OK, I know we've covered this, but...

[SecondCor521]

Hi all,

I have some friends who are asking for my advice. I am in turn coming to you.

Husband (71) and Wife (68) with about $4M invested 60%/40. Most of the 60% is in LTBH individual stocks in IRAs and joint taxable account. I think the 40% is in a mixture of investment grade corp bonds, muni bonds, and CD's. I don't know the taxable/nontaxable ratio.

Husband enjoys doing the individual stock thing - research, annual reports, following the stocks, etc. Wife likes DRIPs. Husband is considering simplifying their investment picture for the sake of the wife in case he dies first. Husband is evaluating handing the port over to his former-broker-turned-financial-advisor. Husband understands about fees (85 basis points on first $1M then 75 bp on further millions, I think, 25 bp for bond portion). Has been handed a somewhat slick table showing investment returns beating the S&P net of expenses over the past 5-7 years, but there are a number of caveats and footnotes of course -- excludes accounts closed prior to a certain date, no mention of risk-adjusted returns, no discussion of investment strategy or policy are a few I saw and mentioned right off the bat. Husband is comparing his performance but isn't calculating it right and doesn't seem to care when I point that out.

So. What are the pointed questions I should be asking? What are decent alternatives for this couple? I have so far thought of Couch Potato, Coffeehouse Investor, 60/40 VTSMX/VTBMX, and Vanguard Retirement 20XX as all relatively low fee, low maintenance, decent return types of investments.

2Cor521

[justin]

Bring Vanguard $500,000+ and they will have a CFP complete a financial plan/asset allocation plan for you. $1,000,000 gets you unlimited free chat time with a CFP. Might be worth a shot. Or pay VG 0.5% or so and they'll manage it all for you. Hard to beat a VG retirement 20XX or Lifestrategy moderate/conservative growth, too. Would the wife be ok sitting back collecting between $112,000 and $137,000 checks from VG each year from $4 million invested in Lifestrategy moderate/conservative growth?

One problem with moving $2.4 million in equities to a new adviser to manage is the tax implications. I don't know what portion of the $2.4 million is in taxable accounts or what kind of capital gains they are sitting on, but selling in the taxable accounts is a taxable event triggering potentially massive tax burdens. The tax impacts are particularly relevant to older folks such as the two in question around age 70. They won't live forever, and their heirs/beneficiaries get a free stepped up basis in whatever assets they inherit in taxable accounts. Assuming they have someone/something to leave money to, they may want to consider the fact that they can avoid paying taxes on gains forever by passing their appreciated assets to their heirs.

DRIP plans can also be very difficult to determine accurate cost basis unless impeccable records were kept (potentially for decades). Passing these DRIPped stocks on to your heirs and letting them take a stepped up basis at time of death is one way to avoid having to hire a forensic accountant with a nice hourly rate to figure out your basis in a file cabinet worth of DRIP stocks.

Another important question is whether they are just running up the score (for the sake of their kids/grandkids/favorite alma mater etc). Or are they really spending more than ~$137,000/yr? If the simple approach would work, it seems like it would be a much lower risk approach. Having a manager potentially churning a portfolio and buying, say, mortgage REITs (isn't that the latest bubble investment ) might outperform the market during boom times, but could leave your 70-ish year old folks flying coach class and eating cat food for the rest of their years.

[SecondCor521]

justin,

Thanks for the reply.

Can you point me to where Vanguard will manage for 0.5%? Is that through VBS?

Wife is a worrywart, but probably wouldn't need to spend the kind of money you describe unless health issues get expensive.

Good point on the tax implications. In their case, I think they are LTBH and thus would have capital gains unless they did in-kind transfers. But the tax issues would rear their ugly head if the FA churned the account.

As for their spending rate now, I think it is around the six-figure mark after all is considered.

Thanks again,

2Cor521

[Coach]

2Cor, they've got a ton of money. If he likes and trusts his FA, and believes they'll take care of things well for his wife when he goes, I think I'd pat him on the back and say "good plan."

Coach

[LOL!]

Lots of folks on the diehards board have stated that if they did, they have told their spouses to invest with a guy who wrote some books and his initials are Rick Ferri.

[justin]

Quote:

Originally Posted by SecondCor521 Can you point me to where Vanguard will manage for 0.5%? Is that through VBS? .... Good point on the tax implications. In their case, I think they are LTBH and thus would have capital gains unless they did in-kind transfers. But the tax issues would rear their ugly head if the FA churned the account.

VG management

Fee structure on pg 20 of the pdf I think.

It turns out they have a graduated fee schedule. .75% on first million, .35% on next million, then .2% thereafter. An average rate of 0.375% on $4 million. Or $15000/yr. This apparently includes up to $1500 of commissions/trading fees.

Not sure how much more service you get with the active management beyond what you could get from flagship service (personal representative, financial plan and annual updates, unlimited consultation with CFP, etc). $15000 I suppose.

Most "hotshot" active managers want carte blanche to trade as they see fit including selling all the old stocks that they don't necessarily like. There are exceptions to every rule, so maybe the dude w/ the slick color handouts is an honest guy.

[FinanceDude]

Quote:

Originally Posted by SecondCor521 Hi all, I have some friends who are asking for my advice. I am in turn coming to you. Husband (71) and Wife (68) with about $4M invested 60%/40. Most of the 60% is in LTBH individual stocks in IRAs and joint taxable account. I think the 40% is in a mixture of investment grade corp bonds, muni bonds, and CD's. I don't know the taxable/nontaxable ratio. Husband enjoys doing the individual stock thing - research, annual reports, following the stocks, etc. Wife likes DRIPs. Husband is considering simplifying their investment picture for the sake of the wife in case he dies first. Husband is evaluating handing the port over to his former-broker-turned-financial-advisor. Husband understands about fees (85 basis points on first $1M then 75 bp on further millions, I think, 25 bp for bond portion). Has been handed a somewhat slick table showing investment returns beating the S&P net of expenses over the past 5-7 years, but there are a number of caveats and footnotes of course -- excludes accounts closed prior to a certain date, no mention of risk-adjusted returns, no discussion of investment strategy or policy are a few I saw and mentioned right off the bat. Husband is comparing his performance but isn't calculating it right and doesn't seem to care when I point that out. So. What are the pointed questions I should be asking? What are decent alternatives for this couple? I have so far thought of Couch Potato, Coffeehouse Investor, 60/40 VTSMX/VTBMX, and Vanguard Retirement 20XX as all relatively low fee, low maintenance, decent return types of investments. 2Cor521

Honestly, do you feel comfortable taking ideas from an Internet forum and dispensing investment advice on a $4 million nest egg? You don't know if they have done estate planning, the tax implications of moving their accounts, etc.

The best thing to do is tell them to meet with and estate planning attorney, tax attorney, and CFP. Beyond that, you are dancing with dynamite.........

I'm NOT on the side of the FA, he sounds like a moron............

[SecondCor521]

Quote:

Originally Posted by FinanceDude Honestly, do you feel comfortable taking ideas from an Internet forum and dispensing investment advice on a $4 million nest egg? You don't know if they have done estate planning, the tax implications of moving their accounts, etc. The best thing to do is tell them to meet with and estate planning attorney, tax attorney, and CFP. Beyond that, you are dancing with dynamite......... I'm NOT on the side of the FA, he sounds like a moron............

Honestly, yes, I did. I was going to say because these folks are the responsible kind of folks who would not just follow my advice off a cliff and then blame me for it, but are careful people who would take it under consideration as one piece of advice. But after reflecting on it they may be in a vulnerable place now (facing death, basically) and may accord my opinion more weight than it deserves. I will proceed with caution and be clear with them that I am providing information / data / things to think about rather than advice.

They have done considerable estate planning with their attorney but I don't know the details. My understanding is that if they move the stocks over somewhere there would be no tax implications, but selling any of them would incur, most likely, LTCG.

I think they are asking me because I am not a paid professional at this. They seem to have an instinctive distrust of professionals who want to handle their money for them, but the husband does want something simpler.

Forgot to mention that husband thinks an average ROR of 7-8% would keep them in good stead forever.

2Cor521

[jIMOh]

If you brought $4 M to Vanguard or T Rowe Price they will take care of you. No reason to pay an advisor ongoing fees, then have mutual funds take ongoing fees from you as well.

Tell T Rowe jIM sent you, they'll hook you up.

I would think 60-40 is good. add 1% to bond position each year, IMO at this point (age 71). I might suggest any taxable monies go to a dividend income fund to take advantage of lower tax rates. I would hold bond investments in the IRAs with other equity investments as needed.

[FinanceDude]

Quote:

Originally Posted by jIMOh If you brought $4 M to Vanguard or T Rowe Price they will take care of you. No reason to pay an advisor ongoing fees, then have mutual funds take ongoing fees from you as well.

How is that solving their issues? Other than everything in one fund company, I don't see how they are getting their issues resolved.................

Are you sure they are willing to take a $4 million portfolio and mange it themselves at VG? Sounds like the wife has little or no investment experience, and the husband though distrustful of his current rep, needs some questions answered.

I'm still thinking hourly CFP............

[2B]

It sounds like they have more money than they need for both or her living expenses. I don't know how the heir issues are set but they are in a good position to go onto cruise control.

I'm a big believer in a diversified portfolio of index mutual funds and individual bonds/CDs. The man of the family can have all the fun he wants searching for brokered CDs with the best rates and being careful to keep each bank with less than $100K. It's something to keep him busy that has very little downside. The mutual funds can be rebalanced annually. No matter how financially illiterate the wife is, she can understand the formula. If the CDs become to complicated, get govt bonds.

Why pay fees? The studies say FA's add negative value and high fee mutual funds don't beat their respective indexes.

They may want to consult a tax/estate attorney to make sure things are set up the right way for their path to eventual mortality.