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ColbyDavis comments on A Guide to Rational Investing - Less Wrong Discussion

26 Post author: ColbyDavis 15 September 2014 02:36AM

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Comment author: ColbyDavis 15 September 2014 08:32:30PM 2 points [-]

Vanguard may very well be better for you, and I am happy to tell people to take advantage of Vanguard if their fortunes are small or they don't want to spend a lot of time on their portfolio or hire an FA.

I want to quell the notion, however, that you're only worthwhile to a financial advisor if you have millions of dollars. The average FA is 50+ years old and so is generally more interested in how your portfolio looks right now than what it will look like in 20-30 years, but younger advisors are much more interested in the trajectory of your wealth. My firm has, and I have known other FAs who have, taken on younger clients with trivial amounts of current assets because they were dedicated to an aggressive savings plan.

Comment author: V_V 15 September 2014 10:55:04PM *  1 point [-]

The average FA is 50+ years old and so is generally more interested in how your portfolio looks right now than what it will look like in 20-30 years, but younger advisors are much more interested in the trajectory of your wealth.

Why does the age of the financial adviser matter?

A firm can be expected to professionally outlive its employees and keep providing its services to its customers after any specific employee retires or quits, provided that employees operate according to known principles and their expertise if generally transferable. That's how engineering and medicine are done, for instance.
Is financial advising some kind of non-transferable "dark art" such that advisers aren't easily replaceable? This rings some alarm bells...

Comment author: ColbyDavis 16 September 2014 12:08:20AM 3 points [-]

The age of the advisor matters not because of the skills he is or is not able to transfer to employees but because it may effect whether he wants to bring you on as a client in the first place. Most wealth management practices are owned by a single advisor or a small number of partners who are more concerned about maintaining their lifestyle than ensuring that their firm remains competitive in perpetuity. If a 55 year old advisor has an established practice working mostly with clients about her age who she likes, she is unlikely to take on a 25 year old from a different culture with few current assets just because the client can be expected to have a sizable portfolio after the advisor has already retired, even if doing so may theoretically increase the NPV of her firm. This is fairly common of private practice type industries like dentistry and law. Business owners are humans who like to form tribes, even if it means not being maximally efficient.

Comment author: V_V 16 September 2014 09:59:08AM *  1 point [-]

his is fairly common of private practice type industries like dentistry and law.

Is it? I never heard of a dentist refusing to take a client because of age difference. Do you have any reference?

Anyway, I understand that while a dentist or a lawyer may be interested to short-term goals, a financial adviser should be interested more to long-term goals, which may cause an age effect. But then, why don't financial managment practices scale to large corporations, or become more like investment funds that provide standardized products?

Maybe I'm overestimating my understanding due of the Dunning–Kruger effect, but from the outside view, it looks like this industry should have substantial economies of scale, since large corporations don't have this age bias, and they can better reduce risk using asset diversification, while the benefits of having a personal financial adviser making a personalized investment plan seem small unless you are truly unusual.
I mean, even luxury items such as Rolex watches and Ferrari cars are more or less standardized products made by corporations. Even if you are very wealthy you are most likely not going to hire a personal engineering team to make and maintain your own fancy car.
Things like medicine and legal assistence need to be personalized because different people have significantly different medical and legal issues, but investment?

I can't help but notice that proven investment strategies (index investment) are usually provided by large corporations like Vanguard, while more speculative investment strategies that promise to outperform index investment are provided by small-scale firms operating according a business model which, will all due respect, reminds me of tarot readers.

I don't mean to imply that that all financial advisers are charlatans. There are obviously lots of incompetent investors and advisers who consistently underperform index funds and a few highly competent investors and advisers who consistently overperforms index funds, probably by taking value from these incompetent investors. Finding the latter while avoding the former looks like a non-trivial problem.

Comment author: ColbyDavis 16 September 2014 06:50:02PM 1 point [-]

There's nothing I strongly disagree with with what you just said, but I think you are probably underestimating the heterogeneity of peoples' financial lives and the degree to which many people enjoy a personal touch.

Things like medicine and legal assistence need to be personalized because different people have >significantly different medical and legal issues, but investment?

Since I have started working in my current role I have been impressed with just how complex and particular an individual's financial situation can be, especially when dealing with high net worth individuals well into their career. Multiple accounts with different tax treatment, employee stock grants and options, insurance, inheritance, real estate holdings, dependents, charitable giving, trusts, required minimum distributions, loans and other financial obligations, etc. are all things I regularly encounter and deal with in considering portfolio construction. Add to this the fact that most people are very emotionally invested in and/or have ugh fields about their money and are prone to making foolish mistakes like selling at the bottom of a bear market (I've seen it from people who I know understand the efficient markets hypothesis) and you can see why there is a market for financial professionals who personally know their client and can hold them responsible to their financial goals. Not that everybody needs this, but I think younger people who have never had (or lost) a lot of money underestimate this aspect.

That said, I more or less agree with your point, and I think in a more competitive market there would be larger scale corporate consolidation in this market, along with law and medicine as well. One thing law, medicine, and finance all have in common is a system of occupational licensing and other cartelization policies in place that protect incumbents.

Betterment and WealthFront are trying to push our industry in that direction and have so far been quite successful for themselves. I would not be surprised, however, if after the next bear market their reputations take a hit when investors panic and hit the sell button when there's nobody there to talk them off the cliff. Maybe that won't happen. Time will tell.

I don't mean to imply that that all financial advisers are charlatans.

Thanks! =)

Part of the reason I got in the business I am in is because there is so much bullshit in the financial industry. I would like to try to bring a little more sanity to it, because I do think it is so important for our economy. This paper is part of my efforts to do so. I hope you appreciate it.

Comment author: V_V 16 September 2014 10:07:14PM 1 point [-]

Multiple accounts with different tax treatment, employee stock grants and options, insurance, inheritance, real estate holdings, dependents, charitable giving, trusts, required minimum distributions, loans and other financial obligations, etc. are all things I regularly encounter and deal with in considering portfolio construction. Add to this the fact that most people are very emotionally invested in and/or have ugh fields about their money and are prone to making foolish mistakes like selling at the bottom of a bear market (I've seen it from people who I know understand the efficient markets hypothesis) and you can see why there is a market for financial professionals who personally know their client and can hold them responsible to their financial goals.

I see. It is certainly possible that I tend to underestimate the complexity of this industry due to my lack of expertise.

Part of the reason I got in the business I am in is because there is so much bullshit in the financial industry. I would like to try to bring a little more sanity to it, because I do think it is so important for our economy. This paper is part of my efforts to do so. I hope you appreciate it.

It is difficult for me to evaluate your paper. Anyway, good luck!