1. The main premise that returns are primarily driven by investor behavior is a good one. Investor behavior is definitely not often driven by a rational and disciplined approach, so I share Murray’s view that the best way in which an advisor can provide value is by protecting investors from themselves. In fact, I recently sent each of my clients this article that reflects this view:
Conflicts of Interest and Mutual Fund Advice –
The last part is insightful:
“A client called up his advisor, wanting to know what he should do in reaction to the plummeting market. “Nothing,” said the advisor. The next year, he called again, wanting to know what he should do in response to the soaring price of gold. “Nothing,” was the advisor’s response. In year three the client called again, wanting to know what he should do to take advantage of the soaring bull market. “Nothing,” said the advisor again. “Excuse me,” said the client, “but every time I ask your advice, you tell me to do nothing. Remind me again what I’m paying you for.” “You’re paying me,” said the advisor, “to keep you from doing something.”
And therein lies the true value of advice.”
He went on to rightfully criticize all of the unnecessary hype and unfair criticism of financial advisors from journalists who promote a do-it yourself approach that can be reckless at worst and irresponsible at best that promotes active trading which has an inverse relationship with growing your portfolio.
I also liked the behavioral psychology insight about how people have such an aversion to and fear of losing money that it will outweigh their desire to make money. This type of behavior is evident when people sell at the bottom – the worst possible time to sell.
2. I enjoyed the empirical evidence Murray provides to support the idea that investing in equities is actually a safer way to protect your wealth in the long-term than investing in cash and bonds. I have made this claim as well, but it’s nice to have more evidence to back it up.
3. His discussion as well as empirical evidence of the value of dollar cost averaging was useful. When you look at investing this way, bear markets are great because now you can purchase investments on sale!
4. It was nice to see that Murray took a balanced and unbiased approach to the active vs. passive debate. Murray correctly pointed out that index funds (depending on the fund) can be more volatile and expensive than some actively managed funds that focus on long term returns and minimizing trading and volatility. He also points out time periods when most actively managed funds outperformed the S & P 500 as well as thinly traded asset classes like small cap that are more likely to outperform the index benchmark. On the other hand he warns against accidentally creating your own overly expensive index fund by investing in several large actively managed funds that collectively replicate the market.
5. While Murray pointed out the pejorative way in which the media refers to financial advisors as “brokers”, he completely ignored the distinction between a broker and a registered investment advisor who acts as a fiduciary and is legally required to act in a client’s best interest as opposed to a broker who is subject to the suitability standard and does not have to act in a client’s best interest. The main difference is that a registered investment advisor cannot take any kickbacks from a third party whereas a broker can only earn percentage-based kickbacks from financial products known as 12b-1 fees.
For more information on the subject, I would suggest watching the two videos along with reading the article below:
Butchers v Dietitians Brokers v Advisors Suitability v Fiduciary:
Suitability vs. Fiduciary Standard: It’s a Big Deal:
6. Murray does give a brief mention to various organizations one can contact if he needs to find a financial advisor, one of which was an association of fee only planners. However, the focus of his book was on the idea that it is generally a good idea to pay an approximate 1% ongoing fee to a financial advisor while ignoring the fact that you could get the same level of service for a flat annual fee or hourly fee that would not necessarily be every year, as a portfolio doesn’t necessarily have to be reviewed literally every year. The two attached articles go into more detail about this issue.
Furthermore, there are still conflicts of interest with an asset-based fee, even if it is charged by a registered investment advisor.
This article elaborates:
There are Conflicts of Interest Inherent in Assets-Under-Management Pricing –
Here are some highlights:
Charging clients on an AUM (assets under management) basis, however, presents more-serious conflicts of interest than those faced by brokers, because the conflicts may involve much more money than the value of a trade.
Here are some typical situations where asset-based fee compensation poses conflicts for advisers:
• When advising a client to roll over a 401(k) for the adviser to manage, even when the client has equivalent and less costly options if they leave their funds with the employer’s fund manager.
• When advising not to pay off a mortgage (thus diminishing assets), even when the mortgage carries a high interest rate.
• When advising against making a large charitable contribution to get a tax deduction (but decrease assets under management).
• When advising not to give large gifts to children to avoid estate taxes.
• When advising not to buy a larger home.
• When advising not to buy an annuity or set up a charitable annuity.
• When advising not to invest in real estate.
He also should have mentioned how significant a 1% can be, as the Department of Labor explained:
Assume that you are an employee with 35 years until retirement and a current 401(k) account balance of $25,000. If returns on investments in your account over the next 35 years average 7 percent and fees and expenses reduce your average returns by 0.5 percent, your account balance will grow to $227,000 at retirement, even if there are no further contributions to your account. If fees and expenses are 1.5 percent, however, your account balance will grow to only $163,000. The 1 percent difference in fees and expenses would reduce your account balance at retirement by 28 percent.
7. Murray also ignores the vast body of research that suggests not that passive is better than active, but that broker sold funds on average significantly underperform direct sold funds because the funds in the broker channel invest far more heavily in sales and marketing activities vs. the direct channel which invests more in the expertise of the fund managers. This article elaborates:
Does New Study Seal the Deal for Fiduciary Standard – or Just Warn Plan Sponsors? (about broker sold funds):
8. When discussing the benefits of a financial advisor, Murray should have also mentioned perhaps the most significant reason to use a financial advisor – tax loss harvesting.
For your non 401(k)/IRA investments, I would consider using Betterment – https://www.betterment.com/. They do charge based on a percentage, but it is low – only 0.35% and only 0.15% for assets over $100,000. They focus on using low cost ETFs which are similar to index funds.
I do not earn any compensation if you use this firm. I just like their approach.
For your IRA investments, however, there is not as much value to using a firm like Betterment because the tax loss harvesting does not apply. I would consider an index fund such as the Vanguard Total Stock Market Index Fund (VTSAX) or replicating one of Betterment’s portfolios.
This article shows how firms like Betterment are changing the industry:
The Rise of Robo Advisors: