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2B 04-14-2007 03:37 PM

My First Convert
 
I had mentioned in a prior post that I finally helped someone fire their "financial advisor." He had a beaut. This guy took a 1% fee (including fixed income) and put the "investor" into high fee mutual funds. The fund fees ranged from 0.7% up to 1.7%. My "convert" estimated the median to be around 1.5%.

Like many of us, he and his wife each had an IRA and a Roth account in addition to a joint after tax account. I don't know his exact figures but the combined totals were above $2MM. Each account had between 12 and 16 funds. Many of the funds were the same in each account.

I showed him my index based portfolio return since 2002 and it beat his planners return by over 3%-5% every year. What a surprise. ;D

I got him interested in Scott Burns indexing articles and showed him Vanguard and Fidelity web sites. It all came down to him feeling comfortable that he can manage his own money.

I led him around FIRECalc and he went wild. I made sure he knew how to input his investment expenses. He came in one day and said he was so pissed that he'd been paying out $50,000 in fees (hence my estimate of his assets) and he could just about live on that.

The clincher came after he called his advisor to find out when he would be able to retire. He got a letter back that said he needed to plan on working at least until he is 70. He is currently 63. He's now convinced he could have retired years ago.

Moral of the story -- There are people out there that can retire now but are being held prisoner of their own fears. The bond between mark investor and FA can be broken with education.

I did suggest that if he felt he needed an expert he could consider a fee-only planner that could help him get a plan together. He says he's fine. He's pumped (but very angry at his planner).

I felt good about it. It forced me to remember those that I had been unable to get motivated in the past. :'(



donheff 04-14-2007 03:51 PM

Re: My First Convert
 
Don't forget to caution him to be careful with the taxable funds. If he converts those over to indexes he will need to deal with capital gains - I am doing that now with some of our funds.

2B 04-14-2007 04:19 PM

Re: My First Convert
 
Quote:

Originally Posted by donheff
Don't forget to caution him to be careful with the taxable funds. If he converts those over to indexes he will need to deal with capital gains - I am doing that now with some of our funds.

Very true. I didn't go into a lot of the details. He has about $80K of LT capital gains in his taxable account. He knows about the 15% capital gains treatment (for now) and he's planning to liquidate these funds in his first few years of retirement.

Nords 04-14-2007 04:38 PM

Re: My First Convert
 
Quote:

Originally Posted by 2B
Very true. I didn't go into a lot of the details. He has about $80K of LT capital gains in his taxable account. He knows about the 15% capital gains treatment (for now) and he's planning to liquidate these funds in his first few years of retirement.

If he's paying $50K/year then $80K of LTCG is only a minor twitch...

2B 04-14-2007 06:12 PM

Re: My First Convert
 
Quote:

Originally Posted by Nords
If he's paying $50K/year then $80K of LTCG is only a minor twitch...

Yes but....

The $50K comes primarily out of his IRA/Roth accounts in advisor and mutual fund management fees. The LTCG is all taxable.

His positioning for smart tax planning is pretty minor. He'll have no difficulty in blending it into his other spending to avoid a significant tax hit that can be easily avoided. The biggest consideration is not triggering the AMT with the sale. When we sold my in laws property, the size of that one time gain doomed them to pay the AMT next year.

lazygood4nothinbum 04-14-2007 06:41 PM

Re: My First Convert
 
job well done. i also might have found myself successfully proselytizing though i'd rather think of it in existential terms as others learning simply by example because moreso i believe that we are responsible for the life we save.

chinaco 04-14-2007 06:56 PM

Re: My First Convert
 
Gosh... all we have to do is find a couple of people to advise and hang it up. 3 $50k/yr jobs and I am set! ;D ;D ;D


By the way... I cannot find the article (I will look for it and post it), but apparently there is some pending legislation and or new rules that will regulate Financial Advisors. This applies to fee advisors that are not selling for commission.

Apparently the number of them have grown to about 100,000 over the last several years and problems have been popping up. All I have to say... it is about time. This is an area that is probably full of abuse and many low grade fools giving bad advice. ???

clifp 04-14-2007 07:04 PM

Re: My First Convert
 
Ataboy from me also 2B. I know that a lot of people are reluctant to offer others financial advice, but I think there are so many sharks in the financial waters, and so few lifeguards, that those of us who are in a position to repel the shark should do so. Best of all our biggest risk is some strained friendships.

There are so much bad advice, given by greedy financial "advisor" that it is truely depressed. My sister called me a couple of days, with a tax question about her late MIL estate. This poor lady had put money in balanced fund, and run of the mill stock fund, back in 1997. Ten years later they both had managed to lose money! How is this possible during a tremendous bull market >:(

tryan 04-14-2007 08:33 PM

Re: My First Convert
 
Nice going ... one more leaves the dark side.

Been working on a good friend who has the same deal (1% fee ... EVERY YEAR!). Asked him how the 1% is justified by the advisor. Said he was told "everybody pays a fee to trade". To which I said "Yup, so does your advisor, PLUS he takes another 1% EVERY YEAR." I got the deer in the headlights stare ... the healing has started. ;)

2B 04-14-2007 09:11 PM

Re: My First Convert
 
Quote:

Originally Posted by chinaco
Apparently the number of them have grown to about 100,000 over the last several years and problems have been popping up. All I have to say... it is about time. This is an area that is probably full of abuse and many low grade fools giving bad advice. ???

It became apparent to me and eventually to him that the primary goal of his advisor was to solicit people to let him "tax" their money. After we talked a little about our respective returns a few times, he realized he wasn't doing so well. I started asking him about the services he was provided and it wasn't much more than a monthly statement. Very few moves were made. There wasn't much that looked like "management" but the original allocation. He had trouble even getting ahold of his advisor and sometimes waited a week for a call back. And, this was for a six figure account.

This was the first time I had ever seen someone take a management fee and buy mutual funds. It was bad enough when the fee was for buying a basket of stocks where the advisor touted the firms superior stock picking prowess. It would seem like anyone can buy a mutual fund. I asked if any of the funds were load funds and he didn't know. He said the advisor just set it up. I didn't press it but buying load funds would have been over the top.

FinanceDude 04-14-2007 09:12 PM

Re: My First Convert
 
Sounds like he was receptive. He probably was sold one of those "wrap accounts" that WERE all the rage years ago.

Most average around 2-2.5%. A lot of banks sell the heck out of them...................

TromboneAl 04-14-2007 09:17 PM

Re: My First Convert
 
Congrats and good job.

But now, keep your fingers crossed that the market doesn't tank in the next 6 months. ;)

FinanceDude 04-15-2007 09:47 AM

Re: My First Convert
 
Quote:

Originally Posted by chinaco
Gosh... all we have to do is find a couple of people to advise and hang it up. 3 $50k/yr jobs and I am set! ;D ;D ;D

Just an FYI......the FEES may be $50,000 a year, but the advisor doesn't get $50,000 a year............a lot of the money goes to the fund managers and firm............ ;)

2B 04-15-2007 12:24 PM

Re: My First Convert
 
Quote:

Originally Posted by FinanceDude
Just an FYI......the FEES may be $50,000 a year, but the advisor doesn't get $50,000 a year............a lot of the money goes to the fund managers and firm............ ;)

By my estimate, $30K would go to the mutual funds and $20K would go to the advisor's firm. I'm sure he got a good enough cut that he'll feel the pain of this client's leaving.

It just amazed me this guy had this type of arrangement at all. He was a senior manager (much higher than I was) at a chemical company most would recognize. He was an engineer so the math wouldn't be an issue. Somewhere along the line he must have decided that "you have people take care of your money so you can focus on making it."

Nords 04-15-2007 12:47 PM

Re: My First Convert
 
Quote:

Originally Posted by FinanceDude
Just an FYI......the FEES may be $50,000 a year, but the advisor doesn't get $50,000 a year............a lot of the money goes to the fund managers and firm............ ;)

Oh, gosh, that makes it all OK then!

Ed_The_Gypsy 04-15-2007 12:53 PM

Re: My First Convert
 
Quote:

He was a senior manager...at a chemical company....
One of the hazards of a delegating mentality. ;)

Kudos, 2B! Another Chem E does outstanding work. ;D

Gypsy

FinanceDude 04-15-2007 01:47 PM

Re: My First Convert
 
Quote:

Originally Posted by Nords
Oh, gosh, that makes it all OK then!

Didn't say it makes it ok, just pointing it out. It's like saying Vanguard does fund management for free, which is not the case.......... :)


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