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Old 07-27-2007, 11:44 AM   #21
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I was referring to the total cost of the FA and the high fee funds that I have typically seen in the portfolios of people that take their advice. The FA gets their 1 to 2%. The high fee funds just add to the misery.

FinanceDude, you may know. Does the typical FA or their firm get a kick back from the high fee funds they put their clients into?

I think we're all aware you are a FA but I believe that they average person is better served by doing it themselves. The typical small investor (<$2MM) is more than capable of doing it all by themselves. Above $2MM, more estate planning is required but that would be through a lawyer.

During my recent stint of underemployment, I was offerred a position as a FA. As I reflected on it, I couldn't stand the thought of taking people's money when they should be doing it themselves. I turned the job down.
The fact remains most FA's aren't making 2 or 3% net on each client.........

I think the ONLY thing that really matters is the individual's WILLINGNESS to take responsibility for their OWN financial future. The reason 95% or so of all folks don't retire financially independent is they won't take responsibility for making it happen, through LBYM, delaying consumption gratification, etc.

Investing has been commoditized, anybody can invest without an advisor. However, so far, ADVICE has not been commoditized, and probably won't be. When I sit down with a business owner whose looking to retire and sell out his percentage, and wants to know the effect it will have on his retirement, etc, he wants advice, not the 800 number to Vanguard.........

Nothing wrong with Vanguard, T Rowe FIDO, TIAA,or anyone else. I agree with you, most folks under $2 million can do it themselves, provided they are mentally prepared to do so.

This DIY's on this board are the exception rather than the norm. I STILL have conversations with wealthy small business owners who have NO retirement plan they are funding, and not a clue about why they need one................. Call it ignorance, a failure of the education system, or what have you, there's a real lack of knowledge out there........

After all, we live in America, the world expert in comsumption.......

I almost forgot, here's a little snippet of a typical mutual fund sale, and how the FA gets paid. One disclaimer, people have to quit thinking ALL fund sales are at 5.75%, there are breakpoints on sales above $25K for most companies. However, for the sake of realism, I'll use $10K.

A client gives the FA a check for $10K. The FA buys a mutual fund. The sales charge is $575, or 5.75%. American funds holdsback .75% from the 5.75%, and sends the FA's Broker-Dealer 5% or $500. Most FA's work on a grid system unless they are an independent advisor.

Most wirehouse guys get 40% or so on mutual fund sales. So, the FA's Broker Dealer keeps $300, and the rep gets a $200 commission as W-2 income before taxes. If the investment stays on the books, the rep gets 40% of the .25% 12B-1 fees (a whole different discussion) every quarter, or $25 a year on that investment.

Bottom line, the investment firms that hire brokers and the fund companies make the big bucks, which is little surprise...........
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Old 07-27-2007, 12:16 PM   #22
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Of course, an FA who really does his job may be worth it if you are not willing or don't have the temperment to do the work on your own.
Here are the reasons the typical small investor won't ever work with a FA that can really "beat the market" consistently.
  1. There aren't any based on the numerous studies done on the subject.
  2. If there were one, they would be immediately hired to run a major mutual fund, endowment or mega-retirement plan. They wouldn't waste their time with puny accounts with only $2MM.
  3. They would have made so much money that they are FIRE'd already and only manage their own money.
What I have seen is that the "typical" brokerage wrap account has the investor into load / high fee mutual funds. The FA makes their money on the load fees and strives to churn the account. The typical "managed" account has a "small fee" taken out quarterly and the assets put in high fee, but not load, funds that are a pretty normal asset allocation.

There isn't any reason that anyone can't manage their own money. It takes a small amount of knowledge and the confidence to do it. If we go with a 4% SWR, having a FA take 1.5% and then another 1.5% go to the high fee fund only leaves 1% for the investor to live on.

My recent triumph at getting someone I worked with to fire his FA was accomplished when my "pupil" realized he could retire on the fees he was paying to the FA and mutual fund companies. It also helped to show that a simple, diversified asset allocation portfolio also consistently beat his FA's return over 1, 3 and 5 years. The delta was slightly over 3% per year. What a surprise!
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Old 07-27-2007, 12:22 PM   #23
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2B. I think you've made some good points on the dangers of an FA, but it's a gross generalization to say that they're all that bad. Of course, some are even worse, but still, many are, I'm sure, very ethical and believe that they're doing the best for their client.

Personally, at this stage in my investing life (barely toddler stage), I sometimes think that I'd be more comfortable with an FA (our FA was invaluable in starting us out on many non-investing aspects of our lives... to a point at least). however, I would be careful to choose a fee-only FA and make sure that I completely understood the commission structure for the FA.

If someone only needs investment help and not the other estate, general assistance, soft-skills work, then an RIA would be a great potential path for someone who doesn't want to manage their own funds.

However, no matter the path, I think everyone should at least sit down with a few good intro books and gain a basic understanding of what's going on. My wife and I have made huge, huge progress in the last few months of doing it alone. And, we realize now that we were grossly negligent to just let our FA be our crutch. We're not happy with many of the choices they made and with our overall relationship with them, but it's our fault and no one else's.
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Old 07-27-2007, 12:31 PM   #24
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Just to let you know, I don't have any mutual funds with my FA. His fee (1.25%) includes all trades in the stock market. I do have a small variable annuity that I bought in 2001 and that is not included in his fee structure because it generates a yearly fee on its own.
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Old 07-27-2007, 12:32 PM   #25
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Uh oh. He said 'variable annuity'...2B's head just exploded.
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Old 07-27-2007, 12:39 PM   #26
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Just to let you know, I don't have any mutual funds with my FA. His fee (1.25%) includes all trades in the stock market. I do have a small variable annuity that I bought in 2001 and that is not included in his fee structure because it generates a yearly fee on its own.
We need to get you on a plan to terminate services with your FA.

Figure out what your surrender charge is on the variable annuity.

By any chance, is your variable annuity in a tax-sheltered account? (IRA, 401k, 403b).

Go to Vanguard and go through this information as a start: https://flagship.vanguard.com/VGApp/...PlnContent.jsp

Be sure to take the Investor Questionnaire.

Go to your library and get a copy of:

Bogleheads' Guide to Investing
All About Asset Allocation

You can easily read both of those by the end of next week.

Retake the Investor Questionnaire.

This will be a much more meaningful discussion after you get that far.
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Old 07-27-2007, 12:59 PM   #27
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Just to let you know, I don't have any mutual funds with my FA. His fee (1.25%) includes all trades in the stock market. I do have a small variable annuity that I bought in 2001 and that is not included in his fee structure because it generates a yearly fee on its own.
So from what you are saying the only other fees are brokerage fees and buy/sell spreads? Still if you used an index fund approach your total fee would be maybe .3% or less. For example, for the Vanguard Total Stock Market Fund (Admiral) the expense ratio is 0.09%. Turnover is only 3.8% so brokerage fees are minimal. On a 250k investment that works out to $2900/year in savings. The 5yr return on VTSAX is 11.85%.

Still it will take some courage to tell your FA you are moving to a low cost fund provider. If you are up front about it he will see that he cannot beat the fee structure.

Hope you will let us know how this turns out .

Les
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Old 07-27-2007, 01:04 PM   #28
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It wouldnt take a whole lot of courage for me to say goodbye to someone who sold me a VA, once I understood that its probably one of the worst possible investments on the planet.

For the buyer anyhow. Pretty good investment for the seller...
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Old 07-27-2007, 01:10 PM   #29
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Unfortunately we know about the high fees/loads. A few years ago, we knew little about investing, most money was in 401/403/IRA plans. Then DH inherited 100k cash, and we invested it through our bank's investment service.

Fast forward to 2007, we are now educating ourselves, and getting our portfolio in order, and we realize what we did back then. 5.75% front end loads on some funds, less on others but with back end loads, and ERs as high as 1.85%. Just thinking of all that money going into others' pockets really irks me.

I talked to our rep to make sure I was understanding all the prospectus's correctly. I asked him why he thought funds with these charges were best for us. He answered that while we could go to Vanguard/Fidelity/TRowe for much lower cost, we wouldn't be getting all the "best in class" funds that he has access to. And since our total is now 500k, if we rolled everything over to him (IRAs/403b), we would avoid loads, and ONLY have to pay 1-1.5% on top of the ERs.

I promptly replied - NO THANKS

Now I am in the process of creating a plan for moving our money. I have to sit down with turbotax to figure out the tax effect of getting out of these funds. I am nervous about the tax costs of transitioning to the portfolio we now want.

I know this was our own fault, but at least we are on the right path now. I really wish we had become enlightened years ago! Looking back I can't believe we invested that much money without reading up on it first.
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Old 07-27-2007, 01:18 PM   #30
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PBAT, your not alone.

Many of the folks including me went through the same thing your going through. I started reading this forum over 3 years ago and also had to go through all the moving to Vanguard. I was with ML and AG Edwards and was shocked when I started reading the books and this forum to see how much I was ripped of for. Live and learn and move on.
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Old 07-27-2007, 01:19 PM   #31
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I would dump the guy not because of recent losses, but because he is putting you in high risk investments that are not really paying that high of a return.

Check the Yahoo or Fidelity fund screeners. There a lots of mutual funds that have paid better than 10% for 5 and 10 year averages.

Demand for energy is not going down, so check into mutual funds in this sector. That and get some international funds. Fidelity has lots to choose from as do other big firms.
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Old 07-27-2007, 01:25 PM   #32
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I do have a small variable annuity that I bought in 2001 and that is not included in his fee structure because it generates a yearly fee on its own.
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We need to get you on a plan to terminate services with your FA.

Figure out what your surrender charge is on the variable annuity.

By any chance, is your variable annuity in a tax-sheltered account? (IRA, 401k, 403b).
Before while I was financially brain-dead I acquired much knowledge or a common sense approach to investing, I met with a FA. He was helpful to a point...however, he convinced me to put some of my stash in a VA (fortunately a very small amount).....in an IRA! It isn't doing 'bad'....it just isn't doing 'good'. Last year it was around 4.6% or 4.7% (IIRC). It isn't a large sum invested, but I KNOW I could have beat that by a mile!!!

I figured out the hit I'd take by drawing it out and moving it into something else, and it was too big of a hit at that time. I'll have to look at it again, but I think, if memory serves me, that it'll be worth the fees/charges/whatever sometime in 2008 to make the move. (I've got the cyphering scribbled down and stapled to the VA's paperwork)

Ain't hindsight a great thing?! IF only I had known then, what I've learned and know now!

The FA never made any great claims, boasts, or guarantees about returns, just the standard "it might/it may/it could"......"but also, it might not/ it may not /it could not". He left the final decision up to me, and I went with it. Oh, well....not a major big deal.

BTW, that was the last time I ever messed with a FA. I very seriously doubt that I'd ever deal with one again.....in fact, I think it's safe to say I'd NEVER deal with one again!
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Old 07-27-2007, 01:28 PM   #33
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It wouldnt take a whole lot of courage for me to say goodbye to someone who sold me a VA, once I understood that its probably one of the worst possible investments on the planet.

For the buyer anyhow. Pretty good investment for the seller...
EXACTLY!!! I came to that understanding....finally....within the last 2 years!
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Old 07-27-2007, 01:29 PM   #34
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2B. I think you've made some good points on the dangers of an FA, but it's a gross generalization to say that they're all that bad. Of course, some are even worse, but still, many are, I'm sure, very ethical and believe that they're doing the best for their client.
If you read what I wrote, I never said that a FA is "bad." I said repeatedly that they cost a lot of money that is not necessary and is not value added after a very small amount of self education.

Quote:
And, we realize now that we were grossly negligent to just let our FA be our crutch. We're not happy with many of the choices they made and with our overall relationship with them, but it's our fault and no one else's.
Unfortunately, many people do use them as a crutch. A key purpose of this forum is to help people get past using them.

I also paid stupid fees and commissions for years. I have learned and moved on. I want to help others do the same.
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Old 07-27-2007, 01:35 PM   #35
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Uh oh. He said 'variable annuity'...2B's head just exploded.
How true.

That really makes it obvious to dump the FA. Anyone who would have you put money into a variable annuity is not your friend. If, by chance, it was inside an IRA or 403b that person is lowly scum and should be burnt at the stake.
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Old 07-27-2007, 01:42 PM   #36
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If, by chance, it was inside an IRA or 403b that person is lowly scum and should be burnt at the stake.
Aw, come on.....the lowly scum poor FA is only trying to reach FI.
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Old 07-27-2007, 02:01 PM   #37
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At the risk of starting a firefight, I read all the time about how great MF are for low fees but aren't the management fees alwalys quoted only a part of the equation? What about the hidden fees that are impossible to determine such as the dollars spent to trade. Those are not part of the management fees. Also have to pay their light bills from somewhere and as it isn't charity for the investor.

Just looking at how does one really know what they are being charged these days with the only way it seems to really control is to be a totally independent, stock trader that uses a transaction based trading fee sight. One can certainly do that, but have to love it and take more risk.

No I am not a FA but just looking to get insight for those that understand MF better than I as to where to find the true cost of MF which again is much more than the management fees and thus to perform apples to apples comparison for any investment vehicle, one should know all the facts

Thanks for the education so I can find all the hidden costs
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Old 07-27-2007, 02:08 PM   #38
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Anyone who would have you put money into a variable annuity is not your friend.

See...I thought that but didnt say it. I must be getting nicer in my old age.

As far as funny fees...

In some managed funds, particularly ones that trade in instruments that are expensive to transact, and who thrash trade...trading costs can add up.

In index mutual funds and funds that tend to not change their contents very often, the trading fees are miniscule.

I think Alec did something a few years ago where he was able to cull these hidden fees out. Maybe I can find it.
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Old 07-27-2007, 02:10 PM   #39
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At the risk of starting a firefight, I read all the time about how great MF are for low fees but aren't the management fees alwalys quoted only a part of the equation? What about the hidden fees that are impossible to determine such as the dollars spent to trade. Those are not part of the management fees. Also have to pay their light bills from somewhere and as it isn't charity for the investor.

You bring up an interesting question. The answer is that the mutual fund covers their trading costs separate from the "published" management fee. If you dig deep into their prospectus, you can get an idea of what they have paid in the past for their trading and other "reimbursible" expenditures.

The answer is to favor low fee index funds that only trade to adjust for the index or to add/remove money from the market. There is no high level of portfolio turnover that happens in the actively managed funds.

Here's a link to a lot of info on this subject if someone wants to go into it. Some of the new people may not have found this site. It is a great source of information on a lot of FIRE subjects.

Investment fees, commissions, and financial advisors.
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Old 07-27-2007, 02:16 PM   #40
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At the risk of starting a firefight, I read all the time about how great MF are for low fees but aren't the management fees alwalys quoted only a part of the equation? What about the hidden fees that are impossible to determine such as the dollars spent to trade. Those are not part of the management fees. Also have to pay their light bills from somewhere and as it isn't charity for the investor.
No! MF's are not for low fees. There are a lot of mutual funds and even different fee structures within those funds. There are many issues that can bite you if you don't know all of the costs. For example, 'A' shares in a MF may charge a front-end load (and that may be waived with enough money moved in) while 'B' shares may charge a higher 12b-1 fee while also charging a back-load fee on sale (which decreases over time but is actually covered by the 12b-1 when you do the math).

On top of that, some MFs may trade a lot. If you're in a taxable account, then you may end up with a lot in capital gains and not even realize it until too late.

Index mutual funds, on the other hand, tend to charge less; if they're passively managed at least.

With an MF, if it's established, then the best quick view, I think, is just to look at the trailing returns on Morningstar. Those take into account all fees and benchmark against the index.

No matter the fund, know why you have it, what the risk is, and if you're being properly compensated for that risk. In that light, maybe another way to look at overhead fees is that, if you can reduce the fees without changing anything else then your reward increases without an increase in risk.

Just remember, risk isn't bad.. everything carries risk (even cash under your mattress since inflation will ensure you have a negative return then).
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