Here's what my 1% fee Fidelity Portfolio Advisors have me in

[dex]

Do you have to pay the 1% advisory fee every year?
If so, I'd dump them and move the money into Vanguard funds over time.


You said you are 40 - if you live to 80 and if you were only to pay them the same 8K/year - you would be paying them 320K. Quite a lot of money.

A percentage fee for the Fidelity advise is like Real Estate selling fees.

Does it really cost twice as much to sell a 400K house Vs a 200K house?

 

[FinanceDude]

Do you have to pay the 1% advisory fee every year?

Yes, he does..........

Does it really cost twice as much to sell a 400K house Vs a 200K house?

In this market, yes...........

 

[dex]

Yes, he does..........
In this market, yes...........

How?

 

[clifp]

Last year, almost all funds looked "doggy".........

LOL true that but as example. For the last 5 years I've considered switching from my slightly under performing Schwab Small Cap Index fund to a lower expense, better perform Vanguard index fund/ETF. But each paying the 15%+ tax on the considerable capital gain in order to pick up an extra .5-1% performance didn't make sense. This year with lots of other other losses making the switch was painless.

 

[Gotadimple]

How?

In relative terms it still costs twice as much to see a house worth $400k than a house worth $200k. That's the literal response.

As to the 1% fee (I'm assuming you're suggesting a break on the rate based on the amount invested), yes 1% fee is due every year until such time as the investments exceed the next tier.

That said, HOWEVER, the OP didn't say if his arrangement with Fidelity limited them in any way to the investments, i.e., no loaded funds, prior approval before investing, etc. The cost, as many have pointed out, is far more than the 1% fee when one counts in the up-front loads and the expense ratios.

To the OP: if you made money in 2008, I'd suggest that Fidelity might want to lower this year's management fee in acknowledgment of the 'haul' they earned on the loads in 2008.

-- Rita

 

[LOL!]

I did not look at the funds since everyone pretty much said, "Holy Crapola!"

But I wanted to write that the OP is probably not paying any front-end loads because the loads are likely waived. And the numerous funds is a good way for Fidelity to have some winners each year.

This makes portfolio reviews easier, "Well, you were in the number one fund in bunny futures this year", while ignoring the fact that you were in the worst fund for large cap stocks. Then the next year, "Well, you were in the number one fund in real estate in third world countries fund", while ignoring that your bond funds lost 10%. Etc.

Basically they are dazzling you.

And you should not compare their results to some play portfolio. Instead, compare it over the long term to a serious asset allocation of index funds that is properly tax-managed.

 

[dex]

In relative terms it still costs twice as much to see a house worth $400k than a house worth $200k. That's the literal response.

Can you explain that in a non literal response; so I can understand it?


++++
A percentage fee for the Fidelity advise is like Real Estate selling fees.

Does it really cost twice as much to sell a 400K house Vs a 200K house?

 

[Kabekew]

And you should not compare their results to some play portfolio. Instead, compare it over the long term to a serious asset allocation of index funds that is properly tax-managed.

And what funds might those be? (Not being sarcastic, I'm new here! Vanguard Wellesley?)

 

[Kabekew]

I second what FIREDreamer said. You can do much better on your own, while saving probably 1.5%-3% a year in fees/expenses/taxes.

I can only think advisors assemble these huge asset lists for their clients for three reasons:
1) To present a highly complex list of holdings that implies some very detailed planning went into choosing them, justifying the 1% fee.
2) To allow some high fee funds to be hidden among the others.
3) To dissuade the client from managing their own investments. The list makes it look like a very complex undertaking, and at a minimum if a client decides to DIY, he has to decode the byzantine structure that has been built, figure out what to sell and when to sell it. The hassle probably encourages some folks to stay aboard for a few years extra. Cha-ching!

I'm surprised that Fidelity would do this to someone. Vanguard has nothing to fear in this area.

Good points, although I'd think with all the competition with investment schemes and money managers out there, it makes more business sense for them to truly do their best and try to get best returns instead of losing clients after a couple of years when they realize it's not worth it. So I have to wonder why their best and brightest are currently saying put everything in big distributed funds of funds?

 

[Gotadimple]

Can you explain that in a non literal response; so I can understand it?


++++
A percentage fee for the Fidelity advise is like Real Estate selling fees.

Does it really cost twice as much to sell a 400K house Vs a 200K house?

Sorry, Dex, if I wasn't clear. In both cases (real estate and investment purchases) any fees to complete the sale are based on the value of the purchase. So to sell a $200k house, it might cost 10% to complete the sale (including commissions and taxes/fees based on the sale price) - $20,000; it also costs 10% to sell a $400k house - $40,000. So the sale of a $400k house costs twice as much as the sale of a $200k house.

-- Rita

 

[Gotadimple]

So I have to wonder why their best and brightest are currently saying put everything in big distributed funds of funds?

(1) For the income it generates for the firm. Even if there is no load to buy the fund, Fidelity is earning a commission from the mutual fund company for selling the OP the fund.
(2) To assure the client they have placed his/her investment with a highly regarding investment company.

-- Rita

 

[samclem]

Good points, although I'd think with all the competition with investment schemes and money managers out there, it makes more business sense for them to truly do their best and try to get best returns instead of losing clients after a couple of years when they realize it's not worth it. So I have to wonder why their best and brightest are currently saying put everything in big distributed funds of funds?

Many clients never catch on to the game. First, the advisor has always got a reason things turned out as they did. Second, many of them sell "hope" as much as anything else, and many clients want to believe. It's the same thing that keeps people paying high fees at boutique managed mutual funds. Sometimes a particular fund might do well, sometimes it won't but on average the managed funds typically do worse than the indexes, particulalry after expenses.

Many people want to pay an advisor who will time the market and get them into/out of the various sectors at the proper time. This seldom works. If it were possible to do it routinely (or even to spot the people who can do it) then it would be very easy to become fabulously wealthy. You probably already know this. What seems to work for many investors is to carefully choose a desired asset allocation and then invest in low-cost products that achieve that allocation. Rebalance periodically and don't fuss with it too much.

 

[haha]

Many clients never catch on to the game. First, the advisor has always got a reason things turned out as they did. Second, many of them sell "hope" as much as anything else, and many clients want to believe. It's the same thing that keeps people paying high fees at boutique managed mutual funds. Sometimes a particular fund might do well, sometimes it won't but on average the managed funds typically do worse than the indexes, particulalry after expenses.

I bet Kabekew is really feeling great about now.

Maybe he just found this forum. But if he has been here a while I am always interested in the motivation of someone who takes a big expensive postion, then asks others what they think of it.

Wouldn't it be better to ask prior to acting?

Ha

 

[Dawg52]

I use Fidelity and I never had anyone call to solicit me to use their advisory fee program. Did you seek out this service? I do get a call every now and then from my account assignment guy to see if there as anything he can do for me. The other day I asked if there was any quick way to recoup my losses and he said no. So I said 'no', there is nothing you can do for me.

If I were you, I would simply diversify among their index funds and use a couple of municipal bond etf's if you are needing some protection from taxes. Should be able to accomplish what you want in 6 for or so funds. Or just go to a target fund. Forty funds is ridiculous.

 

[FinanceDude]

How?

a)The 1% management fee is assessed at 25bp (1/4%) each quarter. If the value of the portfolio goes up, Fido broker makes more money, and vice versa.

b)I'm not an RE expert but one of my best friends is. To answer your question, more expensive houses generally take more time and expense for the agent to market. If you live in an area where "affordable" housing is $200K, that house will sell very quickly. The more expensive a house is, the less buyers there are that can afford it, so the agent has to work harder and incur more expense to market it.

 

[FinanceDude]

I did not look at the funds since everyone pretty much said, "Holy Crapola!"

But I wanted to write that the OP is probably not paying any front-end loads because the loads are likely waived. And the numerous funds is a good way for Fidelity to have some winners each year.

This makes portfolio reviews easier, "Well, you were in the number one fund in bunny futures this year", while ignoring the fact that you were in the worst fund for large cap stocks. Then the next year, "Well, you were in the number one fund in real estate in third world countries fund", while ignoring that your bond funds lost 10%. Etc.

Basically they are dazzling you.

And you should not compare their results to some play portfolio. Instead, compare it over the long term to a serious asset allocation of index funds that is properly tax-managed.

I should start a thread on the lunacy of "wrap accounts".........

 

[REWahoo]

I should start a thread on the lunacy of "wrap accounts".........

Let me guess - you'd title the thread "The rap on wrap accounts"...

 

[FinanceDude]

Let me guess - you'd title the thread "The rap on wrap accounts"...

It would be appropriate. There's a lot of shady stuff going on with those type of accounts......

 

[Grep]

And what funds might those be? (Not being sarcastic, I'm new here! Vanguard Wellesley?)

If you want to retire early, you need to do two things: You need to preserve your capital for the long run, and you need current income to live off of.

To preserve your income for the long run you need to be reasonably conservative, yet you need to protect yourself against long term inflation. That means some reasonable mix (say in the 40-60% range) of stocks.

You also need income, which usually means bonds of some sort, or a tilt towards higher dividend stocks.

A fund like Wellesley is just the sort of thing that accomplishes both. It's oriented towards income, and currently throws off something of order 5%. It contains ~40% stocks and should preserve capital even in the face of ordinary levels of inflation.

Wellesley is an actively managed fund that is not as vastly diversified as say Vanguard's Total Stock Market (or Total World) funds. However, it's one of the least expensive actively managed funds out there, and one of the best. Some people split their money 50-50 between Wellesly and Wellington (which is 60% stocks). You could do worse than Wellesley or some combination.

As an alternative, you can choose one of Vanguards "Target Retirement" funds. Pick the one that currently has roughly the percentage of stocks you want (e.g., 60%).

Another approach is some sort of highly diversified yet low cost combination of a few funds. Here's just one simple example, which is totally pulled from the air and is not a recommendation:

First, a year in cash and a 5-7 year CD ladder of basic expense needs.

Then, with what's left (the bulk of your money by far),

Say 50% stocks (in funds or ETF versions):

20% Vanguard Total Stock Market fund (matches the market)
10% Vanguard Small Cap Value (small and value risk premiums)
5% Vanguard Value fund (higher dividends these days)
15% Vanguard's Total foreign stock market.
Add a dash of REIT's if you are feeling frisky.

Then, with what's left:

50% Vanguard's Total Bond fund.

Alternatively, you could break the bond fund down into say thirds or quarters in GNMA, short-term corporate, TIPS and/or your state's tax free fund (if one exists).

I doubt the above would cost you more than say 0.15% per year, especially as you would be in lower cost Admiral shares more often than not. This is probably at least 10 times less than what you are paying now. Remember that if Fidelity is keeping 1.5% of your money every year, that's 1/2 of your 3% per year withdrawal!!!

It's not that hard.

 

[Kabekew]

(1) For the income it generates for the firm. Even if there is no load to buy the fund, Fidelity is earning a commission from the mutual fund company for selling the OP the fund.
(2) To assure the client they have placed his/her investment with a highly regarding investment company.

I'd think Fidelity's monied customers are probably money-savvy and will readily compare them to the competition and DIY index funds. So it's in their ultimate interest to hire the best people to figure out the best way to get the best returns for their clients, not just sucker people in with some shtick.

And so their best and brightest came up with a scheme like this -- a fund of 40-some funds. Could they maybe be right? Is this maybe be the best way to invest, currently? Diversify your diversified funds? Why else would they do something like that, knowing everybody would be watching them and asking on message boards about it?

 

[haha]

I'd think Fidelity's monied customers are probably money-savvy and will readily compare them to the competition and DIY index funds. So it's in their ultimate interest to hire the best people to figure out the best way to get the best returns for their clients, not just sucker people in with some shtick.

And so their best and brightest came up with a scheme like this -- a fund of 40-some funds. Could they maybe be right? Is this maybe be the best way to invest, currently? Diversify your diversified funds? Why else would they do something like that, knowing everybody would be watching them and asking on message boards about it?

I'd say yes, you are probably onto something. Who cares about expenses when returns will be huge?

Ha

 

[samclem]

I'd think Fidelity's monied customers are probably money-savvy and will readily compare them to the competition and DIY index funds.

Some other things to consider:

- Having money and knowing how to make money work for you are often very different things. Stories abound about the ill-advised investments doctors make, but I don't believe medical professionals are really any more "challenged" in this area than lawyers, managers, or salesmen.
- How will the customers know if the results they get are "good?" These are people who have elected to pay somebody else to give them advice--against which basket of alternative investments will they grade their returns? And when their adviser provides an explanation for any underperformance (don't expect he'll blame the expenses and fees), will these investors be prepared to spot a bogus explanation? And remember, when you look back, it will have been over only one time period, an impossibly narrow sample for making a determination of whether the picks you've been provided were truly good, truly lucky, truly bad, or truly unlucky.

So it's in their ultimate interest to hire the best people to figure out the best way to get the best returns for their clients, not just sucker people in with some shtick.

And so their best and brightest came up with a scheme like this -- a fund of 40-some funds. Could they maybe be right? Is this maybe be the best way to invest, currently? Diversify your diversified funds? Why else would they do something like that, knowing everybody would be watching them and asking on message boards about it?

It's not clear whether you believe that these wizards at Fidelity are able to successfully time the market and provide their customers tips that will let them get in and out of sectors before the market moves. Or, if instead, you believe that they can't make these predictions, but they can help you design a diversified portfolio that will perform as well as possible whichever way the market moves. If it is the former, you should realize that this ability to time the market would be worth billions of dollars, and the guys who perfected it would be wealthy in short order and would certainly not be working at Fidelity and selling their secrets for a fee of 1%. If you believe the later, then all I can say is that you can do it easily yourself and not give up the $8-16K per year in fees and expenses that you will be paying under the present arrangement.

 

[FIREd]

Well, I ran an X-ray on your portfolio (yeah, I know, I have too much time on my hands).

I found some interesting things:
1) do you know what your top stock holdings are?
JP Morgan. Actually 14 out of your 42 funds own that stock.
Bank of America owned by 9 funds out of your 42 funds.
Microsoft owned by 12 out of your 42 funds.
On and on... Multiplying the number of funds you own does not necessarily mean you are getting more diversification.

2) Your overall expense ratio is 0.85%. So in addition to giving $8,000 a year to fidelity, you pay $6,800 a year in various fund fees. According to the 4% rule, a $800K portfolio would generate $32,000 in gross annual income. After taxes and giving $14,800 to Fidelity and various fund companies, you'll be lucky to have $15,000 left to pay the bills. Ouch!

3) Your overall asset allocation is 6% cash, 43% US stocks, 12% international stocks, 38% bonds and 1% other. Your international exposure is pretty low. Was it done on purpose?

4) With your 42 funds, Morningstar says that your equity portfolio pretty much duplicates the S&P 500 in terms of stock types and sector weightings. In other words, you could replace most of these 42 funds with a single fund tracking the S&P500, like the Vanguard 500 fund which has an expense ratio of only 0.07% (for admiral shares).

 

[haha]

4) With your 42 funds, Morningstar says that your equity portfolio pretty much duplicates the S&P 500 in terms of stock types and sector weightings. In other words, you could replace most of these 42 funds with a single fund tracking the S&P500, like the Vanguard 500 fund which has an expense ratio of only 0.07% (for admiral shares).

With that many funds you have pretty well duplicated an index fund, paid higher fund fees, and picked up a 1% poke in the eye.

I am kind of surprised that they would do this to you.

Ha

Looks like you proved it.

 

[Grep]

I'd say yes, you are probably onto something. Who cares about expenses when returns will be huge?

Ha

Kabekew,

At the risk of being presumptuous, I'd say HaHa is being darkly sarcastic, and knows full well that:

1) Expenses matter tremendously! Several, including myself, have pointed out that the low, low fees of "only" 1.85% are eating you alive. You can easily duplicate their results with fees that are 10-20 times less. Compound that over 20-30 years and you are leaving a fortune on the table and have less each year to spend. You can do so much better quite easily.

2) Returns by "the experts" demonstrably do not, and even cannot, beat the averages long term (e.g., broad index funds). Maybe Warren Buffet is the exception, but every prior golden boy has failed in the end. By its very composition, your amalgamation of 40 funds will basically equal some simple combination of a few broad index funds (but the latter will substantially lack the redundancy that others have pointed out).

3) It's often been said that the richest clients are the easiest to be gulled by pitches that they are "special" and deserve special hands-on treatment. Of course, that costs a "little" extra, but it's worth it. Wrong! You succeeded in business. You can succeed in investments, too. But, your broker is NOT your friend! His job is to drain as much money as possible from your account, now and in the future.

Your assignment, should you choose to accept it, is to study the fundamentals of investment and asset allocation. I recommend that you do nothing more until you can make your own choices with some sense of confidence.