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March 26, 2007



I would also make sure to ask how your advisor is paid.

There seems to be many people wanting to take your money in this investment game. But very few people that are really on your side of helping you reach your real goals of creating wealth. Perhaps the only way to counter this bias is to take the time to educate one self.


I read with interest the blog post written by Mr. Ross regarding the competency of investment advisors. While some of his statements are unfortunately accurate in several instances, I found the generalizations to be a bit far reaching. I have been a financial advisor for over 20 years, the last 15 with a large wirehouse and work with many competent and client focused advisors.

I am a third generation financial advisor and am a firm believer in the long term investment benefits of passive investing. A majority of my client’s assets are in low expense index funds as the core component of their portfolios. And for the bond portion of the portfolio, I invest in individual bonds on the secondary markets as I buy no investments on the initial offering. My average client fee is less than .50% annually which covers all portfolio construction and transaction costs.

Granted, I am not in the corner office or invited to the high producer reward trips but I know my clients are receiving sound investment portfolio counsel and are utilizing quality low cost investments. And rather than taking a cynical approach to communicating the benefits of low cost passive investing, I find it to be very rewarding to educate investors; one new client at a time.

Henry Blodget

I think Dylan's point is just that a lot of advisors come up through a system that has not yet caught up with the last 10-20 years of knowledge about the superiority of passive investing. That, combined with the higher profit margins and apparent advisor value-add associated with active (apparent) encourages a lot of advisors to continue to try to pick winners. And then, of course, there's the problem that that's exactly what most of the clients want and expect them to do.


I agree that one of the problems that I face as a financial advisor that advocates the merits of disciplined, passive investment strategies is that the average investor is confident that they are capable of achieving above average returns on a regular basis. This is an easy “tail wind” for most financial salespersons to sell into. I have experienced many times where prospective clients don’t comprehend (or want to comprehend) that the odds are actually working against them when they intentionally take on higher expenses and more portfolio turnover in attempt to be “better than average” (aka hedge funds). Of course, Las Vegas casinos also turn quite a profit riding the backs of the average gambler who is convinced they will achieve above average results by beating the odds.

The irony of this financial advisory paradigm took another turn this past week when a federal appeals court overturned a lower court ruling regarding the use of fee based accounts in lieu of commissions at the brokerage firms.
Although I understand the concern of the fee based investment advisory community on this issue, they also better be careful what they wish for. The brokerage firm community rolled out these fee based accounts in the late 1990’s as a way to compete with the decreasing trading commission revenue caused by discount and online trading. In their haste to introduce these products, the fee schedules that the brokerage firms rolled out were a welcome reduction for many clients to the annual expenses they were incurring while paying on a per transaction basis. Now the brokerage firms are being asked to (told to) discontinue the use of fee based brokerage accounts. The irony is that these fee based accounts are one of the lowest profit margin (and lowest cost to the client) products that the brokerage firms have to offer. So who really won with this latest court ruling…the investment advisor community, the brokerage firms or the client?

Dylan Ross

BogleFan (me too), you brought up many good points in both of your comments. I certainly will acknowledge that competent advisors can be found inside the large wirehouses, and I also applaud you for not succumbing to a culture that recognizes contrary actions with corner offices and reward trips.

On the Appeals Court ruling, brokerage firms do have another option, and that is to register themselves and their reps as investment advisers and convert the fee based brokerage accounts to fee based advisory accounts. The real issue was that brokerage firms were offering a service that looked, smelled, and tasted just like what registered investment advisers were offering, but the brokers were doing it without the same disclosure requirements or obligation to act in the clients’ best interest.

Smart Money magazine’s April issue includes an investigative report about abuses committed by a number of broker reps, further illustrating the need for corrective action. Going forward, fee based accounts and services can still be offered, it just must now be done in conjunction with full disclosure of all conflicts of interest and the advisor must place the client’s interests before his/her own or the firm’s interests. This is a good thing.

Jim Koeniger

Wow, do I ever agree with you, Dylan! I began my career with Connecticut General, am a CLU and ChFC, ran a bank Trust Department for 20 years, was bought out by old Wachovia, which was bought by First Union, and now I'm trying to come out of retirement to do some financial advisory work. I am in complete agreement about passive versus active management, love Vanguard, which I used for ballast in our accounts, and am in talks with an investment consultant that uses DFA. I Googled "investment advisors who beat index over 20 years" and came up with NOTHING! That was interesting!

Jim Koeniger

Stock Market Trading

This is the reason why I am not thrilled to pay for a financial advisor's services. I mean for one, how could they have more knowledge or at par with the real stock players on the floor when they are only in their luxurious offices missing the real action. No offense but I believe that experience is the best teacher and almost all advisors really come short on that area. I rather hear market analysis and insights from the real stock traders on the floor because
1. It is free and
2 unbiased.
As I have said, not all advisors are incompetent, you can hire one but be sure to know him or her first and if he or she has an experience in stock trading in the real market.

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