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Fund Advisory
Old 05-13-2012, 10:28 AM   #1
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Fund Advisory

What a great forum! I'm new here and have been been totally absorbed since discovering ER a week ago. I apologize in advance for any rookie mistakes I will make in my postings. I'd like to start with seeking advice regarding fund advisory services offered by the likes of Fidelity, Vanguard, etc. I have about $300k after tax $$ that I will use to supplement my ER beginning in 7 years (@ age 55). Fidelity charges about 1.05% for active management. Your collective thoughts are much appreciated.

Stats: male 48 years, wife 49. Wife to retire with pension in 4 years. I will have pension available at 55. Total pensions about $45k year. $575k in my 401k, $80k in college fund for last child who begins fall of this year and the aforementioned $300k. $285k remaining (22 years) on my mortgage. House value approximately $500k. No other debt.
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Old 05-13-2012, 10:41 AM   #2
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Hi Kickback, welcome to the forum. Are you looking for a financial plan or someone to manage your portfolio? Is there a reason you don't want to manage it yourself?
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Old 05-13-2012, 10:54 AM   #3
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Welcome to this "do-it-yourself" forum. Most folks here pay 0% to manage their portfolios themselves. See also Bogleheads Investing Advice and Info for another DIY forum of investors.
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Old 05-13-2012, 10:54 AM   #4
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Michaelb. Thanks. Have always managed my own, but getting a little gun-shy frankly with ER around the corner. Just thought i would ask the opinion of those who are living it. Is the 1% fee to manage the funds worth it?
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Old 05-13-2012, 11:12 AM   #5
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Quote:
Originally Posted by Kickback View Post
Michaelb. Thanks. Have always managed my own, but getting a little gun-shy frankly with ER around the corner. Just thought i would ask the opinion of those who are living it. Is the 1% fee to manage the funds worth it?
I'm not MichaelB, but I had some cool sunglasses similar to his back in the early 70's...

Most on this forum would say no, the 1% fee is absolutely not worth it. With a little (free) help from Vanguard and some self-study on your part, you can manage your own and save that 1%. Stated differently, this equates to saving roughly 25% the annual amount you can safely withdraw from your portfolio. Not small change.
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Old 05-13-2012, 11:15 AM   #6
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Michaelb. Thanks. Have always managed my own, but getting a little gun-shy frankly with ER around the corner. Just thought i would ask the opinion of those who are living it. Is the 1% fee to manage the funds worth it?
IMHO no, but you have to ask yourself, what are you getting for that 1%. Although 1% may not seem like much it does add up over time.
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Old 05-13-2012, 11:19 AM   #7
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Is the 1% fee to manage the funds worth it?
Not to me. But, you'll have to study the situation yourself to determine if the services rendered are worth the price.

Remember, you already pay an "expense ratio" for the funds to be managed. The additional 1% is a fee is to have someone else select the funds for you, not manage the funds. The selection of these funds, for a fund dominated portfolio, determines your AA. Your AA, IMHO, is the most important factor you determine related to the performance of your FIRE portfolio vs. market performance and economic conditions.

I'd be very nervous about not understanding how to do this and then doing it myself. You could consider paying a fee-only FA to give your plan a look-see if you're worried that you might be overlooking a landmine in the road ahead.
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Old 05-13-2012, 11:54 AM   #8
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Most on this forum would say no, the 1% fee is absolutely not worth it. With a little (free) help from Vanguard and some self-study on your part, you can manage your own and save that 1%. Stated differently, this equates to saving roughly 25% the annual amount you can safely withdraw from your portfolio. Not small change.
I agree with all the other posts you've gotten, but this forum is largely comprised of DIY investors. Hopefully REWs post above will make you seriously question paying 1% of total assets to an advisor for something you can do yourself. It may sound cheap compared to total assets, but you're providing the assets, the advisor is only providing the return. If he/she provides a 5% real return, you net 4% after the FA gets paid - every year! Paying a 25% or more premium to someone else is very expensive, that's been the incentive that has driven most of us to learn how to invest for ourselves. Almost anyone can do it, though most choose not to...
http://www.forbes.com/sites/rickferr...-bad-behavior/
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Old 05-13-2012, 12:00 PM   #9
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Welcome to the board. As part of your stats, you'll want to determine your ER budget and run your numbers through FIRECalc. The balance sheet is only part of the solution.

Quote:
Originally Posted by Kickback View Post
Michaelb. Thanks. Have always managed my own, but getting a little gun-shy frankly with ER around the corner. Just thought i would ask the opinion of those who are living it. Is the 1% fee to manage the funds worth it?
As REWahoo said, when you retire you're going to be withdrawing roughly 4% of your portfolio. Do you want to hand a quarter of it over to your advisor?

"1%" doesn't seem like much because it leaves you with 99%. However 1% out of your 4% only leaves you with 75%. And if you're withdrawing $40K/year then $10K is real money!

By the way, is that Fidelity fee of 1.05% the total of the annual fund expenses, or is it in addition to the fund expenses themselves? In other words, are you paying a manager to manage an active manager?
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Old 05-13-2012, 12:18 PM   #10
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If you are uncomfortable doing it yourself, hire a fee-only financial advisor for a one-time review to get you started. It is not worth 1%/year on top of MF expenses to get "professional management". Mostly you are going to setup your portfolio and then leave it alone except for rebalancing once a year or so. All the hard part is in the setup.

An FA can also help you with estate planning and key documents you should have in place sooner rather than later.
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Old 05-13-2012, 01:22 PM   #11
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If you are uncomfortable doing it yourself, hire a fee-only financial advisor for a one-time review to get you started. It is not worth 1%/year on top of MF expenses to get "professional management". Mostly you are going to setup your portfolio and then leave it alone except for rebalancing once a year or so. All the hard part is in the setup.

An FA can also help you with estate planning and key documents you should have in place sooner rather than later.
I don't use an advisor, but if I did I know one who charges 0.25% and invests in a style consistent with my IPS. It's probably out of line for me to make a direct recommendation, just know that while 1% is very common, there are higher and lower options. And of course there's as needed only (vs ongoing) as others have mentioned. I'd get as close to 0% or DIY as you can comfortably...
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Old 05-13-2012, 02:12 PM   #12
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For active management 1% is typical and probably necessary with ever growing portfolios. The active manager has to figure out where to put e new $.. For passive management (index funds) 1% is not unusual but is robbery as portfolio grows because more money passively invested requires no more work than less $. Most on this board are convinced that the best active management cannot beat passive in the long run. So look for low cost fixed fee and fee only advice...stay in index funds and Do not give them that 1%. That is not worth it.
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Old 05-13-2012, 02:55 PM   #13
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For active management 1% is typical and probably necessary with ever growing portfolios. The active manager has to figure out where to put e new $..
"Necessary"?

The manager puts 1% in their checking account and 99% into the asset allocation plan. Maybe that involves a stock-screening tool or reading a bond circular. What else is there to figure out?

I'm not sure why a growing portfolio merits the same fee as a smaller portfolio. Hypothetically a fund manager would rather have 0.75% of a $2M portfolio than 1% of a $1M portfolio.
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Old 05-13-2012, 09:08 PM   #14
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Active managers should be doing or paying for a lot of research to "actively" manage the money. And the more money that comes in, the. Ore they have to look around. That great stock they bought for you at $25 a share might still be a good buy when is up to $50 per share or might be just good enough to hold. That kind of active decision makings what lets the really good active managers outperform the indices in a given year. I do not doubt that you can outsmart the market some of the time which is why some active managers do outperform for multiple years in a row. The reason I prefer passive is that the very best managers will still blow it sometimes and blow it big. The risk is higher, the standard deviation is bigger and the expenses are -yes- of necessity -higher than a passive approach. I do not doubt they might be better at beating the market, but the increase in expenses is a significant reason they do not beat passive approaches in the long run. But of a passive investor pays similar expenses as an active managed portfolio that wipes out a significant advantage the that allows passive to beat active.
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Old 05-13-2012, 10:12 PM   #15
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"I'm not sure why a growing portfolio merits the same fee as a smaller portfolio. Hypothetically a fund manager would rather have 0.75% of a $2M portfolio than 1% of a $1M portfolio.

Hypothetically, a fund manager should be willing to accept 0.5% of a $2M portfolio the same as 1.0% on a $1M portfolio. In actuality, a fund manager is much happier accepting 1.0% of a $2M portfolio than 1.0% on a $1M portfolio.
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Old 05-13-2012, 10:22 PM   #16
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I would suggest that you contact Vanguard and find out about their financial planning service. I think it costs $500 (fixed fee) but it would be worth it and they may waive the fee if you bring enough assets to Vanguard. The services isn't perfect, but it is pretty good and I think you would find it informative.
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Old 05-13-2012, 10:49 PM   #17
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I don't like having to defend why higher fees are reasonable, but the prior posts sort of seem to miss the point. In the beginning investing $2 M or $1M may take the same amount of work, just larger buys of the same stuff in the larger account. But as an account grows overtime a fund manager who actively seeks out the best buys at any given time has to look harder to invest your $2million than he had to look to invest when you gave him the first $1 million. They can't just buy more of a stock they already know about last year or ten years ago. They continually have to check whether those are still the right investment. It is very different than passive index investing. It may be a fools game and I won't argue it isn't... But it is ACTIVE and that activity costs money. And the more money the more activity is required, so I don't begrudge them charging a percent of assets under ACTIVE management.
Much better is to do PASSIVE management AND keep costs accordingly lower--so percent of assets under management with passive management makes NO sense.
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Old 05-13-2012, 11:06 PM   #18
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I would suggest that you contact Vanguard and find out about their financial planning service. I think it costs $500 (fixed fee) but it would be worth it and they may waive the fee if you bring enough assets to Vanguard. The services isn't perfect, but it is pretty good and I think you would find it informative.
When I moved a major portion of our investments to Vanguard a few months ago I received their financial planning service at no out-of-pocket expense. For me, their financial planning service was worth exactly what it cost me. Others may find more value.
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Old 05-13-2012, 11:47 PM   #19
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If you agree with the studies that suggest about 4% as a safe withdrawal rate for long term (early?) retirement, remember that 4% also has to cover fees. So 1% doesn't sound like much, but it is 25% of your expected draw from this portfolio. That's a huge cost.
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Old 05-14-2012, 12:13 AM   #20
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I don't like having to defend why higher fees are reasonable, but the prior posts sort of seem to miss the point. In the beginning investing $2 M or $1M may take the same amount of work, just larger buys of the same stuff in the larger account. But as an account grows overtime a fund manager who actively seeks out the best buys at any given time has to look harder to invest your $2million than he had to look to invest when you gave him the first $1 million. They can't just buy more of a stock they already know about last year or ten years ago. They continually have to check whether those are still the right investment. It is very different than passive index investing. It may be a fools game and I won't argue it isn't... But it is ACTIVE and that activity costs money. And the more money the more activity is required, so I don't begrudge them charging a percent of assets under ACTIVE management.
I agree with you that investing a larger amount of money takes more hard work and activity.

I'm skeptical that the financial manager actually does any additional work to invest $2M than they do to invest $1M.

But I'm pretty sure they'll still send out an invoice, whether or not they can sleep comfortably at night.
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