Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
FA - great on paper, poor on execution
Old 02-27-2008, 09:16 AM   #1
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jun 2005
Posts: 8,616
FA - great on paper, poor on execution

My BIL passed away earlier this year and my sister asked me to help her review the advice of her financial advisor. This FA that my sister has used came highly recommended, is fee-only, CPA/CFP/CFA, a member of Garrett network, etc. Basically he has all the right qualifications. I talked to him over the phone at my sister's insistence. The fee is about 0.5% of assets under management (AUM) which is not bad considering that assets are mid-6-figures.

The rant: The advisor developed a new portfolio of about 21 different mutual funds, some with front-end loads, overlapping asset classes, more than one balanced fund, and many with expense ratios above 1%. He also decided to unload some funds that he had picked for her just last year such as Dodge&Cox Income fund. Anyways, the portfolio is well constructed in regards to asset allocation, but it looks like someone was eating Money magazine and just puked up a bunch of funds.

As I see it, this guy gets no benefit to putting his clients in portfolios with an average annual expense ratio of 1.1% since he is fee-only, AUM. Or does he? He could have just as easily touted his expertise and selected a portfolio of index funds or index ETFs. Instead, it looks like he doesn't trust himself and lets fund managers try to do the job for him.

If the safe-withdrawal-rate is 4% before investment expenses and 1.6% goes as fees, that leaves my sister with 2.4% annual withdrawal to live off of.

Anyways, I've written a critique of his advice and sent it to my sister. I know it is not wise to interfere in the financial affairs of close relatives. But she asked for my help and I pulled no punches.
__________________

__________________
LOL! is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 02-27-2008, 09:31 AM   #2
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
FinanceDude's Avatar
 
Join Date: Aug 2006
Posts: 12,484
Quote:
Originally Posted by LOL! View Post
My BIL passed away earlier this year and my sister asked me to help her review the advice of her financial advisor. This FA that my sister has used came highly recommended, is fee-only, CPA/CFP/CFA, a member of Garrett network, etc. Basically he has all the right qualifications. I talked to him over the phone at my sister's insistence. The fee is about 0.5% of assets under management (AUM) which is not bad considering that assets are mid-6-figures.
Well, it goes to show that all the alphabet soup after your name has little to do with implementation in some cases.........

Quote:
The rant: The advisor developed a new portfolio of about 21 different mutual funds, some with front-end loads, overlapping asset classes, more than one balanced fund, and many with expense ratios above 1%. He also decided to unload some funds that he had picked for her just last year such as Dodge&Cox Income fund. Anyways, the portfolio is well constructed in regards to asset allocation, but it looks like someone was eating Money magazine and just puked up a bunch of funds.
Looks she got a healthy dose of "wrapfee-itis"........

Quote:
As I see it, this guy gets no benefit to putting his clients in portfolios with an average annual expense ratio of 1.1% since he is fee-only, AUM. Or does he? He could have just as easily touted his expertise and selected a portfolio of index funds or index ETFs. Instead, it looks like he doesn't trust himself and lets fund managers try to do the job for him.
It's some platform his firm is pushing........unfortunately it happens all too often.

Quote:
If the safe-withdrawal-rate is 4% before investment expenses and 1.6% goes as fees, that leaves my sister with 2.4% annual withdrawal to live off of.
What if the funds do 8-10%??

Quote:
Anyways, I've written a critique of his advice and sent it to my sister. I know it is not wise to interfere in the financial affairs of close relatives. But she asked for my help and I pulled no punches.
Well, you tried.........
__________________

__________________
Consult with your own advisor or representative. My thoughts should not be construed as investment advice. Past performance is no guarantee of future results (love that one).......:)


This Thread is USELESS without pics.........:)
FinanceDude is offline   Reply With Quote
Old 02-27-2008, 09:35 AM   #3
Thinks s/he gets paid by the post
jIMOh's Avatar
 
Join Date: Apr 2007
Location: Milford, OH
Posts: 2,085
Quote:
Originally Posted by LOL! View Post
My BIL passed away earlier this year and my sister asked me to help her review the advice of her financial advisor. This FA that my sister has used came highly recommended, is fee-only, CPA/CFP/CFA, a member of Garrett network, etc. Basically he has all the right qualifications. I talked to him over the phone at my sister's insistence. The fee is about 0.5% of assets under management (AUM) which is not bad considering that assets are mid-6-figures.

The rant: The advisor developed a new portfolio of about 21 different mutual funds, some with front-end loads, overlapping asset classes, more than one balanced fund, and many with expense ratios above 1%. He also decided to unload some funds that he had picked for her just last year such as Dodge&Cox Income fund. Anyways, the portfolio is well constructed in regards to asset allocation, but it looks like someone was eating Money magazine and just puked up a bunch of funds.

As I see it, this guy gets no benefit to putting his clients in portfolios with an average annual expense ratio of 1.1% since he is fee-only, AUM. Or does he? He could have just as easily touted his expertise and selected a portfolio of index funds or index ETFs. Instead, it looks like he doesn't trust himself and lets fund managers try to do the job for him.

If the safe-withdrawal-rate is 4% before investment expenses and 1.6% goes as fees, that leaves my sister with 2.4% annual withdrawal to live off of.

Anyways, I've written a critique of his advice and sent it to my sister. I know it is not wise to interfere in the financial affairs of close relatives. But she asked for my help and I pulled no punches.
If the funds charge 12b1 fees, it's possible he gets reimbursed from the funds. No loads show up, but fee only might not really mean fee only.
__________________
Light travels faster than sound. That is why some people appear bright until you hear them speak. One person's stupidity is another person's job security.
jIMOh is offline   Reply With Quote
Old 02-27-2008, 09:43 AM   #4
Thinks s/he gets paid by the post
saluki9's Avatar
 
Join Date: Feb 2005
Posts: 2,032
Quote:
Originally Posted by jIMOh View Post
If the funds charge 12b1 fees, it's possible he gets reimbursed from the funds. No loads show up, but fee only might not really mean fee only.

VERY VERY unlikely.

More likely as FD indicated he is working off a wrap program that puts together the models for him.
__________________
saluki9 is offline   Reply With Quote
Old 02-27-2008, 09:44 AM   #5
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jun 2005
Posts: 8,616
Re: 12b-1 fees, just checked, about half of the recommended funds have them.
__________________
LOL! is offline   Reply With Quote
Old 02-27-2008, 09:50 AM   #6
Thinks s/he gets paid by the post
saluki9's Avatar
 
Join Date: Feb 2005
Posts: 2,032
Quote:
Originally Posted by LOL! View Post
Re: 12b-1 fees, just checked, about half of the recommended funds have them.
Just because the funds pay them, does not mean that the FA is getting them.

In many cases those get paid to the firm which is running the wrap platform.
__________________
saluki9 is offline   Reply With Quote
Old 02-27-2008, 09:58 AM   #7
Thinks s/he gets paid by the post
jIMOh's Avatar
 
Join Date: Apr 2007
Location: Milford, OH
Posts: 2,085
Quote:
Originally Posted by LOL! View Post
Re: 12b-1 fees, just checked, about half of the recommended funds have them.
If you need to know if this impacts the situation, have your relative ask the FA how they are compensated- full disclosure.

Then ask a second time-maybe you ask.

Then the third time ask how the 12b1 fees the fund pay affect the recomendation.

My problem solving style in situations like this is to collect information, but not give anything out. Collect more and not give anything out. Then try to look for waffling in the response prior to telling person what I know thru research.

If you play your hand too quickly, you cannot try to find the person squirming and disclosing things you do not know.

Care to list the funds here? Then as part of discussion with FA, maybe you could offer two alternatives and ask why these were not recomended.

Have one be managed funds using same asset allocation.
Have one be indexed funds using same asset allocation.

Ask why either of these portfolios would not be better. If the managed funds are from different places in current recomendation, and you could find equivalents at T Rowe, Fidelity or one of the larger fund houses (with lower ER), see if FA bites on this.
__________________
Light travels faster than sound. That is why some people appear bright until you hear them speak. One person's stupidity is another person's job security.
jIMOh is offline   Reply With Quote
Old 02-27-2008, 09:59 AM   #8
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jun 2005
Posts: 8,616
As I look closer, the recommended portfolio seems to have many of today's buzzwords in it: long-short, hard assets (as REITs and TRPrice New Era), global bonds, int'l REIT, etc. But no TIPS and no CCFs.
__________________
LOL! is offline   Reply With Quote
Old 02-27-2008, 10:03 AM   #9
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jun 2005
Posts: 8,616
Quote:
Originally Posted by jIMOh View Post
If you need to know if this impacts the situation, have your relative ask the FA how they are compensated- full disclosure.
...
If you play your hand too quickly, you cannot try to find the person squirming and disclosing things you do not know.
I don't think it really matters if the FA is getting paid more than 0.5% AUM, the expense ratios are gone whether the money goes to the FA or not.

I see no point in making the FA squirm. What I'd like to see is the FA present a similar portfolio with expense ratio under 0.25%. In fact, it could be as simple as selecting a single Vanguard Target Retirement fund . But what would be the value added by the FA in that case?
__________________
LOL! is offline   Reply With Quote
Old 02-27-2008, 10:43 AM   #10
Thinks s/he gets paid by the post
jIMOh's Avatar
 
Join Date: Apr 2007
Location: Milford, OH
Posts: 2,085
Quote:
Originally Posted by LOL! View Post
I don't think it really matters if the FA is getting paid more than 0.5% AUM, the expense ratios are gone whether the money goes to the FA or not.

I see no point in making the FA squirm. What I'd like to see is the FA present a similar portfolio with expense ratio under 0.25%. In fact, it could be as simple as selecting a single Vanguard Target Retirement fund . But what would be the value added by the FA in that case?
A fee only advisor can serve the purpose of verifying a decision is good, or recomending a complex asset allocation.

I think it matters how the FA is getting paid to know why certain funds are recomended. If there is a conflict of interest, the customer deserves to know.
__________________
Light travels faster than sound. That is why some people appear bright until you hear them speak. One person's stupidity is another person's job security.
jIMOh is offline   Reply With Quote
Old 02-27-2008, 10:48 AM   #11
Moderator Emeritus
 
Join Date: May 2007
Posts: 11,038
Once your sister realizes she would lose 40% of her annual retirement income to unnecessary fees, she might start to see things your way. I convinced my MIL to transfer her assets to Vanguard for the same reasons. She was paying close to 1.8% in fees and commissions at her former brokerage company. So I showed her the numbers: On a $500K portfolio, she could draw $20K in income per year. Out of that $20K, $9K alone would have gone to pay fees and she would have had only $11K left to spend. Now, at Vanguard, her fees amount to only 0.25% or $1250 a year, leaving her $18,750 to spend. A HUGE difference. Compound that over several years and the difference is even starker. It didn't require much convincing, believe me... A FA could be great on paper, but it is totally meaningless, execution is everything... And if he can't perform, it's time to go bye bye...
__________________
FIREd is offline   Reply With Quote
Old 02-27-2008, 10:54 AM   #12
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
FinanceDude's Avatar
 
Join Date: Aug 2006
Posts: 12,484
Quote:
Originally Posted by LOL! View Post
I see no point in making the FA squirm. What I'd like to see is the FA present a similar portfolio with expense ratio under 0.25%. In fact, it could be as simple as selecting a single Vanguard Target Retirement fund . But what would be the value added by the FA in that case?
Well, other than he won't get paid on it.........
__________________
Consult with your own advisor or representative. My thoughts should not be construed as investment advice. Past performance is no guarantee of future results (love that one).......:)


This Thread is USELESS without pics.........:)
FinanceDude is offline   Reply With Quote
Old 02-27-2008, 12:09 PM   #13
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
travelover's Avatar
 
Join Date: Mar 2007
Posts: 9,880
Quote:
Originally Posted by FIREdreamer View Post
...........She was paying close to 1.8% in fees and commissions at her former brokerage company. ................
Just to reinforce how prevalent this is - My nephew asked me to help him make 401(k) investment decisions. His first assignment was to find out his total ER on his current investments there. Answer: 3.2% !!!!!!! That's a nice bite outta 4% SWR.
__________________
Yes, I have achieved work / life balance.
travelover is offline   Reply With Quote
Old 02-27-2008, 12:15 PM   #14
Thinks s/he gets paid by the post
 
Join Date: Dec 2007
Posts: 4,764
Quote:
Originally Posted by travelover View Post
Just to reinforce how prevalent this is - My nephew asked me to help him make 401(k) investment decisions. His first assignment was to find out his total ER on his current investments there. Answer: 3.2% !!!!!!! That's a nice bite outta 4% SWR.
Geez what a rip off.
__________________
Notmuchlonger is offline   Reply With Quote
Old 02-27-2008, 12:35 PM   #15
Thinks s/he gets paid by the post
 
Join Date: Jan 2008
Posts: 2,020
Quote:
Originally Posted by travelover View Post
Just to reinforce how prevalent this is - My nephew asked me to help him make 401(k) investment decisions. His first assignment was to find out his total ER on his current investments there. Answer: 3.2% !!!!!!! That's a nice bite outta 4% SWR.
Well, that got me motivated to look at my 401(k). The good news is that it looks like it's 0.51% for me.

One thing I'm not sure on is my bond fund, though. It's an internal fund (no public listing) that buys AAA-BBB funds with the largest holding in treasury notes. There's no expense fee, which sort of makes sense, but I can't find any info on what other fees there might be. Maybe the company is just encouraging investing to increase their overall fund size.

edit. By far the largest fee is the 0.83% for the oakmark equity & income fund (oakbx). Since I'm 32% in that, 16% in the bond fund, and 27% in Dodge and Cox Stock Fund (dodgx), maybe I should rebalance out of the oakbx and into the bond and dodgx fund... if I throw it on m*, I'm guessing there's a lot of overlap in the equity holdings between dodgx and oakbx (they're both lv-weighted)
__________________
Marquette is offline   Reply With Quote
Old 02-27-2008, 12:50 PM   #16
Recycles dryer sheets
 
Join Date: Jul 2005
Posts: 113
regarding the loads on funds: A FA can buy a load waived version of a fund as long as he is charging an advisory fee. It may even have the same ticker as the loaded version. So just because the fund typically has a load does not mean that the load was charged. For instance I use American Funds New World as part of an emerging markets exposure for clients. It would typically have a 5.75% load but it is not charged when I buy it for them.

Regarding the sales within 1 year: Is he harvesting tax losses. I have been selling things within one year for clients so that the tax loss is short term.
__________________
boutros is offline   Reply With Quote
Old 02-27-2008, 12:53 PM   #17
Moderator Emeritus
 
Join Date: May 2007
Posts: 11,038
Quote:
Originally Posted by travelover View Post
Just to reinforce how prevalent this is.
I think you are right, it is prevalent out there. When we were fresh out of graduate school and started making good money, my wife and I decided to use a Financial advisor to "take care" of our money since we knew nothing about investing. He took care of our money all right. We were paying an annual fee of 0.75% of assets for his services (reasonable). The first thing he did was open an annuity in my wife's IRA, get us into 2 VULI's contracts with 10 year surrender periods, and put the rest of our money in underperforming loaded mutual funds (5.75% loads, and oh yes, he made us pay those loads) with high ERs (he got us into a bond fund with a 0.9% ER!). Total rip off. Not including the VULIs and annuity, we were paying close to 2% in annual fees, plus he pocketed 5.75% of every dollar we invested with him over the span of 3 years. He was also churning our account, pocketing the 5.75% load on the money everytime he changed investment. He was less than straight forward with us about the way he was getting paid. But we didn't know better. Neither of us had any incline to look after our money so we kept ignoring the warning signs because it was easy to bury our heads in the sand. After three years, though, we started to wonder why our accounts weren't growing. I started learning about investing, reading book after book, and the more I read, the more I realized that one after the other, all the warning signs of a bad FA were there. All the pitfalls, we fell in. All the fees to avoid, we were paying. All the annuity sales pitches, we bought into.

By educating ourselves we learned several things. 1) taking care of your own money is not that hard. 2) Nobody cares as much about our money as we do. 3) Lower the fees your pay on investments and watch your returns increase (I ended up moving all of our money to Vanguard). 4) Never trust a FA who seem to only have your best interest at heart. He is in it for the money (your money), and that's a fact.

Thank goodness we saw the light sooner rather than later.
__________________
FIREd is offline   Reply With Quote
Old 02-27-2008, 02:12 PM   #18
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
FinanceDude's Avatar
 
Join Date: Aug 2006
Posts: 12,484
Quote:
Originally Posted by travelover View Post
Just to reinforce how prevalent this is - My nephew asked me to help him make 401(k) investment decisions. His first assignment was to find out his total ER on his current investments there. Answer: 3.2% !!!!!!! That's a nice bite outta 4% SWR.
He doesn't have a withdrawal rate until he's withdrawing......... That being said, I'll bet it's an insurance product through Principal or someone...........
__________________
Consult with your own advisor or representative. My thoughts should not be construed as investment advice. Past performance is no guarantee of future results (love that one).......:)


This Thread is USELESS without pics.........:)
FinanceDude is offline   Reply With Quote
Old 02-27-2008, 02:22 PM   #19
Thinks s/he gets paid by the post
saluki9's Avatar
 
Join Date: Feb 2005
Posts: 2,032
Quote:
Originally Posted by FinanceDude View Post
He doesn't have a withdrawal rate until he's withdrawing......... That being said, I'll bet it's an insurance product through Principal or someone...........
I'm betting on John Hancock!
__________________
saluki9 is offline   Reply With Quote
Old 02-27-2008, 03:03 PM   #20
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
FinanceDude's Avatar
 
Join Date: Aug 2006
Posts: 12,484
Quote:
Originally Posted by saluki9 View Post
I'm betting on John Hancock!
And let me guess, it's a 403B!!!
__________________

__________________
Consult with your own advisor or representative. My thoughts should not be construed as investment advice. Past performance is no guarantee of future results (love that one).......:)


This Thread is USELESS without pics.........:)
FinanceDude is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
My poor little footsies! tangomonster Health and Early Retirement 12 05-31-2007 11:35 AM
Poor habits lead to poor future~an old concept mickeyd Other topics 0 05-29-2006 11:24 AM
Hi I am feeling old and poor old woman Hi, I am... 54 12-29-2005 04:50 PM
Poor Jim Rogers wildcat Other topics 2 10-19-2005 06:27 PM
Rich/Poor Gap laurence Other topics 8 06-15-2005 04:54 PM

 

 
All times are GMT -6. The time now is 02:35 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.