over the last 20 years. With rates in the 2’s, who wants 40% of their money in a total bond fund that’s 40% Treasuries?
While everyone has been wrong about when rates are going to rise, they will eventually. When that happens, if you’re not allocated to high-yield, alternatives, or some sort of managed volatility fund, your clients are going to have a bad time.
What’s happening in the industry right now is a perfect example of why you can’t have a “set it and forget it” attitude toward your allocation. Not saying you have to go crazy, but covering all your bases has become more difficult of late.
^ +1
After re-reading this thread, I also wanted to make something clear…not sure that there is any confusion around this but just in case…
The total cost to the retail client is independent of how many funds you put them in. You could easily build an 18 fund portolio that’s lower cost than a four fund allocation. The question is really more about how many funds it takes to be fully diversified (and the definition of that is not clearly defined either).
Anyway, don’t mean to beat a dead horse. Just wanted to be sure I was adequately communicating my position.
I understand the point, but I’m not really sure that this is correct. Sure, the actual wrap fee is probably going to be a function of amount of AUM. But I imagine it’s a lot easier to convince people to pay 1% if you have 16 funds, rather than two.
If you have 16 funds, then there obviously must be a lot of economical insight by top-2 MBA’s, combined with mathematical precision and fundamental/technical analysis in order to come up to the exact asset allocation that would be most beneficial to the client, given their risk/return profile. This must surely be worth a mere penny per year to you.
If you have a basic 60/40 split, then you’re just following an archaic rule that any idiot can do. Why should the client pay a dime for this?
Which strategy will actually perform better is still up in the air.
STL, not sure why you think your exposure is representative of all RIAs in existence, but I’ve seen accounts run by a RIA that have only 8 stocks, not funds, stocks. And i personally know of RIAs that only create financial plans. They have nothing to do with actually implementing the plan. Is your exposure just to large national firms? There are many different models operating as state registered RIAs. These are just facts. Sorry if you fancy yourself as a RIA expert. There is a whole world of RIAs of which you are not familiar. And if you haven’t figured it out, do you think i might own one?
I don’t know about that. I would say you have a higher degree of risk (manager risk especially) when only picking four funds. You had better get it right or a large portion of your client’s portfolio just blew up. If you spread your bets around 15 funds, you have less chance of letting one or two bad calls derail the entire portfolio. And, you certainly don’t need to be some investing wizard to come up with a dozen or two funds to use. If you don’t think you can handle it yourself, there are plenty of services that can assist you. Littmon Gregory for example, or many of the Turnkey Asset Manager Programs will do it all for you.
Setting an allocation mix between equities and fixed income is hardly archaic and it just so happens that a 60/40 portfolio is the most popular mix as it has historically offered steady returns with low volatility. If you look at the home office models of any major wirehouse or broker-dealer, they’re going to have something very close to a 60/40 portfolio, though they now look more like 60% equities, 20% fixed income, and 20% alternatives.
And as to what will actually perform better still being up in the air, well, that’s kind of the whole point. Your strategy puts all your eggs in a few baskets while ignoring some very important asset classes. The very fact we don’t have any idea what asset classes will do well over the next X number of years is the very reason you need exposure to most, if not all, of them to some degree. But, we’ve discussed that already…
^No, there’s a world of difference between how I manage my money and what’s appropriate for the general public. Also, this isn’t the Water Cooler so quite being a bitch and drop the attitude. I’m having a constructive conversation with Greenie (and whomever else is reading).
I’m well aware of different RIA models but Greenie specifically outlined the type of shop he would run. I do have extensive expertise in that area. While you may own an RIA, that means less than a fart in the wind to me. I’ve worked with RIAs that have $20mm under management to guys at Hightower that manage billions. Obviously there can be huge differences in the way they run their business but I’ve been around long enough to form an education opinion on the most successful business models. Yes, I fully admit - seeing as how I work for a mutual fund company - I don’t work with RIAs that only use individual securities, for example. But, again, that isn’t the business model Greenie is talking about implementing, so it really isn’t germaine to this discussion.
If you want to contribute something to this thread, by all means please tell us about your RIA and how you run your business. Or, if you just want to talk smack, let’s head back over to the WC and I’ll beat you like a red headed stepchild.