Please Review this Portfolio Proposal

[GalaxyBoy]

Dumbest thing I have ever seen. Fire that "advisor".

+1

 

[ERD50]

.... I wrote him an email over the weekend saying, among other things: "The proposal is such a complex and voluminous approach that it seems like it would take a very long time for you to explain each choice you made, clearly and completely enough so that we could understand and concur with it." ...

Exactly - and isn't that reason enough to dump this FA right now? The only reason I can see for such complexity is that some customers will be impressed with how 'thorough' and 'detailed' this is, and they just 'know' they couldn't do this w/o the help of this incredibly 'intelligent' FA who can put this long list together. But it is all just a bunch of that 'Baffling Stuff'.


I could go on, but like I said before, this is NUTS.


But I really guess I should withhold judgement until I know the exact allocation of the ContraFund to properly evaluate this - just guessing that it is somewhere between 0.00000% and 0.50000% is not enough information for me. <<< I'M KIDDING!


But thanks for posting, this puts everything you post in a new light for me.

-ERD50

 

[sengsational]

But thanks for posting, this puts everything you post in a new light for me.

Yeah. I was thinking the OP was just yanking our chain. At least now we know there's 4 accounts and an advisor that's, well, I'll let everyone fill in their own descriptor there.

 

[Donzo]

seems like some advisors complicate things to continue to be "needed". A simple 3 or 4 fund portfolio would be to easy for layman to manage.

 

[Midpack]

Exactly - and isn't that reason enough to dump this FA right now? The only reason I can see for such complexity is that some customers will be impressed with how 'thorough' and 'detailed' this is, and they just 'know' they couldn't do this w/o the help of this incredibly 'intelligent' FA who can put this long list together. But it is all just a bunch of that 'Baffling Stuff'.

+1.

In my first post, I wasn't sure if it was you or the FA who chose so many funds. If it was the FA, I'd agree he/she is trying to baffle you and give the impression you can't do this on your own. Unfortunately that's not uncommon, but it's a needless ruse.

Even if you conclude you want an FA to oversee your investments, there's no need to have so many funds unless he/she/you have no confidence in any of them (they're trivially small positions). It looks like someone who does not know what to pick, so he/she has chosen quantity over quality - or a shotgun approach as others have noted. That's not confidence inspiring from an FA.

I would not continue with this FA if he/she put this portfolio together. He/she should provide you with expense ratios, overall allocation and tax efficiency/placement for each fund - you should not have to ask elsewhere, and pay an FA too.

 

[walkinwood]

Don't waste your time with this planner.

 

[FUEGO]

Dump the financial adviser. This set up looks horrible.

Go to Vanguard. Buy the Lifestrategy Conservative fund. If you are feeling lucky, buy the Lifestrategy Moderate fund.

Have a beer. Go for a walk. Play some tennis. Count the thousands or tens of thousands you won't be losing to a financial advisor each year

Done.

 

[Meadbh]

With so many overlapping funds, an investor could actually be less diversified than intended. This is way too complex and probably would not be a high performing portfolio.

Given that the OP has posted this list in several forums, one might wonder whether the idea was to populate Google searches with the fund names. One might wonder, if one were a skeptic........

 

[bUU]

Exactly - and isn't that reason enough to dump this FA right now?

Not really: His services are already paid-for, and investing is just one part of what he's providing advice on. So there's really no reason to "fire" him. It'll just upset the friend who recommended him, and won't actually benefit us. Besides, perhaps calling him out on these problems will get him to do some more work that I can use, and get him a bit more nervous about losing my friend's business, that he'll look into doing a better job for her going forward.

In the end, he's going to have to convince me that he's correct before we actually use any of his advice.

The only reason I can see for such complexity is that some customers will be impressed with how 'thorough' and 'detailed' this is, and they just 'know' they couldn't do this w/o the help of this incredibly 'intelligent' FA who can put this long list together. But it is all just a bunch of that 'Baffling Stuff'.

I'm sure that my weekend email to him dissuaded him of the notion that such an approach will impress us.

But thanks for posting, this puts everything you post in a new light for me.

I don't see how. Perhaps your explanation of that will put everything you post in a new light for everyone.

 

[bUU]

Given that the OP has posted this list in several forums, one might wonder whether the idea was to populate Google searches with the fund names. One might wonder, if one were a skeptic........

Given how my doing so will likely to bring more shame than fame to the funds ...

 

[target2019]

Not really: His services are already paid-for, and investing is just one part of what he's providing advice on. So there's really no reason to "fire" him. It'll just upset the friend who recommended him, and won't actually benefit us. Besides, perhaps calling him out on these problems will get him to do some more work that I can use, and get him a bit more nervous about losing my friend's business, that he'll look into doing a better job for her going forward.

In the end, he's going to have to convince me that he's correct before we actually use any of his advice.

I'm sure that my weekend email to him dissuaded him of the notion that such an approach will impress us.

I don't see how. Perhaps your explanation of that will put everything you post in a new light for everyone.

My opinion is that you are making several mistakes. Paying for financial advisor, and then looking for free validation of FA recommendations is just baffling to me. If the FA is putting you into 80% stock fund portfolio when you are 5-10 from retirement, his advice is so out of line with convention, it tells me he is a shark. If that didn't convince you, then the array of 50 funds (with above average expenses) should tell you something. And a real warning bell for me is that the advisor comes to you based on a friend's recommendation.

You asked, so I answered. I do hope it turns out well for you.

 

[bUU]

Paying for financial advisor, and then looking for free validation of FA recommendations is just baffling to me.

Really? So I guess you also feel that Angie's List is a waste. We'll have to agree to disagree. If an electrician comes in and determines that the remedy for the fact that we lose the light bulb in a specific receptacle every month or so is to use light bulbs rated for 130v instead of 120v, I'm going to give that a sniff-test on appropriate online forums, rather than blinding accepting the expert professional's say-so. If the comments I get online support what the expert says, confidence goes up. If the comments I get online don't support what the expert says, then maybe I need to consult another expert.

What's a "mistake" is relying either on online advice or the advice of a professional. The former is just plain foolish, and the latter is pretty silly too, given that also consulting online resources is practically without cost (and, in this case, would have had the client actually going ahead with this adviser's recommendations!)

If the FA is putting you into 80% stock fund portfolio when you are 5-10 from retirement, his advice is so out of line with convention, it tells me he is a shark.

So why would you suggest that it wouldn't be a good idea to consult online forums to validate that suspicion? Your earlier comment is simply not making any sense to me.

You asked, so I answered. I do hope it turns out well for you.

Me too. I'm using the constructive insights folks are providing me in my reply to the adviser. Perhaps I can even use such info to brow-beat him into refunding the some portion of his fee that would be attributable to investing advice, since he seems to have disappointed me so badly in that regard.

 

[aja8888]

Really? So I guess you also feel that Angie's List is a waste.

Angie's List is in business to make money, especially now that it is a public company.

Do some research on them...a good idea turned into a cash cow with most contractor's paying fees to get to the top of the lists and promote coupons (which have no meaning since they generally can't be applied after a quote is given). They are no different than the coupon shopper that ends up in my mailbox each week. We tried to use Angie's List last year when rehabbing a house for sale.....we gave up with their recommendations (in general) due to higher pricing and other professional reasons.

Try to find a lawyer recommendation on Angie's list... Or a FA's recommendation.

 

[ERD50]

I don't see how. Perhaps your explanation of that will put everything you post in a new light for everyone.

Sorry, I didn't actually mean that in a derogatory way, but as a matter of explanation. IIRC, some earlier posts from you struck me as very complicated. I think you just view things differently than me in terms of complexity. I'm a Keep It Simple Stanley kinda guy. Everything should be as simple as possible, but no simpler.

It is actually just stunning to me that anyone would seriously post a list like that for review, or that they would take it seriously for more than a nano-second before just handing the list back to their 'advisor' with a 'are you joking?' look on their face. The complexity is just staggering to me.

-ERD50

 

[ERD50]

Really? So I guess you also feel that Angie's List is a waste. We'll have to agree to disagree. If an electrician comes in and determines that the remedy for the fact that we lose the light bulb in a specific receptacle every month or so is to use light bulbs rated for 130v instead of 120v, I'm going to give that a sniff-test on appropriate online forums, ....

I think you are getting the responses you are, because there is such a huge disconnect.

If you go to a forum of capable DIY people, I think they would typically respect that a non-DIY person would call a licensed electrician for certain problems and that electrician would most likely be able to help the homeowner out. But second opinions are fine - is the guy over-doing it, or maybe taking shortcuts that will cost you more later, maybe he missed something? It's not all black & white.

But you've been around this forum long enough to know that the vast majority are DIY, and feel that the skills you need to evaluate an FA are enough skills to DIY anyhow, therefore invalidating the need for the FA (in most cases). But rather than come here and ask for portfolio advice, you go to the FA and then ask for a review of that recc. It's backwards from how most of us would look at it, so you are getting a lot of kinds of responses.

As another illustration, go to one of the plumbing forums and ask about those magnetic/electro/magic water conditioners that use no salt, just a couple wires wrapped around a pipe. They'll all tell you it's snake oil. But you would come in and say, "I talked to the guy who sells these things, I rented one for 6 months, he says they are great, what do you think?" What kind of replies would you expect?

-ERD50

 

[bUU]

Sorry, I didn't actually mean that in a derogatory way, but as a matter of explanation.

Thanks for the clarification.

IIRC, some earlier posts from you struck me as very complicated. I think you just view things differently than me in terms of complexity. I'm a Keep It Simple Stanley kinda guy. Everything should be as simple as possible, but no simpler.

And here we find this financial planner who makes my approaches look downright simplistic by comparison!

It is actually just stunning to me that anyone would seriously post a list like that for review, or that they would take it seriously for more than a nano-second before just handing the list back to their 'advisor' with a 'are you joking?' look on their face. The complexity is just staggering to me.

I think you have to factor in the innate respect due anyone, and that especially due someone who a close friend values and respects greatly. Beyond that, I don't want to confront the man with just my own words; my rejection of his proposal is stronger for the constructive insights others have offered in this thread and others.

 

[bUU]

I'm going through my adviser's reply. Some of it sounds quite worthy of consideration, such as this comment aimed at explaining why he's recommending an asset allocation close to 80/20:

The concern we have about the amount of fixed income current portfolio (and in 401k plan target date funds) and the reason we’d replace bonds with dividend paying equities, real estate, non-traditional fixed income and other alternatives is that for the first time in 30 years it is reasonable to expect a loss in fixed income over the long-term. Not just an after-inflation “real” loss, but more devastatingly, a pre-inflation “nominal” loss. Interest rates have gone from a peak of over 14% on a 10-yr us treasury, to less than 2% over the last 30 years. As interest rates go down, as they did from 1982 through this year, bonds become more valuable. Rules of thumb like % splits based on age were determined during this time period when it was impossible to lose money in bonds and won’t be equally valid during periods of stable or rising interest rates. You also may see other rules of thumb like “subtracting your age from 100” to get an equity percentage. That rule has been changed to subtracting from 120 based solely on longer life expectancy. Such rules were developed for an audience who were supported by pensions for income and investments were their extra money. Pensions were managed for growth behind the scene, without the pensioner’s conscious knowledge, skewing the effective total portfolio allocation. Your accounts will have to be growth, income, and extra money all at the same time.

What I think he's saying is that things have changed (and that's for sure) - that bonds simply are bad right now (and that's almost surely true, as well). I'm not sure that that really means that the right answer is more equities, however, cash assets are losing "real" value (though not "nominal" value). Is anyone ready to stand up and say that holding 35% of your entire savings in CDs is the way to go?

He also tackled the tax-efficient fund placement issue, in a rather novel way:

With capital gains, you’ll have to pay the tax eventually. You could wait for retirement or reduced income when you might qualify for the 15% rate, but it’s probably better to accept the fact that the government has a 20% claim to your gains whether you take them now or in the future. The bite could even be more than 20% in the future. We hope that your investments keep growing, but if they do, the dollar amount that you have to pay the IRS grows too. It is usually better to put together the best portfolio you can, include tax efficient investments where possible, and pay what you must.

What I think he is saying here is that, essentially, he doesn't see a big benefit in strategically placing funds (at least not with regard to the value versus growth dynamic) because he sees taxes on gains going up (and that's almost surely true), and that we're probably going to get hit with worse taxes when we take the money out than if we just pay the tax now - that the compound effect may actually be smaller than the impact of taxes increasing. I'm not sure that that's true, and I'm not sure it really gets to the heart of the tax-efficient fund placement issue.

 

[rackingguy]

I didn't go over the entire list. I can tell you just at a glance that it stinks to high heaven.

Here's the very simple reason why:

Front loaded mutual funds. Why are you paying this "advisor" 4.9% of your investment funds right up front for actively managed funds when actively managed funds historically underperform index funds? Anything with "Class A" is a front loaded mutual fund. I just looked at a couple more at random, and, surprise, they were front loaded as well. A front load means sales commission for the "financial advisor" - a wealth transfer from you to him with no value added. You say he's already paid for, but he's not. He's about to take 4.9% of your net worth for a ride into his pocket.

I have an article coming out on this exact topic and an evaluation of how loads + active management crush your portfolio.

But, in the interim, I can at least provide a teaser: Front loaded funds versus their no load equivalents

Before you do anything else with this guy, no matter how much anyone else respects him, make him sign a legally binding fiduciary oath. Once he's signed that, see if he recommends this bag of Russian Roulette front-loaded mutual funds.

 

[ESRwannabe]

I apologize if you've seen this message on other forums, but I'm seeking feedback from various sources.

I recently received a proposal from a financial adviser. Putting aside that he didn't map out how we'd get from where we are to where he proposed we go, could you please assess his recommendations based on:

Just FYI.

Having multiple actively managed funds all covering the same sector will result in your simply duplicating an index fund, but with a much higher ER.

 

[redduck]

Your financial advisor doesn't seem to be as thorough as one would hope. How could he leave out the Disney Mutual Fund?
+++


oldnews thread heading: I put it all in Disney in October 2012…

quote: oldnews: …I view DIS as a mutual fund without any fees, and they pay a dividend…

 

[bUU]

Front loaded mutual funds.

Front-loading is a non-starter for me. It's just utterly backwards.

You say he's already paid for, but he's not.

He is. I've made it very clear to him, saying "Something else we outlined from the start was that we would not consider changing our brokerage to yours." His reply, "I’d be happy to review the Fidelity fund screener to see if there are reasonable alternatives available to you." (The Fidelity fund screener was my personal preference.)

I have an article coming out on this exact topic and an evaluation of how loads + active management crush your portfolio.

Any chance of including in your article a direct rebuttal to this article?

Active Share and Mutual Fund Performance, Antti Petajisto - January 15, 2013
Active Share and Mutual Fund Performance by Antti Petajisto :: SSRN

 

[rodi]

Not really: His services are already paid-for, and investing is just one part of what he's providing advice on. So there's really no reason to "fire" him. It'll just upset the friend who recommended him, and won't actually benefit us. Besides, perhaps calling him out on these problems will get him to do some more work that I can use, and get him a bit more nervous about losing my friend's business, that he'll look into doing a better job for her going forward.

Would you really take what appears to be bad advice (as you pointed out - 80/20 mix) so that you don't upset your friend?

I'm all about friendship - but not at the risk of my nest egg.

I looked up several of the funds - high expense ratio's... front loads... etc.

As you know ER.org is full of DIYers who prefer LOW COST index funds. That's why so many people are reacting strongly.

I don't see where this FA is adding value... only expense and risk.

 

[bUU]

Having multiple actively managed funds all covering the same sector will result in your simply duplicating an index fund, but with a much higher ER.

Pretty much. Someone on another forum was nice enough to enter the portfolio and backtracking it to 2000. I'm not sure it means anything, but it's a pretty graph. (Attached.)

 

[pb4uski]

On the interest rate risk thing, I agree that bonds are subject to price declines if interest rate rise from the low rates today, but I'm not convinced that the best solution is to load up on equities, even dividend paying equities. I think the better solution is to move to short/medium duration bonds or CDs and accept the lower return in exchange for the lower interest rate risk. My solution has been to move into Guggenheim target date bond funds which have a defined maturity so it is like investing in individual bonds with built-in credit risk diversification.

Actually, if CD rates were a tad higher I would consider putting my whole fixed income allocation in 5 year CDs. The problem is that I would have to then have numerous IRAs with a few different banks and I'm not keen on doing that. Since with the Guggenheim target date funds I expect to get the par upon maturity in 5 years, I view it as similar to a CD but with some credit risk and more liquidity risk.

On the tax thing, at least in my situation he would be dead wrong. My federal tax rate has dropped from 28%+ while working to 0% in retirement. I can now harvest about significant capital gains at 0% tax.

 

[rackingguy]

Any chance of including in your article a direct rebuttal to this article?

Active Share and Mutual Fund Performance, Antti Petajisto - January 15, 2013
Active Share and Mutual Fund Performance by Antti Petajisto :: SSRN

I'd do it, but Larry Swedroe already stole my thunder.

Even if you dismiss the skewness (and potential homoscedasticity) problem, there are still three issues:

1. Aside from one year (2010, if I recall correctly), the outperformance of the active pickers still didn't justify a 4.9% front load. 19 years of underperformance out of 20 is not the benchmark I'd seek to emulate.
2. Are all of the funds recommended by this "financial adviser" in that small quintile?
3. To borrow a quote, "The problem with most tactical asset allocation schemes is that they can't be systematized, which basically means in the end you're relying on someone's gut instinct and eventually they're going to screw up."

I do find it interesting that the author is a Vice President at BlackRock's Multi-Asset Strategies group. I think it would be in his best interest to find evidence to support active management. He does brush off survivor bias rather blithely. However, since I don't have the data, I won't wander farther than Swedroe already did in raising questions.

Assuming you decide to go with actively managed funds, it's still difficult to ascertain the difference between skill and luck. Furthermore, you run into retirement or death risk; by the time a fund has escaped the incubation bias, the manager's probably been around for many years. What happens when you're reliant on a stock picker and that stock picker is no longer there?

Regardless, the biggest bugabear is still the front loaded mutual funds. You told this "financial advisor" that you weren't going to pay him any loads, and yet front-loaded mutual funds were the best he could come up with? He really seems like a one-trick pony and simply based on the evidence you presented is not someone I would advise my parents to go seek financial counsel from.

I'm probably dancing close enough to compliance issues that I should stop; I'm not your advisor, this isn't investment advice, and returns aren't guaranteed. Insert further SEC weasel clauses as needed!

I wish you good luck in your endeavors!