How to assess advisor's performance?

[clubdeac]

Not too happy with my advisor's recommendations, portfolio's performance and high tax liabilities in the form of capital gains and dividends this last year. When discussing this I'm given several reasons. As far as the poor performance, I'm told I need to look at the 5-10 year big picture and not just one year. Second I'm told these tax liabilities were inevitable considering the size of the account.

How does one assess their portfolio's performance? What standards or benchmark can one use to determine whether their portfolio and/or advisor are doing a good job?

I'm in a 75/25 stock/bond mix and underperformed significantly in comparison to the S&P, DJI and Nasdaq this year. I know performing as well these may be unrealistic but what is acceptable?

Also what's a reasonable tax burden one can expect to incur annually? I will be paying a large sum in additional taxes this year which I feel is unnecessary. Is there some metric or benchmark one can use? Perhaps a % of the portfolio's return?

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[Chemist0157]

Not too happy with my advisor's recommendations, portfolio's performance and high tax liabilities in the form of capital gains and dividends this last year. When discussing this I'm given several reasons. As far as the poor performance, I'm told I need to look at the 5-10 year big picture and not just one year. Second I'm told these tax liabilities were inevitable considering the size of the account.

How does one assess their portfolio's performance? What standards or benchmark can one use to determine whether their portfolio and/or advisor are doing a good job?

I'm in a 75/25 stock/bond mix and underperformed significantly in comparison to the S&P, DJI and Nasdaq this year. I know performing as well these may be unrealistic but what is acceptable?

Also what's a reasonable tax burden one can expect to incur annually? I will be paying a large sum in additional taxes this year which I feel is unnecessary. Is there some metric or benchmark one can use? Perhaps a % of the portfolio's return?

You do need to take a long-term approach.

I'm not sure what they mean by tax liabilities being inevitable due to the size of the account. You get taxed on dividends and realized gains, not really size of a portfolio...unless they mean you are paying x in taxes which seems like a big nominal number because the account itself is big. No getting around that.

Active managers will provide you past performance figures. You can compare that to the overall market's progress.

I could see this going either way. It's not inappropriate to lag the market if they think what they are doing is better long term. Is this an actively managed fund, or is this one guy or firm just investing on your behalf?

Bonds are not doing anything right now so a portfolio 25% bonds would certainly lag the current market.

Note that you lose some of your returns to fees and expenses. There is a benefit of letting someone do it for you, but you have to pay to play. That's why a lot of the conventional wisdom is do invest in index funds that get you a market return for minimal price. Active managers have a hard time beating index funds long term.

Tax burden is going to be different for everyone. You will pay taxes on dividends unless in a tax-deferred account. You will pay taxes on realized capital gains. Short term capital gains (less than 1 year) are higher than long term capital gains so you can avoid taxes by holding onto securities for at least one year.

 

[clubdeac]

You do need to take a long-term approach.

I'm not sure what they mean by tax liabilities being inevitable due to the size of the account. You get taxed on dividends and realized gains, not really size of a portfolio...unless they mean you are paying x in taxes which seems like a big nominal number because the account itself is big. No getting around that.

Active managers will provide you past performance figures. You can compare that to the overall market's progress.

I could see this going either way. It's not inappropriate to lag the market if they think what they are doing is better long term. Is this an actively managed fund, or is this one guy or firm just investing on your behalf?

Bonds are not doing anything right now so a portfolio 25% bonds would certainly lag the current market.

Note that you lose some of your returns to fees and expenses. There is a benefit of letting someone do it for you, but you have to pay to play. That's why a lot of the conventional wisdom is do invest in index funds that get you a market return for minimal price. Active managers have a hard time beating index funds long term.

Tax burden is going to be different for everyone. You will pay taxes on dividends unless in a tax-deferred account. You will pay taxes on realized capital gains. Short term capital gains (less than 1 year) are higher than long term capital gains so you can avoid taxes by holding onto securities for at least one year.

I don't think it's actively managed. I just think he invests on my behalf (mostly in ETF's and index funds) but I guess I don't know. Many months I was only 20% bonds so anywhere b/w 20-25% bonds but yes I agree with your point. And I understand everything else you said. I just don't know what's acceptable as far as returns and additional taxable income. Let's say an account made $200k last year. It certainly wouldn't be acceptable if you had $200k in realized gains you had to pay taxes on, provided you were investing for the long term and didn't need the money. But what is an acceptable amount of taxable realized gains and dividends? Obviously tax efficiency is one way to assess your portfolio's and advisor's performance

 

[Chemist0157]

I don't think it's actively managed. I just think he invests on my behalf (mostly in ETF's and index funds) but I guess I don't know. Many months I was only 20% bonds so anywhere b/w 20-25% bonds but yes I agree with your point. And I understand everything else you said. I just don't know what's acceptable as far as returns and additional taxable income. Let's say an account made $200k last year. It certainly wouldn't be acceptable if you had $200k in realized gains you had to pay taxes on, provided you were investing for the long term and didn't need the money. But what is an acceptable amount of taxable realized gains and dividends? Obviously tax efficiency is one way to assess your portfolio's and advisor's performance

It would be good to see where the money is going. If it's just index funds, I would do it yourself.

The $200k would only get taxed if it was realized gains. It depends on what led to that. Was it selling things that you would rather hold? Then bad. Was it selling things that ran up way more than they should have in a short term frame, then maybe not bad and better to sell and put it somewhere else. There's a lot of nuance here.

I would say that generally for a long term portfolio, there should not be a lot of selling. Maybe close to no selling.

I am probably never going to have someone manage my money, but if I did, and my approach was long term and trying to buy long term holds at good prices, I would be upset if I had a lot of realized gains. Taxes on dividends cannot really be avoided.

 

[Mman]

Not too happy with my advisor's recommendations, portfolio's performance and high tax liabilities in the form of capital gains and dividends this last year. When discussing this I'm given several reasons. As far as the poor performance, I'm told I need to look at the 5-10 year big picture and not just one year. Second I'm told these tax liabilities were inevitable considering the size of the account.

How does one assess their portfolio's performance? What standards or benchmark can one use to determine whether their portfolio and/or advisor are doing a good job?

I'm in a 75/25 stock/bond mix and underperformed significantly in comparison to the S&P, DJI and Nasdaq this year. I know performing as well these may be unrealistic but what is acceptable?

Also what's a reasonable tax burden one can expect to incur annually? I will be paying a large sum in additional taxes this year which I feel is unnecessary. Is there some metric or benchmark one can use? Perhaps a % of the portfolio's return?

first of all you probably don't need a financial advisor, passive low cost ETFs and mutual funds make constructing your own low cost portfolio quite simple and your advisor isn't outperforming that low cost portfolio once you take out their fees.

As for how to measure your portfolio's performance, you should not compare a 75/25 portfolio to returns from something like the S&P for a yearly basis. You should instead compare to a low cost approach to the same allocation. For example, in 2021 Vanguard's total stock fund (VTI) returned 25.72%. The similar total bond fund returned -1.77%. A 75/25 allocation of those funds would have return around 18.8% for the year.

(technical notes to follow)

Although worth noting that 18.8% is what is called a time weighted return. It only applies to money invested the entire 12 months duration. Your overall portfolio return for the year depends on what is called money weighted return, as money invested at different points over those 12 months would have a different return throughout the year. In 2021, stocks made the vast majority of their gains from January-September. If you had invested a large sum of money into the portfolio in September, your actual money weighted returns for the year would be lower than you'd otherwise calculate because that larger sum of money had relatively little return.

Time weighted returns are what you can control (picking the right things/allocations to invest in) but money weighted returns are what you care about.

 

[doctalaughs]

Financial advisors are for those that have little discipline spending or zero willingness to learn very basic finance and investment principles. If you fall into one of those categories — by all means find a financial advisor (but one that you trust, which can be hard).

I don’t know your specific situation but has your advisor really made sure you are maxing all sheltered accounts before taxable investments?

I invest myself and very rarely generate any tax bill off investments year-to-year. Despite exhausting every tax shelter I can first, probably my portfolio has now grown to 40% in taxable buckets. But if you choose tax-efficient vehicles for that portion of your assets (assuming long term view) it’s unlikely to generate a big bill each year.

For example look at vanguard’s bad press on their target date retirement index funds this year generating huge capital gain liabilities for personal investors. Sure that was nasty of them not to “warn” people—. But any good financial advisor should tell you to keep those in your retirement accounts (which grow tax free) and put most of your bond allocation (say in the form of tax-free municipal bonds or something like that) in your taxable account. That way you avoid taxes.

Location of assets matters almost more than what you invest in — particulalry with index fund strategies.

 

[clubdeac]

Financial advisors are for those that have little discipline spending or zero willingness to learn very basic finance and investment principles. If you fall into one of those categories — by all means find a financial advisor (but one that you trust, which can be hard).

I don’t know your specific situation but has your advisor really made sure you are maxing all sheltered accounts before taxable investments?

I invest myself and very rarely generate any tax bill off investments year-to-year. Despite exhausting every tax shelter I can first, probably my portfolio has now grown to 40% in taxable buckets. But if you choose tax-efficient vehicles for that portion of your assets (assuming long term view) it’s unlikely to generate a big bill each year.

For example look at vanguard’s bad press on their target date retirement index funds this year generating huge capital gain liabilities for personal investors. Sure that was nasty of them not to “warn” people—. But any good financial advisor should tell you to keep those in your retirement accounts (which grow tax free) and put most of your bond allocation (say in the form of tax-free municipal bonds or something like that) in your taxable account. That way you avoid taxes.

Location of assets matters almost more than what you invest in — particulalry with index fund strategies.

Yes I max out my 457, 403b, back door Roth and mega Roth every year. What’s left over is put into a taxable account.

 

[Phantom Spike]

I suppose it depends on the constitution of your portfolio. If you mainly have ETFs and low-volatility, slow growth stocks, you shouldn't have many tax-generating transactions. However, if you're heavily invested in the more speculative sectors, you might do well to consider taking profits at some point, and that can generate capital gains (which would still be preferable to watching all your profits disintegrate because you weren't paying attention to moving averages, candles and wicks, P/E ratios, etc. ). Most of us in practice probably do not have time to follow that closely, so in those cases a financial advisor may make sense, and owing taxes on your account may not be signs of a poor advisor (although hopefully they have maximized tax strategy by selling losers for short-term losses, etc).

 

[Neopolymath]

You don't need a financial advisor and you definitely don't need someone actively managing your money instead of pouring it into mutual funds. Become a boglehead or at least adopt some of the principles and DIY.

 

[mdartclub]

You don't need a financial advisor and you definitely don't need someone actively managing your money instead of pouring it into mutual funds. Become a boglehead or at least adopt some of the principles and DIY.

I am a believer in the bogleheads philosophy as well! Invest early and often, diversify with index funds, and minimize fees!

 

[dpmd]

It would be good to see where the money is going. If it's just index funds, I would do it yourself.

The $200k would only get taxed if it was realized gains. It depends on what led to that. Was it selling things that you would rather hold? Then bad. Was it selling things that ran up way more than they should have in a short term frame, then maybe not bad and better to sell and put it somewhere else. There's a lot of nuance here.

I would say that generally for a long term portfolio, there should not be a lot of selling. Maybe close to no selling.

I am probably never going to have someone manage my money, but if I did, and my approach was long term and trying to buy long term holds at good prices, I would be upset if I had a lot of realized gains. Taxes on dividends cannot really be avoided.

They kinda can by investing in dividend generating stuff in retirement accounts and not so much in your taxable accounts.

 

[Barrel Proof]

And don’t forget, non qualified dividends are taxed at your income rate vs qualified dividends which are taxed as capital gains. This is important if you hold REITs in say a brokerage account.

 

[mvenus929]

And don’t forget, non qualified dividends are taxed at your income rate vs qualified dividends which are taxed as capital gains. This is important if you hold REITs in say a brokerage account.

I'm just starting in a brokerage account. How do you determine if dividends are qualified or non-qualified?

 

[Barrel Proof]

I'm just starting in a brokerage account. How do you determine if dividends are qualified or non-qualified?

There is a list of requirements which have to be met. The main ones being that you have to meet a holding period requirement and the dividend has to be paid out by a qualified corporation that is tradable on the US exchange. But your brokerage company will help you and it will be nicely laid out in detail on your 1099.

 

[cincincyreds]

Not too happy with my advisor's recommendations, portfolio's performance and high tax liabilities in the form of capital gains and dividends this last year. When discussing this I'm given several reasons. As far as the poor performance, I'm told I need to look at the 5-10 year big picture and not just one year. Second I'm told these tax liabilities were inevitable considering the size of the account.

How does one assess their portfolio's performance? What standards or benchmark can one use to determine whether their portfolio and/or advisor are doing a good job?

I'm in a 75/25 stock/bond mix and underperformed significantly in comparison to the S&P, DJI and Nasdaq this year. I know performing as well these may be unrealistic but what is acceptable?

Also what's a reasonable tax burden one can expect to incur annually? I will be paying a large sum in additional taxes this year which I feel is unnecessary. Is there some metric or benchmark one can use? Perhaps a % of the portfolio's return?

I would suggest you ask this question on the bogleheads forum online. Also I would recommend to purchase the white coat investor book and read it through.

 

[clubdeac]

I would suggest you ask this question on the bogleheads forum online. Also I would recommend to purchase the white coat investor book and read it through.

Read it, not that helpful. I know the basics and found the book to be fairly basic but good for early investors. I need to know stuff like acceptable tax drag, acceptable return on a 75/25 mix (which others have helped answer above) and acceptable advisor fee ladders and structure for multimillion dollar portfolios. Does WCI discuss this stuff? If so I forgot it

 

[OraclePL]

Read it, not that helpful. I know the basics and found the book to be fairly basic but good for early investors. I need to know stuff like acceptable tax drag, acceptable return on a 75/25 mix (which others have helped answer above) and acceptable advisor fee ladders and structure for multimillion dollar portfolios. Does WCI discuss this stuff? If so I forgot it

The book is very basic. To answer those questions you should spend more time on his blog. Has articles on just about every topic imaginable

 

[owlegrad]

I respect you asking this question but to me it seems like you already know the answers? Are you looking more for support or confirmation or what?

Anyway, I agree with others here. Don't pay someone to underperform the market for you. You can underperform the market on your own. Or even better, just own the market. 😉

 

[abolt18]

Read it, not that helpful. I know the basics and found the book to be fairly basic but good for early investors. I need to know stuff like acceptable tax drag, acceptable return on a 75/25 mix (which others have helped answer above) and acceptable advisor fee ladders and structure for multimillion dollar portfolios. Does WCI discuss this stuff? If so I forgot it

As mentioned above, the bogleheads forum or even the WCI forum will likely yield good discussion.

 

[clubdeac]

As mentioned above, the bogleheads forum or even the WCI forum will likely yield good discussion.

are these forums on SDN or is this a different website altogether?

 

[voxveritatisetlucis]

Sharpe ratio is the standard metric

What percentage is he taking? most investment advisors actually underperform passively managed index funds, despite charging higher fees

 

[abolt18]

are these forums on SDN or is this a different website altogether?

Different website.

whitecoatinvestor.com and find the forum.

Or bogleheads.org and find the forum.

 

[clubdeac]

Different website.

whitecoatinvestor.com and find the forum.

Or bogleheads.org and find the forum.

Thank you!