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Is Cullen Roche becoming Jack Bogle II?

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Posted by Mehul Gandhi
Posted on 12/27/2016 10:42 PM
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I wish his mantra would catch fire in the rip-off arena of real estate sales commissions and fees. Talk abou antiquated..

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Posted by Cowpoke
Answered on 12/28/2016 1:38 PM
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    The sentiment is very kind, but there will never be a Jack Bogle 2.0.

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    Cullen Roche Posted by Cullen Roche
    Answered on 12/28/2016 2:12 PM
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      The major flaw in this “low fee is good uber alles” Boglehead dogma is in assuming that there’s no value added with the relatively higher fees for active management (need I point out that despite that misleading 87% (GIGO) figure, it still leaves a gap of 12%?). But free markets don’t work on B.S. for too long, so waiting for more creative destruction on fund or RIA fees seems like a futile endeavor… no different than a race to the bottom. Managers are paid six or seven figure salaries for their added value to the fund portfolio; unfortunately, who doesn’t get that added value is the dumb money fund shareholders. So that’s the real problem, not fund/RIA fees. My intuition is what will occur to deal with that obstacle is Robo-Advisors v2 will force creative destruction onto funds via Direct Investing and RIA’s aka overpaid asset gathering salesmen will be forced to act as true financial planners for their dumb money clients, all while the smart money continues to fund outperforming active management. Win win for everyone! So in the near future, .9% will get you real financial planning advice along with a core of ultra low-cost passive and a satellite of higher cost active.

      So don’t worry, creative destruction will happen, but its going to be lot more complex and nuanced than just a basic, simple fee disruption. That was v1.0 and what Bogle presided over.

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      Posted by MachineGhost
      Answered on 12/28/2016 7:23 PM
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        There are a couple of key components missing in the CR post. Most importantly is the value of the fee (a friction) vs. tax planning (a friction). Now investment advisors are unable to provide legally binding tax information by law, but most financial advisors for managed assets above a million (or at least a couple or few million) maintain steady contact with the accountant (and less frequently but definitely) the estate attorney. All charge very high fees. But given the complexity of the tax code many people with ca. $2 million or above probably find it worthwhile vs. their implicit charge out rate to pay someone 0.75% or a bit more to both handle finances and be the principle in coordinating with the accountant and the estate attorney.

        Macro economically it’s a mixed bag. Financial specialization and knowledge is a service which should be paid for. In the pure macro economic classical model it’s a friction (vs. everyone operating individually optimizes) but that’s not reality. I enjoy the abstract factors of macro and market economics, but I do this as a scientist. I’d rather spend my time on mathematical models and simulations of economics and finance than deal with my financial assets directly. Combined we try and optimize over short term taxes and long term taxes, the latter being highly unknown. But it’s harder to do this with ETF’s and bond funds than individual stocks and bonds. So is the value of an advisor that charges 0.75% but optimizes taxes, with input from your accountant and lawyer worth the cost? Perhaps not, but sometime there is value in just removing that from your plate. In the end a good financial advisor understands your current and future life situation and tax situation and is worth it.

        Sadly, I think that the excess fee/value range applies more to people who have savings in the broad range of $200K to $2M.

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        Posted by John Daschbach
        Answered on 12/30/2016 1:59 AM
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          MG,

          Im not an advocate of pure passive ala Bogle head. In fact I’ve complained about the Bogle heads and pure passive dogma quite a bit here in recent years….

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          Cullen Roche Posted by Cullen Roche
          Answered on 12/30/2016 2:04 AM
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            I haven’t been reading your blog all that long (a year or so?), but sometimes you do sound an awful lot like a Boglehead.

            What freaks me out is I was almost believing in it too until I was brought to my senses and realized the Boglehead cult was an ideology of mediocrity based on very, very specific framing (in the neurobehavioral sense). Like Pandora’s box, once opened you can’t go back…

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            Posted by MachineGhost
            Answered on 12/30/2016 2:44 AM
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              @John The average American’s savings is so far below your range, it’s almost hysterical. We have vast amounts of people that don’t save, yet if they somehow manage to do so, then they’re their own worse enemy making emotionally impulsive decisions that cause permanent lost of capital and then on top of that you have the Boglehead cult mediocrity being offered as their salvation, but if only they would be willing to learn. It’s a tragic comedy of errors! When the facts change I change my mind, so I do see a need now for RIA’s (in the true financial planner sense), but Wall Street needs to be disrupted so the alpha generated by hired talent actually trickles down to the average investor. Fund fees can’t be higher than .30% to .40% for the alpha to shine through all of the other baggage. The “other baggage” is what I believe will be disrupted by robo-advisors, so we get direct investing, tax loss harvesting, etc. all the good stuff that makes it unprofitable to get any alpha via funds at the moment. No one is doing this yet, so its a huge opportunity.

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              Posted by MachineGhost
              Answered on 12/30/2016 2:54 AM
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                I do wonder if the industry will start feeling a fundamental shift towards flat dollar amount fees as opposed to asset based fees. At least for some of the financial planning pieces. For example – does a client with 800K really really require 4x the amount of work that a client with 200K has? Because in an asset-based payment structure, the 800K client is paying 4x as much. From my experience, the time required to develop a plan is often comparable. On occasion the 200K client takes more time. On occasion the 800k client takes more time. At the end of the day, I think the industry might begin to shift away from asset-based fees for financial planning. Instead of charging x% on the savings a client has accumulated, does it make more sense to charge $500 (for example) for each necessary piece of the financial planning puzzle (college planning, tax strategy, etc)? And then maybe $250 each subsequent year to “review and refresh” those components? In the end, it seems more appropriate to charge for the service and time that I provide, rather than the amount that my client has saved. Maybe the actual asset management piece could be a reasonable asset-based fee, but even that part doesn’t feel quite right. Does it truly take 4x more work to allocate 800K than 200K? This is something I’ve been brainstorming on for a couple years now, with no concrete resolution. Any thoughts from the smart people here are welcomed and appreciated!

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                Posted by Aaron Jensen
                Answered on 12/30/2016 10:08 AM
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                  I thought long and hard about this when I structured my fees. I wanted to establish a flat fee, but that wouldn’t have worked because I work with some relatively large institutions and companies who could really take advantage of this if I got really big. For instance, if a fund of funds established a LLC they could technically bring a billion dollars into my firm and they’d be counted as one customer. Managing a billion dollars at a flat rate would be ludicrous.

                  As is usually the case, the marginal price setter establishes the cost structure in a market. In finance the marginal price setter is large institutions. Everyone else just follows their lead because it’s the only sustainable way to run a business. Yeah, if you’re a small shop with 100 $1MM accounts then that works fine with a fixed price, but if you scale your business then a AUM fee structure is the only way you can run the business. I am really happy with the size of Orcam at present, but if I ever decide to scale it then I have no choice but to use a AUM structure. So I chose that structure because I didn’t want to limit how big I could build my business.

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                  Cullen Roche Posted by Cullen Roche
                  Answered on 12/30/2016 5:12 PM
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                    Another alternative not mentioned here is a higher % of AUM for the first 100K, 500K or 1 million. The % fee then declines as individual AUM increase.

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                    Posted by Mehul Gandhi
                    Answered on 12/30/2016 7:12 PM
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                      Yes, a scaled structure works well and it’s becoming more and more common thankfully.

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                      Cullen Roche Posted by Cullen Roche
                      Answered on 12/30/2016 7:58 PM
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