Being the one that “works in finance”, and more and more because of this blog, I have been asked for advice*.
For this reason, and considering the dumbfounding difference between the state of the financial advisory industry in the US compared to Europe, my mind sometimes wonders why we are here and what can be done to improve the situation.
Classic Monday morning quarterback thinking.
Let’s start with a list of topics that are a foundational part of any advisory service but are rarely promoted.
Holistic view
There are plenty of free resources on what is “the best”: the best asset allocation, the best credit card, the best life insurance and so on. Often these suggestions take into consideration different profiles, acknowledging the simple fact that we are different and we have different preferences. What is missing is a recognition of how these various items interact with each other and with our current circumstances. Also, our circumstances and the related solutions (in terms of new products but also rules of the game, i.e. laws) are not static and what is great today might require adjustments in the future.
Maybe ChatGPT 5 will be able to handle this task (I am ignoring the pure behavioural side of things on purpose here) but as of today, a person is the best shot you have to get a plan tailored to you today and tomorrow.
Saving for retirement
Many European countries (for sure, the ones where I lived) have the same pension framework, a “pillar” system divided into:
first pillar: public pension, funded by worker taxes
second pillar: private pension, funded by the worker on a semi-voluntary basis with some tax advantages
third pillar: private pension, any other investment/insurance product associated with some tax advantages
Typically you cannot do anything about the first pillar (in reality, I think you can: under the EU framework, one year of public pension contribution in one State counts as one in any other State of the union. Many EU countries require that you have worked in that place for at least 10 years to receive back a pension equal to all the years you have worked. This matters because some States are more generous than others in terms of public pension checks. Maybe I am thinking too much about my personal circumstances and also gambling that rules will not change in the next 20+ years, but if you can work from anywhere, maybe it matters?).
The second pillar is where the tricky choices reside. This is because there are clear advantages (well, clear to anyone willing to pay attention) but also some disadvantages. The pros are:
the employee contribution: if you have a 1-to-1 match, you should squeeze to the max because that’s a 100% gain from day one and no investment would match that type of return
tax deferral
The disadvantage is that you are not (as far as my experience in 4 countries goes) free to choose where to invest the money. Out of a desire to “safeguard citizens”, politicians decided that an employee cannot pick their favourite, low-cost ETF but have access to a limited selection. Sometimes to a ridiculous degree: one of my employers in London decided to work with Royal London, an asset manager that offers the same BlackRock ETFs at…3 times the fees. If you live outside the UK, this is a good glimpse into where the institutional money management robbery will move in the future: from high fees active funds to ring-fenced high fees passive funds. All of this to prevent you from gambling all your pension savings into a shitcoin. Good luck with that.
Since your employer doesn’t offer you also someone who will hold your hand when the stock market crashes, in the majority of cases the risk of people panic-selling is basically solved by not offering funds that invest 100% in stocks. Even if this represents the perfect bucket where to be all-in in stocks because you cannot touch those funds for decades.
So the trade-off is between getting the tax-deferral return boost vs investing in a fund with a higher expected return. The estimation of the optimal point is not trivial. Even without considering that in the future taxes might go up or (ahahahhahaha, sure) down.
Then there is the liquidity aspect, which is also relevant for the third pillar. Once you invest in these tax-deferred accounts, there are limitations in the way you can access the funds: typically you cannot touch them before you reach a certain age. If you invest the savings by yourself, you are free to spend them as you prefer. While this limitation might make sense for a lot of people, if you are a financially savvy person this is just downside for you.
Each system also has its own idiosyncrasies. For example in Switzerland the second pillar, which is mandatorily linked to your employer and invested as a black box (in many cases) for its participants, can be redeemed as a lump sum, an annuity or a combination of the two. The annuity option is good because it eliminates the longevity risk. The annuity option is bad because the payout is not inflation-adjusted. The annuity option is good because (right now) the payout ratio is high, above 5%. But it can change.
How much should you invest in the second pillar program instead of DIY?
To complicate the matter, if you are an expat Switzerland allows you to contribute to the second pillar with extra capital in order to compensate for the “missing years” you lived in a third-world country outside Switzerland. Should you do it? If so, starting when?
Insurance
I wrote a post about insurance here.
The naive approach would be to identify the risks someone wants to cover and then find the best products to achieve that goal. This should not require external help because the risks worth covering are few and the solutions, once identified, do not require much maintenance.
But life is rarely that straightforward, innit? Sometimes, insurance products are great investment vehicles (thank you, tax man) and sometimes, investment products have embedded insurance feats. I do not need life insurance in Switzerland because the first and second pillars provide enough coverage; I didn’t need life insurance in the UK because my employer paid for it. But these are the known-knowns. There might be other tricks out there that I am not aware of, might serve well my circumstances and they would require hours of research to be discovered.
Withdrawal strategies
How many times did I write the word tax already?
Absent the “Big T” effect, withdrawing from a portfolio with the aim of rebalancing it will achieve two goals with one action: you get the money to fund your retirement while selling the most “overvalued” asset. It is the same logic you applied when building the portfolio: adding more to the undervalued assets so that the overall portfolio weights would match the target allocation.
Contrary to the building situation, what you sell and when determines how much you will pay to the omnipresent tax man. I would not even dare to add an example because I have no clue and no expertise: I am a million years away from the moment this will be an issue for me, it is not exactly top-of-the-list for yours truly. Doesn’t mean the problem is not there.
Succession
This is quite related to the above point…with a major difference: if it is going to be an issue for you, the earlier you tackle it, the better. Or so I was told.
It is a weird conversation to have with your parents. Like “I am not wishing you anything bad but, if possible, can we avoid being the only assholes who contribute to closing the Italian deficit? Better if you spend it all, honestly”. It is your problem but your parents have to solve it. Allegedly, the strategy has to be implemented early enough to be successful, where early means decades. But “early enough”, your parents might still think they will need the money later for themselves. Is there a solution that works both ways? Oh, maybe we will need an expert for this.
Same thing for your kids. Is there a tax-friendly way to save for their education? Oh shit, is it tax again? Who said that money was fungible? This whole post would turn into the ad that NBA LeaguePass is forcing down my eyes before every playoff game: Enjoy Abu Dhabi (srsly, that ad is cringe af. Sure I’ll come to AD just to learn how to weave a basket but I appreciated the effort in scoring all the (legit to your country) diversity points).
Anyhow, you are just a bunch of stingy, selfish FIRE lads. No need to think about how to effectively pass money down the line when the plan is to die with zero.
Good Advisory
So why do financial advisors only promote their foretelling capacity in finding the next best investment and, sometimes, their behavioural coaching skills?
Why no one come out with a funnel website that helps you understand if, given today’s inputs, is it better to lease or buy a car (new or used)? To say one…
It is hard to put a fair value on the services I listed above. And as I said, most of it is related to your specific circumstances. How do you price such a service? What’s the marketing strategy?
The irony is that if you arrive to understand the problem, you likely want to solve it by yourself. The more you see value, the more you go to exploit it. And if you do not see it, why ask and pay someone else for a service you think is worth nothing?
If I think about “normal” people (net worth-wise), only a minority cares about the serious aspects of personal finance. 85% are in for the action, the thrill and the entertainment. See the current resurgence of GME. You need a client that sees the problem but is too busy to DIY; or is smart enough to understand that their free time is better spent elsewhere.
Have you wasted 10 minutes of your life reading something that would be obsolete next year, when AI would solve it all? Are you wasting your life getting a CFP designation?
Bonus Points
I found the video of (another!) guy who was trying to sell his exclusive!!1! recipe for an enhanced-All Weather Strategy using UCITS funds.
Let’s put aside for a moment the fact that the OG All Weather had such a dire track record in the last 5 years that I am not sure how the idea can still lure anyone. In the video, the guy shows some random numbers, including a Sharpe ratio above 1.
My immediate reaction was that there was no combination of UCITS funds that could achieve that result, starting in 2018 (as the video claimed), however crazy the concoction was. I quickly dug this in PortfolioVisualizer (R.I.P.) and somehow got what I expected:
But I was wrong!
Look at the UCITS version:
The trick is that the USD was particularly strong against the EUR in 2022 and that conveniently mitigated the losses you see in PV.
Next challenge. The YTer claimed a 10% CAGR with 6% vol.
This one I think is not achievable, within the boundaries of a ‘plausible’ All Weather strategy…unless we push hard on datamining. The closest, ‘reasonable’ portfolio I got is this one:
Every other solution, either moves the CAGR and vol too low or both too high.
I guess this is a good exercise to understand that you should always be suspicious when you see some “magical” portfolios thrown around. Think about it:
a 6 year track record might be considered more than enough by many
especially if I tell you that includes a crash (2020) and a nightmare year (2022)
the portfolio looks well diversified, therefore well thought
But what about the Golden Butterfly then?!?
It is a fair point. And indeed I wrote about the potential perils here. To achieve above average results, a portfolio has to present some ‘magical’ feats; otherwise it would be too easy and everyone would buy it. The hard part is to distinguish the good magic from the bad. I am not telling you I can do it but you should definitely be sceptical of someone that sells it to you at a cost of $xy7 😉
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