FA After One Year - 2019 Update

[Jerry1]

A bit more than a year ago I signed up with an FA. Long thread on that here:

https://www.early-retirement.org/forums/f28/hired-a-fa-94626.html

As I indicated in that thread, I am updating the group on my experience after one year. 2019 was my first complete year so that is the period I’ll be referencing 1/1/2019 - 12/31/2019. The update is twofold. First, the main thing anyone asks - did I do better under an FA. Short answer is that I don’t think I did any better or worse, but of course there’s that 1% fee. Second, how’s the service. In that respect, I’m pretty happy with the service. All told, it has been a good experience, but that fee is hard to get over.

I started the year at just under $1M. I earned 13.67% for an increase of about $135K. The portfolio started out the year at 40/60 but in August I met with the FA and we agreed that 60/40 would be better and that I was comfortable with that. The portfolio went to 60/40 early August and was there at year end. Of course the change midyear makes comparison a little difficult, but I was happy with the outcome. The 13.67% is net of any fees. Any feedback on the financial results is welcome. Since I didn’t track exact balances and exact dates and am not really willing to go back and reconstruct such, some blending and estimating would have to be done and is acceptable.

The service was very good and I’m satisfied with it. Unfortunately, I did not get a Christmas card, but all else was fine. The FA is very professional and our year end budgeting meeting (late 2018) and the midyear meeting were very helpful. There’s no doubt it’s nice to have a knowledgeable professional to discuss financials with. We discussed taxes, which is heavily focused on ROTH conversions, we discussed my spending targets, we continue to evaluate SS since DW is over 62 but we’re not ready to do that yet and we discussed one of my retirement goals which involves a large purchase ($150K) and how to best cash flow that. We’ve also been discussing some level of payment for future educational expenses for the three grandchildren. His responses are always well thought out and well supported and presented very professionally. Bottom line is that the FA is part of a higher end team and there’s not much to be critical about - except. The one thing I do not like is that they operate through Raymond James. Everything is held by RJ. When FA does something (makes a trade), I get notified directly from RJ. That separation is a good thing. But I’d rather they used Fidelity. Pet peeve of the moment is that I still don’t have my 1099-R for the ROTH conversions. It’s a highly subjective thing, but I just don’t like RJ. I feel like Fidelity is more my style (almost blue collar) whereas RJ tries to be something else. Subjective.

My conclusion is that I’ll be giving the FA another year, but I do not see me sticking around for much longer. I’m happy enough with the experience and will miss it at some point, but the fee is just too much to get over. So in case you didn’t calculate it already, the fee for 2019 was $10K. In a good year like we had for 2019, it’s possible to stomach it. Especially since I’m early on in this retirement thing and it’s nice to have a crutch. In a bad year, that $10K would still come out and unless the FA did a lot better than the market, I’d be upset. It’s kind of a one sided situation with me. I’m fine with taking less on the upside but I’d be more satisfied to lose less in the bad years. Not that I want a bad year to come, but a bad year would be very helpful in evaluating the FA’s performance.
So there it is. Nothing earth shattering and nothing that hasn’t already been discussed on this board. I guess my year confirms that it’s probably nothing one couldn’t do for themselves but to do so would take a good deal of self educating. This board is a great resource for the feedback loop that is needed however; I would highly recommend a trip to a good FA early on in the process. The idea of a fee only initial evaluation and recommendation probably makes the most sense but one would have to find a good one (get a personal recommendation). Even with this board as a support group, you don’t know what you don’t know and therefore, you may not ask the questions that you need answered. Everyone’s situation is different and it’s hard to share that over the internet. Not impossible, but more difficult.

The one thing I’ll struggle with without an FA is making sure everything is set up so that if I pass or if me and DW become unable to manage our finances there is someone to rely on. It was nice as we finished up our will and TRUST documents to be able to tell our children that if anything happens, call Matt (the FA). That’s kind of another topic, but it is a factor that many cite as reason for using professional services.

Thanks for reading. Comments welcome, questions attempted to be answered.

 

[Idnar7]

I left my FA and have been managing myself at Fidelity for six years. My wife stayed with the FA. Every years my amount pulls away from my wife's amount. Not that I am doing so well, but 1% adds up and compounds as well.

 

[Midpack]

Thanks for following up and taking the time to share your experience after a year. IMO detailed sharing by smart people is what makes ER.org unique and special - “pay it forward” sorta.

Without asking you to share specifics, did the FA put you in holdings you wouldn’t have considered yourself? Any timing or tax suggestions that helped? Was the AA change something you wouldn’t have done on your own?

Looks like your returns were in the same range as Wellesley (40:60ish) and Wellington (65:35ish) and other similar AA balanced funds as you know, but you got other services with your FA.

I’m still good with my reaction on your late 2018 thread.

You won’t be flogged here, ER.org is largely a community of DIY investors that’s all. You’ve chosen to own a Ford and post on a GM forum, both fine, many things in common, just different. If an FA is worth it to you, that’s fine. Lots of people would be better off with an FA, but not all FA’s are created equal (there may be more bad than good) - sounds like you’ve found one you have confidence in.

 

[Scratchy]

Thank you for sharing your experience! It sounds like you have a well suited plan going forward.

I'm curious about the reasoning behind the shift in AA from 40:60 to 60:40 midyear. Of course, it turned out to be a good move. But I hope it was not based on the advisor trying to time the market. Was it a change in your risk tolerance? Other reasons?

 

[Ready]

If the FA has charged an hourly rate of $200, that would have represented 50 hours of their time. How does that compare to the actual amount of time you think they spent on your account?

 

[pacergal]

We've used FA's for years. One through our DefComp program from work at no cost, have known and worked with her for a good 20 years. She has primarily helped with running calculators and looking at our retirement income. The other one was one my folks had. We stayed with her after she helped with inheritance portfolio. After a year, we did change to Fee Only, as I really did not like seeing the AUM fee.It wasn't a big amount, but still....
Plus, all of the info I gathered here and books I read made me confident I could manage pretty well. We see her once year at no cost just to check in. I don't have a problem keeping them both as someone to check in with. I am still in charge of our portfolio.

Glad your FA is working well for you. It is always a personal decision and no one else knows your full story.

 

[RunningBum]

That switch from 40/60 to 60/40 almost certainly paid for the advisor and then some. The question becomes whether you need the guidance going forward.

 

[Jerry1]

The switch from 40/60 to 60/40 was initiated by me. The FA helped in me getting comfortable with being less conservative but it was not his recommendation. He relies on me and DW to help him understand how risk sensitive we are. In this case, he was not the driving force as much as a second opinion. Frankly, I got less conservative as I read and engaged here on the discussion. I went from more of a overall conservative to a bucked approach where I realized that 40% in safer investments was enough to live on as the equity portion fluctuates.

 

[Rainbowdash]

I will be the first one to say good financial advisors are well worth the money (even at high AUM model) if you are not interested to manage your own money or lack self confidence and discipline to handle in a downturn market. Most of us here we manage our own money here including me, but I have seen too many people buy high sell low, trying to beat the market or just can't stomach the market drops and therefore making bad decisions with their money.

 

[OldShooter]

Thanks for the post. One thing implicit in your experience is the difference between an investment advisor and a financial advisor. I think those two get mixed up around here a lot. IAs are more or less what you get at a brokerage house, while FAs consult on a broader scope of issues. It's hard to put a dollar value on that but it's not zero.

... The portfolio started out the year at 40/60 but in August I met with the FA and we agreed that 60/40 would be better and that I was comfortable with that. The portfolio went to 60/40 early August and was there at year end. Of course the change midyear makes comparison a little difficult ...

Common problem. There's really no way to figure out whether your 13.67% is good, bad or indifferent because it includes both equity results and fixed income results. Pour some red Kool-Aid and some green Kool-Aid into a glass and you really can't tell the proportions from the resulting color.

I'm involved with a nonprofit's investment committee and what we have done is to require that the FA break out equity performance separately on each quarterly report. They basically have to figure this out manually but it only took a moderate amount of leaning on them to get them to agree. They then also report and compare against the performance of the ACWI (MSCI All Countries World Index), also quarterly. We can benchmark against other things as well once we have the equity numbers. You might try this with your FA. As @Ready implies, your fee should be paying for a significant number of professional hours plus staff hours.

Re custodian, using a custodian is A Good Thing. Madoff did not use a custodian, so he could make the customer statement say anything he wanted. I have experience with Fido as a custodian and also LPL financial. (https://www.lpl.com/about-Us.html) LPL only works with FAs but the reports are both adequate and readable. I would also be less happy with storefront brokers like RJ and (God forbid!) Eddie Jones.

 

[OldShooter]

I will be the first one to say good financial advisors are well worth the money (even at high AUM model) if you are not interested to manage your own money or lack self confidence and discipline to handle in a downturn market. Most of us here we manage our own money here including me, but I have seen too many people buy high sell low, trying to beat the market or just can't stomach the market drops and therefore making bad decisions with their money.

I was talking to an FA one time about fees and he made an excellent point: "Look," he said, "If I keep a client from panic selling once or twice I will have earned every dollar in fees that he has ever paid me and all of the dollars that he will pay me in the future."

 

[Jerry1]

Midpack, the FA has me in a bunch of stuff I wouldn't likely be in. I keep challenging him on that. It just seems if you buy 10 funds, how do you not basically own the market? Plus, I was a bit pissed that his large cap fund didn't do as well as the S&P. But, I need to look at overall. Nothing tax savvy about the recommendations since most of my portfolio is in tax deferred accounts. He did recommend the ROTH conversions. He wants us to do more (we're just over the 22% bracket), but it's hard for us to stomach the tax payment. We have a meeting scheduled where we want him to provide a more detailed schedule to show our cash flow once RMD's and SS kick in. I believe him that we'll be in the 22% bracket then (or whatever rate it is at that time), but I want to see it in better detail before I can convince myself to go deep into the 22% bracket for conversions.

 

[Jerry1]

If the FA has charged an hourly rate of $200, that would have represented 50 hours of their time. How does that compare to the actual amount of time you think they spent on your account?

I doubt he put in 50 hours. Probably more like 10 plus some lower level staff time.

Doesn't make it that much better, but I would put him closer to $400 per hour. I used to work at a CPA firm and the partners billed out much higher than that so maybe I'm a bit bias, but he and his organization are worth more than $200 per hour. Heck, I billed out at $80 as a rookie and that was in the early 90's. But those fees cover a lot of overhead and in this case, a team of investment managers that don't bill out, the advise the FA's.

I'm a bottom line guy. No way to sugar coat it, $10K imho, is expensive. I choke every quarter when I see the bill.

 

[The Cosmic Avenger]

If the FA has charged an hourly rate of $200, that would have represented 50 hours of their time. How does that compare to the actual amount of time you think they spent on your account?

This. It's not just comparing the 1% vs. what you could do on your own, because sometimes it does help to be able to issue instructions and have someone carry them out, and maybe point out ways of optimizing certain things. But there are different ways to do that; AUM, fee for service, or you might qualify for a "free" advisor with over $1M at some brokerages.

 

[OldShooter]

... It just seems if you buy 10 funds, how do you not basically own the market? ...

Of course, unless they are really goofy funds. When the "stock picking" mutual funds do this, it is called "closet indexing." The manager will never excel, but he will never look too bad either and he continues to collect his big expense ratio.

FAs have kind of a problem: We all know and almost all of them probably know, too, that investing is really simple. But if an FA bought a Bogleheads two- or three-fund portfolio, then just let it ride year after year (which would be good) the customer is going to wonder what he's paying that AUM fee for. So the FA has to make it look a bit like voodoo.

 

[RunningBum]

I just don't think figuring the hourly rate is a worthwhile measure. If a guy spends 15 minutes and saves or makes you $100K over what you'd do on your own, he's worth it, even at $40,000 an hour. If another guy spends 200 hours and just churns your account or otherwise does very little, he's not worth $50/hr.

 

[Scratchy]

The switch from 40/60 to 60/40 was initiated by me. The FA helped in me getting comfortable with being less conservative but it was not his recommendation. He relies on me and DW to help him understand how risk sensitive we are. In this case, he was not the driving force as much as a second opinion. Frankly, I got less conservative as I read and engaged here on the discussion. I went from more of a overall conservative to a bucked approach where I realized that 40% in safer investments was enough to live on as the equity portion fluctuates.

Thanks for the follow up. BTW I'm also at 60/40. Half the days I wake up I think I should be at 70:30. The other days I think 50/50. So 60:40 is probably right for me.

FWIW I think your advisor is getting more than he deserves, but you also got good value for your money so far. It's not always a zero sum game. I think your plan to get a divorce from your advisor in a bit when you are comfortable is good too and hope you get there on schedule.

Best wishes.

 

[Midpack]

Midpack, the FA has me in a bunch of stuff I wouldn't likely be in. I keep challenging him on that. It just seems if you buy 10 funds, how do you not basically own the market? Plus, I was a bit pissed that his large cap fund didn't do as well as the S&P. But, I need to look at overall. Nothing tax savvy about the recommendations since most of my portfolio is in tax deferred accounts. He did recommend the ROTH conversions. He wants us to do more (we're just over the 22% bracket), but it's hard for us to stomach the tax payment. We have a meeting scheduled where we want him to provide a more detailed schedule to show our cash flow once RMD's and SS kick in. I believe him that we'll be in the 22% bracket then (or whatever rate it is at that time), but I want to see it in better detail before I can convince myself to go deep into the 22% bracket for conversions.

Smart move IMO. It wasn’t until I saw that kind of detail side by side (comparing no conversions to 22% and 24% for every single year), that I could “stomach the tax payments” but I’m all in topping up to 22% for the next 6-7 years. Right there with you.

 

[Midpack]

FAs have kind of a problem: We all know and almost all of them probably know, too, that investing is really simple. But if an FA bought a Bogleheads two- or three-fund portfolio, then just let it ride year after year (which would be good) the customer is going to wonder what he's paying that AUM fee for. So the FA has to make it look a bit like voodoo.

A sad truth more often than not, and an issue with many professions, not just the financial sector. Most people would be shocked at how much they could do for themselves as well or better if they did a little research, and it’s even easier today with all that’s online. Of course you have to be honest with yourself and be willing to admit early when you’re over your head - pros are money very well spent some times too...

 

[splitwdw]

Thanks for posting. I'm always curious how I'm doing as my own advisor.

 

[golfnut]

Besides the 1% fee, have you checked the individual expense ratios of the mutual funds? They can be quite high (greater than .75 - for example).



Many years ago, I had a meeting with Edward Jones FA. I showed him my portfolio and he gave me some pointers and one thing that struck me was his high opinion of the Wellington and Wellesley funds I had and still do.


At the same time, he showed me some funds which were his favorites of his-American Funds While their expense ratios looked reasonable, I think the FA gets a fee on top of this expense ratio every time the fund is prurchased or contributed to. I could be wrong here



We agreed there was no compelling reason to go with him as my FA. I'm a big fan of diy, and using Vanguard and Fidelity. I know we are all different.

 

[MRG]

OP thanks for posting, really a well thought out review of your experience. I'll offer something to consider.

I have two separate sets of investments accounts, one DIY at Fidelity and I use Vanguard's PAS on the other as I didn't want to deal with both. Vanguard's 50/50 mix did >17% last year including the .30 fee. My own Fidelity money did better somehow. I won't say the customer experience was as good as what you described but $$$ speak.

I'd consider going to Vanguard for better returns. Good luck and best wishes.

 

[savory]

I changed over to fully self managed late last year after about 10 years. I had 2 FAs. They both purchased mostly large cap stocks based upon their analysis. For most of the time, they held most of the same stocks (mostly different between the two FAs). They also purchased bonds and not bond funds.

I tracked the commissions as a percent of my total spending. It was a high percentage of my annual spending. Seeing it that way was helpful in making my decision.

Since taking this on myself, I was given some good advice on this forum for what to do with the stocks. I have kept a high percentage of them since my portfolio meets my AA goals. I also have some nice gains, like many of us do, over the last several years and I would prefer not to pay the taxes now. I did have them sell some of the bonds since I was told that was a bit more complex. I think the FA was honorable in getting the best price he could.

My brokerage rep has been helpful. I think I have my hands around the buying and selling process, now. And the online tools are helpful to see the AA of my portfolio.

Suffice it to say, I was happy not to make the January commission payment and the refund I received last year from the FAs was not bad either.

 

[OldShooter]

These tend to evolve towards FA bashing. Here is a counterexample:

My son has a woman friend in her early 50s who spent the last 10 years or more in a basement apartment of her mother's house as sole caregiver. Mom would give her money from time to time but daughter typically shopped at Goodwill and lived like a poor person.

Mom died a year ago and among the assets was about $1M in 3M stock and a paid-for rental house in Los Angeles. Also a life insurance policy and other financial assets. Daughter is more financially naive than you can imagine. We hooked her up with a female FA we know who has taken daughter under her wing. She's gathering and sorting the assets and coaching daughter into a new life. Last week the FA asked the daughter if $50K/year was enough income for her. Daughter is still in shock; she has no idea what she would do with so much money. This FA has and will earn every dime she is paid. I can only imagine what would have happened to daughter if left on her own.

 

[nvestysly]

Thanks to the OP for their previous thread as well as following up on their experience one year later. The subject is very timely for DW and me. If we ever utilize the services of a FA we will certainly identify someone who works with the Fidelity platform so we don't have to move assets.

We are very familiar with an FA business in our area. We like them enough that we've suggested friends and family use their services if they really want a "guy" rather than continuing on the DIY path. Like the OP, I can't imagine paying the fee. The FA we like also has a tiered pricing structure for AUM (very common) and even with the favorable rate we would receive it would increase our annual expenses by 33%! Yikes! I just can't imagine doing that.