I found the predatory FA... and it's my Mom

[growerVon]

I finally dug into the 529 fund details that my Mom as a Financial Adviaor got DW and I into 8+yrs ago for the benefit of DD and DS. With what I've learned about Expense Ratios, I was not pleased to learn these funds ran at between 1.0% and 1.2% when I reviewed them two weeks ago. "OK," I thought, balancing my relationship with my Mother and my aversion to being ripped-off, "we'll just eat that crappy ER because I know it helps Mom," but of course this is gnawing at me; these terribad rates are sucking away at my kids' college funding. At my Mom's grandkids' college funds.

Looking at the prospectii, I see there is also a Front Load of 5.77%. Oh crap. If you don't know, loads are another way funds and the people associated selling them take more of your invested money. Bad stuff, loads. When we started the 529s so long ago, I didn't know day from night when it came to investing. I had noticed these line items in our purchase acknowledgement statements in the past, but while they listed a dollar amount in the detail section of the line item, the end line to the right always said 0.00 and I figured Mom was paying these - sort of a contribution to the kids' education because it was her grandkids, right?

What's the axiom about "assume"?

Flash forward to today, I bring this up directly; hadn't before.

"Mom, the funds we have the kids' 529s in, do they have a front-end load?"

"Yes."

"But you're paying those for them, right?"

"No..."

"Oh. I thought you were or something because they always show 0.00."

"That because the money is taken out before." (Now, I admit I don't recall her exact words, in part because of the sick feeling that had suddenly developed in my stomach region, but they were something like this)

"But, Mom, Front End Loads... those are really bad, right?"

"No, they're pretty common."

At this point, I now knew. Switched the topic, finished the call. The part of me that cares about this is so steamed. There is another part that isn't sweating the small stuff. Back to the indignation. There is no way I'm going to put another dime into those funds. Now in the process of finding a new 529 home. Since I kind of like confrontation, the future discussion about this will be fun but I wonder how much she'll actually pry given what she's heard me talk about since waking up to FI/RE.

But seriously, my Mom?!?!

 

[hnzw_rui]

Wow. 5.77% front-end load and 1.0-1.2% ER? I wonder if you're at break even yet after factoring inflation.

 

[travelover]

Yea- wow, just wow.

 

[Midpack]

Yea- wow, just wow.

+1. Hard to believe...

 

[donheff]

Are there a lot of options on 529s? I thought they were setup by the states.

 

[audreyh1]

Yea- wow, just wow.

+2!

 

[donheff]

This post prompted me to log into the DC 529 site through which I fund my grandkids. They offer about a dozen options most of which have nearly 1.3 - 2% ERs. There are only two lowish cost funds - an equity index that I have the GKs in (.43) and a sorta bond fund with .15. It is a crime that most of these funds are so expensive.

 

[MichaelB]

I finally dug into the 529 fund details that my Mom as a Financial Adviaor got DW and I into 8+yrs ago for the benefit of DD and DS.

Just to clarify, are you saying your mother is a professional FA, or just giving you financial advice when this account was opened?

 

[REWahoo]

This post prompted me to log into the DC 529 site through which I fund my grandkids. They offer about a dozen options most of which have nearly 1.3 - 2% ERs. There are only two lowish cost funds - an equity index that I have the GKs in (.43) and a sorta bond fund with .15. It is a crime that most of these funds are so expensive.

Agreed. That's why I did some serious research before opening a 529 for my grandchildren and went with the plans offered by the state of Utah - even though I live in Texas. Utah has one of the best plans around, offering low fees and Vanguard funds:

For age-based and static investment options, the total annual asset-based fees range from 0.160 to 0.224 percent. This includes the underlying fund operating expense ratios, if any, and the 0.140 to 0.180 percent Administrative Asset Fee.

http://www.uesp.org/pdfs/Investment-Info/Asset_Fee_Structure_Table.aspx

 

[donheff]

Agreed. That's why I did some serious research before opening a 529 for my grandchildren and went with the plans offered by the state of Utah - even though I live in Texas. Utah has one of the best plans around, offering low fees and Vanguard funds:



http://www.uesp.org/pdfs/Investment-Info/Asset_Fee_Structure_Table.aspx

makes me want to kick myself for not doing more due diligence. I understood this for myself but didn't apply it in the slightly different grand kids situation. Now I will have to research whether there are any advantages to an in state plan and whether splitting up investments into a couple of different plans is ok.

 

[Texas Proud]

I will assume the answer to Michael B's questions is she is a FA....


This is what she has been taught... she is just part of the machine who thinks they know better than the people they help and that they deserve to be paid very handsomely for that knowledge.....


I would suggest just moving the funds to a low cost provider and leave it alone... at least you put money away and that is good... you did not say how well the funds did.... did they do OK Also, did your mom push you to invest IOW, one of my sisters was put into high cost funds early on in her career... she was OK with that since she said she would not have put anything aside without the guy coming by all the time trying to sell her on it... so he got paid for what he did and when sis learned more later she moved the money.... a win-win in her opinion....

 

[target2019]

Since you've paid the up-front fees, it may help family stability to keep existing funds in the plan, especially if the amount there is not substantial. Just sayin.

You can open another 529 plan after doing some research. Put new money there.

This is a tough spot to be in, where a family member benefits from their advice to you.

 

[Mulligan]

Wow. 5.77% front-end load and 1.0-1.2% ER? I wonder if you're at break even yet after factoring inflation.

Stunning isn't it. If they had an alternate 529 roulette wheel option sans the additional above fees I would be tempted to try that instead.


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[Fermion]

Stunning isn't it. If they had an alternate 529 roulette wheel option sans the additional above fees I would be tempted to try that instead.


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That is a good point! A roulette wheel has better odds even with 2 house numbers (greens). A craps table has even better odds than the ones the OP's mom was giving them.

5.7% is over three years return on short duration bonds.

 

[FlaGator]

Vanguard runs NY state's plan (maybe others too) and has good low cost options. They are presented on the website (nysaves.org) with names such as "growth option", but a little research will tell you the underlying funds.

You can also do a trustee->trustee transfer to move the money elsewhere. I moved my kids' accounts from CA's TIAA managed fund to NY's Vanguard options several years ago.

There may be state income benefits for contributing to your state's plan but there is no requirement you use a plan sponsored by your state of residence.

 

[MRG]

... Snip...


Looking at the prospectii, I see there is also a Front Load of 5.77%.

What's the axiom about "assume"?

Flash forward to today, I bring this up directly; hadn't before.

"Mom, the funds we have the kids' 529s in, do they have a front-end load?"

"Yes."

"But you're paying those for them, right?"

"No..."


"But, Mom, Front End Loads... those are really bad, right?"

"No, they're pretty common."


But seriously, my Mom?!?!

Mom's right, FE funds are real common LAST CENTURY. The industry is full of folks that still believe that.

 

[karluk]

My state offers two different 529 plans - one for direct purchase and one that is sold through brokers. The plan sold directly to investors has reasonable fees, but the one sold by brokers has front end loads and higher expenses, just like the one sold to OP. I suggest that OP investigate whether reducing costs is a simple matter of transferring the 529 investments to a cheaper plan offered by his own state. That would preserve any tax advantages he's getting now.

I also suggest that OP take time to calm down before discussing this matter with his mother. He seems to be spoiling for an argument right now, which isn't an ideal attitude to take into a discussion, even if the broker weren't also a close relative. There's all sorts of potential to do permanent harm to the relationship the way things stand right now.

I see two lessons here. First that brokers need to get paid and, not being fiduciaries, typically steer investors into higher cost investments. If you can do it yourself, you're almost always better off going solo. Second, doing business with close friends and relatives is one of the likeliest ways to damage the relationship.

 

[redduck]

OP: You might want to consider looking around for a different mom.

 

[karluk]

Let me enlarge on the matter of preserving the tax advantages OP may be enjoying by investing in his own state's plan. Some states, including my own, give tax deductions for investing in the home state's 529 plan, but also have laws in place to recapture the tax breaks when the 529 money is moved to an out-of-state plan. If you're contemplating a move, you should investigate whether you will run into this kind of tax penalty. Getting hit with a large, unexpected state tax bill isn't usually the best way to reduce expenses.

 

[FUEGO]

Donheff and others,

You can switch to any state's 529 plan if you want to. The only possible loss is a state tax deduction/credit if you don't contribute to your own state's 529 plan.

NY Direct's 529 plan was the best I found in a search a few years ago, with the Utah plan not far behind. NY also has an advised 529 option which has much higher fees (so make sure you pick the Direct plan).

 

[ERD50]

...
Flash forward to today, I bring this up directly; hadn't before.

...

"But, Mom, Front End Loads... those are really bad, right?"

"No, they're pretty common."

Mom's right, FE funds are real common LAST CENTURY. The industry is full of folks that still believe that.

Reminds me of a bit of sage wisdom (paraphrasing, don't know the exact quote or attribution * see below): "It is near impossible to convince a person of a truth, if acknowledging that truth interferes with their livelihood".


See the sales training in action? No actual answer to bad/good - just that they are 'pretty common'. Hah, that wasn't the question! Traffic deaths are pretty common too - so I guess they are 'good'?

OP: You might want to consider looking around for a different mom.

How's that one go, "You can pick your friends, and you can pick your nose, but you can't pick your relatives!"?

Some of this reminds me of some recent posts about the difference between the more common 'suitability' standard, and the 'fiduciary' standard. Suitability is weak and subjective, and says it's fine to put a client in a FE loaded fund even if an identical fund is available w/o the load - as long as neither is 'unsuitable'. But a 'fiduciary' must act in the clients best interest - why would you knowingly deal with anyone but a fiduciary? And of course the answer is most people don't know.

edit/add - OK found it:

“It is difficult to get a man to understand something, when his salary depends on his not understanding it.”


― Upton Sinclair, I, Candidate for Governor: And How I Got Licked

-ERD50

 

[rodi]

Echoing karluk's comment about *state taxes*... some states allow contributions to in-state 529 plans to be tax preferred - like a 401k. Other's don't. California (my state) doesn't. So there was zero reason to stay with the state plan. Like REwahoo - I selected Utah because it was the lowest fees and Vanguard funds.

Even still - fees on 529's are slightly higher than directly purchasing vanguard funds outside the 529. But the tax advantage on the growth (like a Roth - the growth is untaxed, if it's used for educational purposes.)

Another question: Your kids are the beneficiaries... but who "owns" the account. Your mom started it - is it in her name, or your name? If it's in her name - you can't do anything about it - can't roll it to another 529 plan. If it's in your name, you can roll it out if you choose... trustee to trustee - just like an IRA.

If you don't want bad blood with your mom - perhaps you establish NEW 529's for new contributions. Let the old 529's sit there... but don't contribute to them. I'm pretty sure you're allowed to have more than 529 in a beneficiary's name. Or you could put it in your own beneficiary name - and then transfer it to your child's beneficiary name later. (The money is semi-fungible... can be transferred between beneficiaries... which is good if a 1 kid gets a full ride scholarship and the other kid doesn't.)

 

[Mulligan]

OP: You might want to consider looking around for a different mom.

And worse yet.... A FA that is also your mother that provides this kind of service will not help the cause around here for the FA when the occasional thread pops up about "Should I hire a Financial Advisor". Someone is going to remember this.


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[ERD50]

And worse yet.... A FA that is also your mother that provides this kind of service will not help the cause around here for the FA when the occasional thread pops up about "Should I hire a Financial Advisor". Someone is going to remember this.
...

In homage to BB King (RIP)...

Nobody loves me, but my mother...
And she could be jivin' too

-ERD50

 

[bssc]

Wow, that's all I can say.