CFP

burk85 wrote:
bchadwick wrote:
“A sensible asset allocation probably does add value to mom and pop. “
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I agree with everything you said, but this. A sensible asset allocation can add value to all investors. Not just mom and pop
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I don’t disagree. I just meant that a CFP tends to focus people on asset allocation, whereas a CFA background may induce people to do more stock picking and such, which sounds like what you were saying too. I agree that asset allocation is important to all investors.
Whether stock picking and other strategies add value is a more complex question that mom and pop investors probably shouldn’t get too involved in and so the CFP is probably fine for mom and pop planning. Institutional investors might have the resources to exploit alpha-generating better (by hiring full time trained analysts, etc.), and they tend to have AUMs large enough to make even small alphas worth pursuing if it is there. This arguably requires more CFA type skills, but even this is debatable, as your CalPERS example shows.
 
“It’s really not the same things though. CFPs deal with the retail world.”
Fair enough. But my worlds collide. We have a small cap domestic value composite for our institutional clients, and a total return composite for our private clients. On the private client side, like it or not, we compete with the Wells Fargos of the world. So our firm fits within your caveat.
 
Systematic wrote:
Bpdulog, can I ask what you do or why you care so much?
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Yeah sure. I’m a bank consultant with a specialty in regulatory risk. I can care less about the CFP since I don’t intend on obtaining that designation, but my overall impression is that someone with the charter is somehow superior to those who possess the CFP. I don’t think that’s necessarily the case since asset allocation explains 90% of your returns anyway, and I believe that is one components taught in that program.
 
Just to clarilfy, I know that a financial advisor adds some value, how much varies by case. I don’t think its worth the 1% per year on an on going basis. You can build a portfolio with 10 passive mutual funds, rebalance it once a year and it will probaly outperform 90% of professional money manages over the next 10 years. Since that’s largely what a Financial Advisor does for you and outsources the work where you can add some alpha- estate planning and taxes, I don’t think they’re worth the cost.
Now, I must admit, know someone that works as an RIA that has a lot of celebrity clients. These people need to pay someone, they have no chance of managng their own wealth.
On the other hand, I’ve dealt with many clients that have graduate degrees from top 10 schools, defense engineers, & and head the R&D department for F500 companies. Some of these people are so much smarter than their advisors, its sickening. They build their own stochastic models, write code, and understand higher order movements.
Different firms attract different types of clients, I’m sure I’m seeing more that are capable of managing their own money.
 
Out west, I’ve had a few friends who have hired fee-per-hour financial advisors who consult on asset allocation and things like that. I have no idea whether they are any good, since I didn’t go into their specific recommendations in much detail, but it is clear that the fee-per-time model is at least being experimented with.
From the mass affluent standpoint, this may be a very logical way to go - less than the 1% AUM fee of standard RIAs, yet they probably don’t have sufficient capital to justify very active managment.
From the RIA and wealth manager’s standpoint, there’s obviously little incentive for them to volunteer to switch to this model of service, but the west coast is where they like to experiment with new buisness models that break up entrenched rent-seeking through the use of technology and decentralized consulting.
Quality control is probably the biggest issue here, but just because most RIAs currently don’t use this model doesn’t mean there won’t be pressure to shift to it in the future.
 
There are some VC backed firms that are basically trying to cut out the financial advisor because they aren’t worth the 40% of the AUM fee they’re taking for maybe a few hours of work per year (which is probably done by someone else making $30/hour)
See companies like:
Wealthfront
Betterment
Future Advisor
We’ll see which model prevails. For the time being, the standard RIA model will be here because most people with wealth(retirees) arent as technologically advanced and are used to the current model. By the time you and I retire, I bet the online platform is huge. I think these places charge about 25 bps
 
bchadwick wrote:
Quality control is probably the biggest issue here, but just because most RIAs currently don’t use this model doesn’t mean there won’t be pressure to shift to it in the future.
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It goes way beyond quality control. RIAs (and FAs) have a fiduciary responsibility to their clients. Being paid on assets - at least in theory - helps align their interests. I see a lot of problems with the pay-by-the-hour model. First of all, when fees are explicit you’re going to have a harder time getting your client to come see you. The best FAs/RIAs I have worked with touch base with their clients monthly. I don’t see that level of service being reasonable with an hourly rate. Also, who would act as the dealer for the client? RIAs have custodial fees they’re on the hook for to Schwab/Fidelity/TD and sometimes ticket charges. Without predictable revenue coming in the door that could create cash flow problems.
Someone that has a $1mm to invest is going to be charged around $6k a year. For the level of service they get, I don’t see that as prohibitive. There’s a lot more to it than setting asset allocations and buying passive funds.
The way RIAs are paid isn’t going to change the amount of clients they can service, and they’re not going to take a pay cut. Assuming the same level of service, would that $1mm client have a better experience paying the fees implicitly by $6,000 being deducted from their account, or by writing a $1,500 check each quarterly visit?
 
I think there are a lot of out-of-work financial people who might find the by-the-hour model appealing. Discount brokers abound, and there’s a ton of rent-seeking and plain old lazy behavior in RIAs.
I think the AUM model will survive, but I suspect it may be like systematic said and get crushed from 100 to 25 bps.
Anyway, it’s just an opinion. The world is a complex place, and very little comes out exactly the way one predicts.
 
I work for an RIA and our fees are ridiculously low. Our effective rate is around 35 bps. I think that is way too low, but I am not a principal so I really have no say on the issue.
 
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