FA - great on paper, poor on execution

[LOL!]

My BIL passed away earlier this year and my sister asked me to help her review the advice of her financial advisor. This FA that my sister has used came highly recommended, is fee-only, CPA/CFP/CFA, a member of Garrett network, etc. Basically he has all the right qualifications. I talked to him over the phone at my sister's insistence. The fee is about 0.5% of assets under management (AUM) which is not bad considering that assets are mid-6-figures.

The rant: The advisor developed a new portfolio of about 21 different mutual funds, some with front-end loads, overlapping asset classes, more than one balanced fund, and many with expense ratios above 1%. He also decided to unload some funds that he had picked for her just last year such as Dodge&Cox Income fund. Anyways, the portfolio is well constructed in regards to asset allocation, but it looks like someone was eating Money magazine and just puked up a bunch of funds.

As I see it, this guy gets no benefit to putting his clients in portfolios with an average annual expense ratio of 1.1% since he is fee-only, AUM. Or does he? He could have just as easily touted his expertise and selected a portfolio of index funds or index ETFs. Instead, it looks like he doesn't trust himself and lets fund managers try to do the job for him.

If the safe-withdrawal-rate is 4% before investment expenses and 1.6% goes as fees, that leaves my sister with 2.4% annual withdrawal to live off of.

Anyways, I've written a critique of his advice and sent it to my sister. I know it is not wise to interfere in the financial affairs of close relatives. But she asked for my help and I pulled no punches.

 

[FinanceDude]

My BIL passed away earlier this year and my sister asked me to help her review the advice of her financial advisor. This FA that my sister has used came highly recommended, is fee-only, CPA/CFP/CFA, a member of Garrett network, etc. Basically he has all the right qualifications. I talked to him over the phone at my sister's insistence. The fee is about 0.5% of assets under management (AUM) which is not bad considering that assets are mid-6-figures.

Well, it goes to show that all the alphabet soup after your name has little to do with implementation in some cases.........

The rant: The advisor developed a new portfolio of about 21 different mutual funds, some with front-end loads, overlapping asset classes, more than one balanced fund, and many with expense ratios above 1%. He also decided to unload some funds that he had picked for her just last year such as Dodge&Cox Income fund. Anyways, the portfolio is well constructed in regards to asset allocation, but it looks like someone was eating Money magazine and just puked up a bunch of funds.

Looks she got a healthy dose of "wrapfee-itis"........

As I see it, this guy gets no benefit to putting his clients in portfolios with an average annual expense ratio of 1.1% since he is fee-only, AUM. Or does he? He could have just as easily touted his expertise and selected a portfolio of index funds or index ETFs. Instead, it looks like he doesn't trust himself and lets fund managers try to do the job for him.

It's some platform his firm is pushing........unfortunately it happens all too often.

If the safe-withdrawal-rate is 4% before investment expenses and 1.6% goes as fees, that leaves my sister with 2.4% annual withdrawal to live off of.

What if the funds do 8-10%??

Anyways, I've written a critique of his advice and sent it to my sister. I know it is not wise to interfere in the financial affairs of close relatives. But she asked for my help and I pulled no punches.

Well, you tried.........

 

[jIMOh]

My BIL passed away earlier this year and my sister asked me to help her review the advice of her financial advisor. This FA that my sister has used came highly recommended, is fee-only, CPA/CFP/CFA, a member of Garrett network, etc. Basically he has all the right qualifications. I talked to him over the phone at my sister's insistence. The fee is about 0.5% of assets under management (AUM) which is not bad considering that assets are mid-6-figures.

The rant: The advisor developed a new portfolio of about 21 different mutual funds, some with front-end loads, overlapping asset classes, more than one balanced fund, and many with expense ratios above 1%. He also decided to unload some funds that he had picked for her just last year such as Dodge&Cox Income fund. Anyways, the portfolio is well constructed in regards to asset allocation, but it looks like someone was eating Money magazine and just puked up a bunch of funds.

As I see it, this guy gets no benefit to putting his clients in portfolios with an average annual expense ratio of 1.1% since he is fee-only, AUM. Or does he? He could have just as easily touted his expertise and selected a portfolio of index funds or index ETFs. Instead, it looks like he doesn't trust himself and lets fund managers try to do the job for him.

If the safe-withdrawal-rate is 4% before investment expenses and 1.6% goes as fees, that leaves my sister with 2.4% annual withdrawal to live off of.

Anyways, I've written a critique of his advice and sent it to my sister. I know it is not wise to interfere in the financial affairs of close relatives. But she asked for my help and I pulled no punches.

If the funds charge 12b1 fees, it's possible he gets reimbursed from the funds. No loads show up, but fee only might not really mean fee only.

 

[saluki9]

If the funds charge 12b1 fees, it's possible he gets reimbursed from the funds. No loads show up, but fee only might not really mean fee only.

VERY VERY unlikely.

More likely as FD indicated he is working off a wrap program that puts together the models for him.

 

[LOL!]

Re: 12b-1 fees, just checked, about half of the recommended funds have them.

 

[saluki9]

Re: 12b-1 fees, just checked, about half of the recommended funds have them.

Just because the funds pay them, does not mean that the FA is getting them.

In many cases those get paid to the firm which is running the wrap platform.

 

[jIMOh]

Re: 12b-1 fees, just checked, about half of the recommended funds have them.

If you need to know if this impacts the situation, have your relative ask the FA how they are compensated- full disclosure.

Then ask a second time-maybe you ask.

Then the third time ask how the 12b1 fees the fund pay affect the recomendation.

My problem solving style in situations like this is to collect information, but not give anything out. Collect more and not give anything out. Then try to look for waffling in the response prior to telling person what I know thru research.

If you play your hand too quickly, you cannot try to find the person squirming and disclosing things you do not know.

Care to list the funds here? Then as part of discussion with FA, maybe you could offer two alternatives and ask why these were not recomended.

Have one be managed funds using same asset allocation.
Have one be indexed funds using same asset allocation.

Ask why either of these portfolios would not be better. If the managed funds are from different places in current recomendation, and you could find equivalents at T Rowe, Fidelity or one of the larger fund houses (with lower ER), see if FA bites on this.

 

[LOL!]

As I look closer, the recommended portfolio seems to have many of today's buzzwords in it: long-short, hard assets (as REITs and TRPrice New Era), global bonds, int'l REIT, etc. But no TIPS and no CCFs.

 

[LOL!]

If you need to know if this impacts the situation, have your relative ask the FA how they are compensated- full disclosure.
...
If you play your hand too quickly, you cannot try to find the person squirming and disclosing things you do not know.

I don't think it really matters if the FA is getting paid more than 0.5% AUM, the expense ratios are gone whether the money goes to the FA or not.

I see no point in making the FA squirm. What I'd like to see is the FA present a similar portfolio with expense ratio under 0.25%. In fact, it could be as simple as selecting a single Vanguard Target Retirement fund . But what would be the value added by the FA in that case?

 

[jIMOh]

I don't think it really matters if the FA is getting paid more than 0.5% AUM, the expense ratios are gone whether the money goes to the FA or not.

I see no point in making the FA squirm. What I'd like to see is the FA present a similar portfolio with expense ratio under 0.25%. In fact, it could be as simple as selecting a single Vanguard Target Retirement fund . But what would be the value added by the FA in that case?

A fee only advisor can serve the purpose of verifying a decision is good, or recomending a complex asset allocation.

I think it matters how the FA is getting paid to know why certain funds are recomended. If there is a conflict of interest, the customer deserves to know.

 

[FIREd]

Once your sister realizes she would lose 40% of her annual retirement income to unnecessary fees, she might start to see things your way. I convinced my MIL to transfer her assets to Vanguard for the same reasons. She was paying close to 1.8% in fees and commissions at her former brokerage company. So I showed her the numbers: On a $500K portfolio, she could draw $20K in income per year. Out of that $20K, $9K alone would have gone to pay fees and she would have had only $11K left to spend. Now, at Vanguard, her fees amount to only 0.25% or $1250 a year, leaving her $18,750 to spend. A HUGE difference. Compound that over several years and the difference is even starker. It didn't require much convincing, believe me... A FA could be great on paper, but it is totally meaningless, execution is everything... And if he can't perform, it's time to go bye bye...

 

[FinanceDude]

I see no point in making the FA squirm. What I'd like to see is the FA present a similar portfolio with expense ratio under 0.25%. In fact, it could be as simple as selecting a single Vanguard Target Retirement fund . But what would be the value added by the FA in that case?

Well, other than he won't get paid on it.........

 

[travelover]

...........She was paying close to 1.8% in fees and commissions at her former brokerage company. ................

Just to reinforce how prevalent this is - My nephew asked me to help him make 401(k) investment decisions. His first assignment was to find out his total ER on his current investments there. Answer: 3.2% !!!!!!! That's a nice bite outta 4% SWR.

 

[Notmuchlonger]

Just to reinforce how prevalent this is - My nephew asked me to help him make 401(k) investment decisions. His first assignment was to find out his total ER on his current investments there. Answer: 3.2% !!!!!!! That's a nice bite outta 4% SWR.

Geez what a rip off.

 

[Marquette]

Just to reinforce how prevalent this is - My nephew asked me to help him make 401(k) investment decisions. His first assignment was to find out his total ER on his current investments there. Answer: 3.2% !!!!!!! That's a nice bite outta 4% SWR.

Well, that got me motivated to look at my 401(k). The good news is that it looks like it's 0.51% for me.

One thing I'm not sure on is my bond fund, though. It's an internal fund (no public listing) that buys AAA-BBB funds with the largest holding in treasury notes. There's no expense fee, which sort of makes sense, but I can't find any info on what other fees there might be. Maybe the company is just encouraging investing to increase their overall fund size.

edit. By far the largest fee is the 0.83% for the oakmark equity & income fund (oakbx). Since I'm 32% in that, 16% in the bond fund, and 27% in Dodge and Cox Stock Fund (dodgx), maybe I should rebalance out of the oakbx and into the bond and dodgx fund... if I throw it on m*, I'm guessing there's a lot of overlap in the equity holdings between dodgx and oakbx (they're both lv-weighted)

 

[boutros]

regarding the loads on funds: A FA can buy a load waived version of a fund as long as he is charging an advisory fee. It may even have the same ticker as the loaded version. So just because the fund typically has a load does not mean that the load was charged. For instance I use American Funds New World as part of an emerging markets exposure for clients. It would typically have a 5.75% load but it is not charged when I buy it for them.

Regarding the sales within 1 year: Is he harvesting tax losses. I have been selling things within one year for clients so that the tax loss is short term.

 

[FIREd]

Just to reinforce how prevalent this is.

I think you are right, it is prevalent out there. When we were fresh out of graduate school and started making good money, my wife and I decided to use a Financial advisor to "take care" of our money since we knew nothing about investing. He took [-]care of[/-] our money all right. We were paying an annual fee of 0.75% of assets for his services (reasonable). The first thing he did was open an annuity in my wife's IRA, get us into 2 VULI's contracts with 10 year surrender periods, and put the rest of our money in underperforming loaded mutual funds (5.75% loads, and oh yes, he made us pay those loads) with high ERs (he got us into a bond fund with a 0.9% ER!). Total rip off. Not including the VULIs and annuity, we were paying close to 2% in annual fees, plus he pocketed 5.75% of every dollar we invested with him over the span of 3 years. He was also churning our account, pocketing the 5.75% load on the money everytime he changed investment. He was less than straight forward with us about the way he was getting paid. But we didn't know better. Neither of us had any incline to look after our money so we kept ignoring the warning signs because it was easy to bury our heads in the sand. After three years, though, we started to wonder why our accounts weren't growing. I started learning about investing, reading book after book, and the more I read, the more I realized that one after the other, all the warning signs of a bad FA were there. All the pitfalls, we fell in. All the fees to avoid, we were paying. All the annuity sales pitches, we bought into.

By educating ourselves we learned several things. 1) taking care of your own money is not that hard. 2) Nobody cares as much about our money as we do. 3) Lower the fees your pay on investments and watch your returns increase (I ended up moving all of our money to Vanguard). 4) Never trust a FA who seem to only have your best interest at heart. He is in it for the money (your money), and that's a fact.

Thank goodness we saw the light sooner rather than later.

 

[FinanceDude]

Just to reinforce how prevalent this is - My nephew asked me to help him make 401(k) investment decisions. His first assignment was to find out his total ER on his current investments there. Answer: 3.2% !!!!!!! That's a nice bite outta 4% SWR.

He doesn't have a withdrawal rate until he's withdrawing......... That being said, I'll bet it's an insurance product through Principal or someone...........

 

[saluki9]

He doesn't have a withdrawal rate until he's withdrawing......... That being said, I'll bet it's an insurance product through Principal or someone...........

I'm betting on John Hancock!

 

[FinanceDude]

I'm betting on John Hancock!

And let me guess, it's a 403B!!!

 

[travelover]

He doesn't have a withdrawal rate until he's withdrawing......... That being said, I'll bet it's an insurance product through Principal or someone...........

Yea, I know there is no withdrawal rate now, but you get the picture.

Company is called AXA Rosenberg.

 

[FinanceDude]

Yea, I know there is no withdrawal rate now, but you get the picture.

Company is called AXA Rosenberg.

Well, the "advantage" is that they probably do a match, he gets a tax-deferral credit on the money taken out, and he will in all likelihood NOT be working there for the next 30-40 years, so he'll get into a "better" plan someday...........

 

[RonBoyd]

It would typically have a 5.75% load but it is not charged when I buy it for them.

So they give up income in the amount of 5.75% simply because you are a good friend? How nice of them.

 

[Dawg52]

I wonder what this guy would say if your sister told him to buy her one fund? A target retirement fund.

 

[travelover]

Well, the "advantage" is that they probably do a match, he gets a tax-deferral credit on the money taken out, and he will in all likelihood NOT be working there for the next 30-40 years, so he'll get into a "better" plan someday...........

There is no match. It is a big city fire department, so most guys do work there 30 + years. His wife works part time, so their tax bracket is low.

I don't know how long he will work there, but I'm recommending that he maximize their Roths instead.