Should I Fire my Financial Advisor

[crispus]

I have used the same advisor since 2002 and have averaged gains of about 10% net per year. He uses a covered call strategy. I am invested 100% in stocks and pay a 1.25% commission per year. As of 6/30 we were only up 6.35% for the year. He told me that we are getting close to market returns in an up market and are somewhat protected in a down market.

Now as of today’s close, I am down over 5% in the last two weeks. So much for downside protection.

I have two questions. One should I change managers? Two, if I do change to lets say Vanguard or Fidelity how do I extradite myself from this covered call strategy?

Thank you, in advance

 

[teejayevans]

I have used the same advisor since 2002 and have averaged gains of about 10% net per year. He uses a covered call strategy. I am invested 100% in stocks and pay a 1.25% commission per year. As of 6/30 we were only up 6.35% for the year. He told me that we are getting close to market returns in an up market and are somewhat protected in a down market.
Now as of today’s close, I am down over 5% in the last two weeks. So much for downside protection.
One should I change managers?

The dow is STILL up 8% even after today...you do the math.

BTW, are you returns with or without the commission, trading fees.

What kind of income is that strategy throwing off anyway, is it tax
friendly dividends, LT Gains....or is it a lot of ST gains that will be
taxed at your regular income rate.
If its the latter, I'd sue him for incompetence.
TJ

 

[MasterBlaster]

Covered calls get you too little income, all of the downside risk in stocks, and none of the upside potential.

In my opinion they are just there to generate trading commisions for your broker.

 

[Lsbcal]

Should you get rid of your FA -- YES, this is a no brainer. Hopefully you are not retired or near retirement because 100% stocks is playing with fire. Either Vanguard or Fidelity would be an excellent alternative. They may be able to advise you on how to get out of your positions. My $'s are at Vanguard so that is my bias.

Les

 

[Spanky]

should I change managers?

The total stock market fund 's 5 year annualized return is 11.76% while your return under your adviser's guidance is 10% - you decide.

 

[pedorrero]

A broader, more important question is this: do you feel more comfortable having a financial advisor/money manager handle your investments? Lots of folks do. There is nothing wrong with that, assuming you don't mind the annual fees -- 1.25% in your case. That is pretty average. Assuming an honest, competent advisor (most are probably), you will get market returns (no better, no worse). Actually they will be worse - by 1.25% in your case. Many people here are DIY types, who can manage their own investments as costly or as cheaply as they want. You can get very close to 0.00% costs with simple techniques like an index fund. stick around if interested.

 

[Enuff2Eat]

interesting that the minute the financial advisor "lose" or not upto par with market. we immediately FIRE them..



enuff

 

[Bigritchie]

interesting that the minute the financial advisor "lose" or not upto par with market. we immediately FIRE them..



enuff

Burn the Witches! A DUCK!

 

[cute fuzzy bunny]

Well lets see...we could make this into one of those "two words!" posts.

You'd get a lot of replies with a variable first word and the second word "YES!"

 

[crispus]

My returns are after commission expenses.

Which Vanguard or Fidelity Funds do you recommend? I am looking to retire in about 5-7 years.

 

[Webzter]

My returns are after commission expenses.

Which Vanguard or Fidelity Funds do you recommend? I am looking to retire in about 5-7 years.

Well, what kind of investor are you? If you're a fire and forget kind of person, how about a Vanguard Targeted Retirement or Vanguard LifeStrategy? If you want a little more slice and dice, how about a model Vanguard balanced portfolio from Paul Merriman(FundAdvice.com - Suggested Portfolios)

Is your stuff tax-sheltered or taxable? Do you have some basics in place like an emergency savings fund? Can you sleep at night and be 100% stock?

What if I showed you this table from Larry Swedroe outlining a portfolio during the 1970's:

Max Equity - Exposure Max loss
20%...............5%
30%..............10%
40%..............15%
50%..............20%
60%..............25%
70%..............30%
80%..............35%
90%..............40%
100%.............50%

Can you still sleep at night with your allocation?

(p.s., that came from a very excellent response to my questions over at Diehards.org [my thread is here: Bogleheads :: View topic - Looking for Asset Allocation Guidance / Ideas]. pps, it made me go heavier into bonds)

If you have a large portfolio right now, and you don't want to go it alone, then start looking for a Registered Investment Advisor. One that you probably couldn't go wrong with is Rick Ferri's company, Portfolio Solutions (Portfolio Solutions). At the very least, you should read his book 'All about asset allocation'

We fired our FA's a while ago... we kept feeling that, in our case at least, they weren't on our side of the equation. However, there are also some great FAs in the world. Just interview and trial.

At the very least... don't make any sudden moves. Act rationally and keep your wits about you.

 

[chinaco]

I would fire the advisor (no matter who they were). Especially if I was using mutual funds. The average mutual fund fee is about 1.5% + 1.25% for the advisor + 3% for inflation + taxes on gains... I would have to make over 5.75% + taxes to make money. If I really felt I needed an advisor for investments... i would buy berkhatty. The only problem here is that WB is probably getting close to retirement.

IMHO - Low cost MF or ETFs are the way to go. Using those vehicles, one can create a well diversified portfolio.

 

[teejayevans]

I would fire the advisor (no matter who they were). Especially if I was using mutual funds. The average mutual fund fee is about 1.5% + 1.25% for the advisor + 3% for inflation + taxes on gains...

IMHO - Low cost MF or ETFs are the way to go. Using those vehicles, one can create a well diversified portfolio.

Thats a managed fund fee, use index funds that are only .5% or less, and
index outperform managed funds as a group (after expenses).
TJ

 

[JohnDoe]

Which Vanguard or Fidelity Funds do you recommend? I am looking to retire in about 5-7 years.

We need a lot more information to answer that question. Sounds like you should do some reading, starting with asset allocation.

 

[NinjaPigeon]

interesting that the minute the financial advisor "lose" or not upto par with market. we immediately FIRE them..



enuff

Is it? One of the main reasons for having an advisor is because they can supposedly beat the market through their "expertise". If they aren't doing that, why would you keep them?

Or was your point that having a bad couple weeks in an otherwise "successful" run is overreacting? If so, I'd agree if not for the fact the advisor is lagging the market annualized.

 

[crispus]

Let me explain my situation. My FA has about 280k spread in 2 roth ira's 1 traditional ira (old) and 1 simple ira. My wife also has 401k with fidelity 230k. She also has a defined benefit pension worth about 500k fully vested in less then 2 years. We also keep about 30k in an emergency fund with emmigrant bank. Our only debt is our home 15 yr 4.875 owe about 113k (house value 400k).

As far as my concideration of firing my FA, I was thinking about it before the recent downturn. This just put it on the front burner. I have not done anything thus far because, one I have known this advisor for a long time outside his current job and two I do not like to make lots of sudden moves on a whim.

 

[2B]

As a new poster you may not be familiar with the recommended "reading list." Do a search for recommended books. Also, you should google Scott Burns and read his articles on Couch Potato Investing.

You will come out way ahead by managing your own money. If you are smart enough to find this forum, you are definitely qualified to manage your own money.

Most of us have diversified, low fee index funds for the bulk of our investments. Some like individual bonds/CDs and some like bond mutual funds. Right from the start, we are all ahead of someone with a financial advisor by 1 to 2% a year. Most FA's put their clients into high fee mutual funds so there's another 1 1/2%. All told, the typical person with a FA is paying out about 3% in fees that can be almost totally avoided.

 

[FinanceDude]

As a new poster you may not be familiar with the recommended "reading list." Do a search for recommended books. Also, you should google Scott Burns and read his articles on Couch Potato Investing.

Smart idea........

Right from the start, we are all ahead of someone with a financial advisor by 1 to 2% a year. Most FA's put their clients into high fee mutual funds so there's another 1 1/2%. All told, the typical person with a FA is paying out about 3% in fees that can be almost totally avoided.

I don't know of any advisors that are getting 3% a year............

Investing is a commodity, advice is not. If you are not getting worthwhile advice, might as well do it yourself. Performance is just one piece of the puzzle..........

 

[2B]

I don't know of any advisors that are getting 3% a year............

Investing is a commodity, advice is not. If you are not getting worthwhile advice, might as well do it yourself. Performance is just one piece of the puzzle..........

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.

 

[Lsbcal]

Crispus, it's good that you do not like to make sudden moves on a whim. It's not good that you have connected up with an FA and have some emotional bond there. Personally, I try to have no emotional bonds with people I invest with. Even with Vanguard I own Vanguard and non-Vanguard funds (through their VBS service unit). I've talked to VG advisors but not followed all their advice. Better to stay independent.

The amount that you have with the FA could be transferred to Vanguard or Fidelity. Either way when you plan things out you should view it all as one portfolio. As a first step in determining your asset allocation (if not already done) you could go to the vanguard.com site. Select the Planning and Education tab. Then find the quesiton "How should I allocate my assets" and click on this. It will get you to a brief quesitonaire which at the end should give you a nice chart showing various stock/bond allocations and which one might be best for you. It includes data about how bad a loosing year has been in the past for given allocations plus average past gains. At least that is what I remember from using it in the past.

Keep in mind that if, in retirement, you are withdrawing 4% annually that extra 1% fee to an FA (or high cost fund) is going to loom large. 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.

Hope this helps.

Les

 

[FinanceDude]

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...........

 

[2B]

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!

 

[Webzter]

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.

 

[crispus]

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.

 

[cute fuzzy bunny]

Uh oh. He said 'variable annuity'...2B's head just exploded.