FA After One Year - 2019 Update

[LOL!]

Thanks for posting. You didn't mention much about taxes, but maybe your portfolio has no taxable account and only tax-advantaged accounts.

As for 40/60 versus 60/40, here are the 2019 returns of two Vanguard LifeStrategy funds with those asset allocations:

15.7% VSCGX Vanguard LifeStrategy Conservative Growth (40/60)
19.4% VSMGX Vanguard LifeStrategy Moderate Growth (60/40)

(numbers from Vanguard.com)

 

[Jerry1]

The FA only has a small amount of taxable money, about $100K. Not much tax implication of that. We also have about $140K in cash and another $500K in a VOYA account that is DW’s 401K. We haven’t moved that because about $400K of that is in a 3% fixed fund that is now closed. They limit how we can take that money unless we want to let that account go and lose the guaranteed rate. That is another reason we went to 60/40 with the FA. Overall, I’m not 60/40. Just 60/40 with the FA. I’d move to a higher percentage of equities with the FA and be 60/40 in total, but with the restrictions on the account and the feeling that the market is at a high value mark, I’ve just not pushed myself to do it. Definitely something to reassess when the market pulls back.

 

[target2019]

Sounds like your experience with FA is along similar lines with reports here and on Bogleheads. I also watched my in-laws wealth management advisor do the same. Their AUM fee was .65 and later went up to .75. Along with that, the investments were funds that had an equivalent expense ratio of .66, so they paid about 1.40 to a large company that is now in the process of selling off the business in pieces.

I suspect your total fee is about 2.00, and I base that on what I see in current account of a friend and the many threads I see. Maybe I am off by .25.

I won't bore you with the e/r of funds like Wellesley and Wellington, as I know you've already looked at performance figures. Vanguard mixes of funds, or even STAR, would have netted over 20% performance for 2019.

The funds you're in are not going to protect you in the downturn around the corner. It will be your asset allocation that mitigates, provided your investments are broad-based.

The advice on other aspects you mentioned has value, so the 15,000 or more spent this year can be looked at as a one-time cost of 'tuition.'

I totally get the concept of helping to set up the particulars for your spouse. The way I've handled that is to discuss specifics with her, and also move forward in transferring more and more to Schwab, so that she will have a person within 15-minute drive to go and speak with. Other companies (like Fidelity) are highly thought of, too. I've also begun to splice in DD on conversations, and she accepts the future responsibility of shadowing everything so it stays focused on zero fees and low expenses.

I wish you well with the future changes.

 

[Jerry1]

I suspect your total fee is about 2.00, and I base that on what I see in current account of a friend and the many threads I see. Maybe I am off by .25.

I think that is correct. The FA fees plus the fund load are hard to ignore and are a bit much for sure.

 

[OldShooter]

I think that is correct. The FA fees plus the fund load are hard to ignore and are a bit much for sure.

Actually, the stock-picker funds typically underperform their benchmarks by 1-3% or more beyond the ER, so that adds to the cost estimate.

 

[Dtail]

I think that is correct. The FA fees plus the fund load are hard to ignore and are a bit much for sure.

Why not ask your FA why his funds are better than the applicable low cost index funds and the comparable returns of both after fund fees?

 

[Jerry1]

Why not ask your FA why his funds are better than the applicable low cost index funds and the comparable returns of both after fund fees?

I have. It's a joke. He's not allowed to say that he can beat the market but of course that's what he's trying to do. I mess with him on this but he tries to get his talking points out about diversification and protection on the downside the whole time I have BS written all over my face and then when he's done I ask him where his 3X5 cards are or does he have that crap memorized.

I don't see him for investment advice. I see him for financial planning.

 

[donheff]

The biggest danger I see with this exploratory approach is that the OP seems to have a general handle on what would be involved with a DIY approach but may be putting himself in a difficult position to make the move if he has a sizable taxable account. If the OP decides to move to index funds in Schwab, VG, or Fidelity he could find himself with a bunch of capital gains to make the move. Even if he could transfer his funds in kind he could be caught in funds he doesn't fully understand and which may have high ERs. When I wised up in the early 2000s and moved to Vanguard, I luckily made the move during a downturn but I still incurred a fair amount of CGs. The longer this bull market continues the greater the lock in becomes.

 

[mrfeh]

When I put a 50/50 portfolio into portfolio visualizer (FSKAX, FXNAX), I get a 19.7% return for 2019.

I know that's not exactly what happened w/ the OP's portfolio, but it certainly looks to me like the FA under performed.

 

[Scratchy]

When I put a 50/50 portfolio into portfolio visualizer (FSKAX, FXNAX), I get a 19.7% return for 2019.

I know that's not exactly what happened w/ the OP's portfolio, but it certainly looks to me like the FA under performed.

FSKAX is US domestic. International funds could explain a lower return for OP.

 

[Chuckanut]

IMHO, there are two ways to look at the OP's 1% fee:

1.) Consider it in terms of total assets. I have $1,000,000 invested. I pay $10,000 fee which is 1% of my total assets. (I'll ignore the 1% on my gains for the year to make things simple.)

2.) Consider it in terms of the gain (or loss ) for the year. My $1,000,000 gains 10% this years. GREAT! I have made $100,000 dollars. I pay the $10,000 fee, and find that I have given the FA 10% of my profits. (Again, I will ignore the 1% on the gains to make things simple.) Hmmm.... Not quite as comforting.

I tend to look at things from the #2 point of view. YMMV.

OTOH, if without the FA's advices I would have left my money in a MegaBank 0.3% savings account, or a 1.5% CD, or panicked at the first down turn and sold low, maybe having the FA at the helm is the better choice. Again, YMMV.

I'm welcome to a critique of my view on this.

 

[OldShooter]

... OTOH, if without the FA's advices I would have left my money in a MegaBank 0.3% savings account, or a 1.5% CD, or panicked at the first down turn and sold low, maybe having the FA at the helm is the better choice. Again, YMMV.

I'm welcome to a critique of my view on this.

I don't think you're out in left field at all. I was talking to a guy once who had just come from a meeting with his Ameriprise FA. I sort of gently tried to suggest that Ameriprise was generally thought to be expensive and its funds known for underperformance. His response was a light bulb moment for me: "I know all that. But if it wasn't for this guy I wouldn't have anything."

That said, I think there is a third way to look at the fee: During savings/accumulation where the saver is hoping for 6% long term the fee is 16%. In retirement with a 4% draw rate, the fee is 25%. So the question becomes whether the value that the FA is providing to the customer is worth the fee or not. For many of us the answer is "not" but for others (see my post #24) the answer is "definitely." That is, if the advisor is a true financial advisor and not just an investment advisor. For investment advisors I think the number of people for whom the aswer is "not" is larger.

 

[augam]

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."

Hey if you know anyone that’s not sure if they should buy or sell and they want to pay me for that thought

I would be more than happy to help.

 

[jazz4cash]

I just struggle with the extra cost to hire an FA that is primarily using funds. It seems counter intuitive to me. All the other stuff like income projections, taxes, insurance, estate plans, and having someone a spouse or beneficiary can rely on are important too.

 

[target2019]

IMHO, there are two ways to look at the OP's 1% fee:

1.) Consider it in terms of total assets. I have $1,000,000 invested. I pay $10,000 fee which is 1% of my total assets. (I'll ignore the 1% on my gains for the year to make things simple.)

2.) Consider it in terms of the gain (or loss ) for the year. My $1,000,000 gains 10% this years. GREAT! I have made $100,000 dollars. I pay the $10,000 fee, and find that I have given the FA 10% of my profits. (Again, I will ignore the 1% on the gains to make things simple.) Hmmm.... Not quite as comforting.

I tend to look at things from the #2 point of view. YMMV.

OTOH, if without the FA's advices I would have left my money in a MegaBank 0.3% savings account, or a 1.5% CD, or panicked at the first down turn and sold low, maybe having the FA at the helm is the better choice. Again, YMMV.

I'm welcome to a critique of my view on this.

I see the investing costs in this way. For each case there is also additional savings just by investing in broad index fund(s).

1) Consider as a percentage of total assets. I had $1M end of last year, and performance left me with $1.1M. Pay the FA 1% or $11,000.

2) Consider as part of my gain for the year. My gain was $100,000 and I paid the FA $11,000 or 11% of my gain.

3) Consider as part of my safe withdrawal rate. My balance was $1M at end of last year. I withdrew 4% at the end of this year ($40,000) from my balance of $1.1M. I also paid the FA $11,000, or 27.5% of my SWR.

 

[OldShooter]

I just struggle with the extra cost to hire an FA that is primarily using funds. It seems counter intuitive to me. ...

Well, one aspect of it is diversification. To diversify away individual stock risk, numbers like 60-100 well-chosen issues are thrown around. Buying just a few issues amounts to betting the farm; not a good idea for retirement savings IMO. So the alternative is to get diversification by buying diversified/aka total market funds.

I recently reviewed one FA portfolio holding around $15M in individual stocks. I stopped counting because there were so many -- maybe 200. This is basically "closet indexing" where they hold the market but get the an investment advisory fee. This was a portfolio for a community fund nonprofit where it is not feasible for them to run their own money. Because it is a community fund, too, they have to invest with local FAs. They could probably save at least 30bps by hiring Vanguard to run the money.

 

[mrfeh]

FSKAX is US domestic. International funds could explain a lower return for OP.

If I say that 20% of the equities are international (FSGGX) , that takes the return down to 18.7%

I don't see any explanation other than poor investment choices, which is the usual case in this type of situation.

 

[target2019]

If I say that 20% of the equities are international (FSGGX) , that takes the return down to 18.7%

I don't see any explanation other than poor investment choices, which is the usual case in this type of situation.

There is a post where OP describes moving mid-year from conservative allocation to something like 60/40.

 

[skipro33]

I've just read the OP. I've got to say I did the same thing; 1 year at 1% and show me the money that makes this worth your fee. He didn't. All the additions stuff OP posted as FA advice I got before actually letting them manage what funds, rebalance, etc. my money was invested in. I meet twice a year in person and twice a year on the phone. At no time am I charged to discuss my financial shape, plans, or any other aspect of my financial health. The FA doesn't seem to mind one bit if I am or am not letting them manage my money and collect a 1% fee. The only thing that letting them manage my money provided was access to funds exclusive to their brand; Fidelity Investments. I compared their investment strategy to one that had 60/40 in an equity fund and bond fund. They cost me 7% under that litmus including their 1% fee. I asked them to explain how they could be sooooo bad at making investment choices and I was given some BS about this taking multiple years to pan out.

Anyways, they are nice enough to contact me 4 times a year to discuss my account or meet with me, they don't charge me a dime and there's no limit of the topics as long as it at least remotely involves my finances.

 

[mrfeh]

There is a post where OP describes moving mid-year from conservative allocation to something like 60/40.

Yes, I know: https://www.early-retirement.org/forums/f28/fa-after-one-year-2019-update-102207-2.html#post2371876

Even though I didn't exactly replicate what happened in portfolio visualizer, it's clear there was under-performance.

 

[target2019]

Yes, I know: https://www.early-retirement.org/forums/f28/fa-after-one-year-2019-update-102207-2.html#post2371876

Even though I didn't exactly replicate what happened in portfolio visualizer, it's clear there was under-performance.

Yes, also see my post where I noted the performance of STAR, a 60/40 fund, being north of 20% for 2019. The underperformance has been pointed out and acknowledged.

 

[Scratchy]

Yes, also see my post where I noted the performance of STAR, a 60/40 fund, being north of 20% for 2019. The underperformance has been pointed out and acknowledged.

Yes, I know: https://www.early-retirement.org/forums/f28/fa-after-one-year-2019-update-102207-2.html#post2371876

Even though I didn't exactly replicate what happened in portfolio visualizer, it's clear there was under-performance.

Agree. Using portfoliovisualizer, benchmarks VTI, VXUS, BND. Looked at portfolios varying from international 20 % of equities to 50 % of equities, and whether change from 40:60 to 60:40 was at end July or end August. 2019 returns ranged from 17 % to 19 %.

 

[Jerry1]

I agree that the performance was not up to snuff. I'll be discussing this with him. Thanks for the thought to go to portfolio visualizer. I put in a two fund portfolio (VTSMX and VBMFX) and had to get the portfolio down to 25/75 to come close to my results. The same two funds would have returned 17% at 40/60, which my portfolio was never below. That alone is about a $30K difference. Net out the fee and I'm still wanting him to explain why the $20K didn't come my way. We'll see. As I've indicated, this is a learning experience and it's easier to take in a good year, but it still needs explaining.

So in that regard, how would you respond if the FA says that the funds chosen were defensive and that while I did not do better than a hypothetical portfolio, I would have lost less if the market did indeed turn negative? I ask it this way because we have made it clear to the FA that we are more adverse to losing money than leaving some on the table.

 

[braumeister]

So in that regard, how would you respond if the FA says that the funds chosen were defensive and that while I did not do better than a hypothetical portfolio, I would have lost less if the market did indeed turn negative?

I would ask what exactly would he have done to adjust it if he saw a big downturn happening, how long it would take him to do that, and what would he do when he saw it rebounding again.

 

[mrfeh]

So in that regard, how would you respond if the FA says that the funds chosen were defensive and that while I did not do better than a hypothetical portfolio, I would have lost less if the market did indeed turn negative? I ask it this way because we have made it clear to the FA that we are more adverse to losing money than leaving some on the table.

I wouldn't even bother asking the question. Aversion to losses should be handled with asset allocation, not trying to choose "defensive" stocks.

You have to remember - his goal is making money for himself, not you.