Value of a financial planner

[Lance Covington]

Hi all. I have been perusing these forums for quite a while and absorbing all kinds of useful info and tips. Now, I am about to retire at age 56 and have some specific questions.

My wife and I have about $1,000,000 in various 401Ks, IRAs, a Roth IRA and misc. stocks. Our friends have recommended a financial planner who they have used for 15+ years. After meeting with him a couple of times, he has recommended a portfolio of mutual funds which he says will provide the proper asset allocation as well as an income for us. Sounds very nice but after reading a few books on the subject and reading these forums, I have two questions:
1. The planner's fee for his service is 1.5% of our assets per year. I'm guessing he also gets a commission on all the funds he is recommending. He says "he only makes money if we make money". What is the current wisdom of the group regarding this type of planner and his value to us?
2. As part of his plan for us, he is recommending a variable annuity inside my wife's IRA. I have always read that annuities are questionable at best and there is never a justification for one inside an IRA. I questioned him about this and he justifies it by saying that this annuity has a "SmartSecurity" feature that ratchets up our guaranteed investment every year, thus protecting us from a market downturn. The cost of this extra protection is pretty high; given a hypothetical return of 6%, our net return would only be 3.25%. After reading the prospectus and quizzing the planner, I could never get a fix on the total cost. What is the group's opinion of this use of an annuity?
It is probably apparent that I am a little leery of this whole thing but I want to be open minded if any of you see value in this approach to investing. Thanks in advance.

 

[Bob_Smith]

It is probably apparent that I am a little leery of this whole thing but I want to be open minded if any of you see value in this approach to investing. Thanks in advance.

Lance, forget it! I wouldn't even consider it - any of it.

 

[bruce1]

Run Fast Run Far....Read instead. Maybe contact a fee based financial planner where you pay a fixed amount for a plan and implement the plan (or not) yourself.

 

[BigMoneyJim]

The planner's fee for his service is 1.5% of our assets per year. I'm guessing he also gets a commission on all the funds he is recommending. He says "he only makes money if we make money".

Bull****. If he gets 1.5% of your assets per year he's making money without doing anything. If he moves you into loaded assets he'll make way more. If he works very hard to maximize your return he's highly unlikely to return better than a Vanguard balanced fund, especially since he has to beat it by more than 1% per year plus the cost of his loads plus the difference in vehicle expenses. Makes much more sense for him to put his efforts into making clients feel comfortable and secure with his loaded vehicles than to try to maximize each clients' portfolio individually.

Put all your money in Vanguard Lifestyle Moderate Growth, send me $500 per year and you have a really good chance of outperforming your financial planner's plan. And I'm probably doing more work for you than he did/will.

Okay, now that I've got the FP aggression out, it sounds like you have your investments well in hand. If you need to feel more secure about it buy a Chicken Soup book or other self-help book. Sorry, guess I haven't gotten the FP aggression out after all; I'm not trying to put you down in any way, I just think the FP is worse than a waste of money for you and is trying to sell you an expensive feelgood plan.

Keep picking up ideas here, and check out the ORP calculator ( http://www.i-orp.com/ ) since you have so many accounts. And you don't have to send me money, but I'll take it if you want to send it .

Added: By the way, on planner's fee alone he'll make $7500 from you next year if he loses half your money this year. 10 clients like that per year and he can make a handsome salary with abysmal performance.

 

[brewer12345]

Lance, you are right to be suspicious Based on his advice, I would suggest that you walk away from this charlatan. Mutual fund expense ratios plus his take would eat up most of what you could safely withdraw from your portfolio even if you didn't buy the annuity.

I think you could easily do better on your own managing the portfolio. If you really feel the need for a bit of handholding, I would suggest that you come up with your own plan then find a good financial planner to double check it. You want someone who charges by the hour (a fee-only planner) and has appropriate certifications (CFP is good, CFA would be good too).

 

[charlie]

I agree with all the above ..... can't express my
deepest feelings as this forum may be read by
the young and innocent.

Cheers,

Charlie

 

[Cut-Throat]

Yup, Ditto what they all said!

We argue a lot here, but this is one topic that we'll all agree on.

 

[John Galt]

Yep, once again C-T and I agree! Financial planners?
We don't need no stiiiiiiiiiinking financial planners

JG

 

[jj]

That line "he only makes money if we make money" is just not true and makes me soooo mad!! He takes his 1.5% of your asset base whether you make money or not. A thing that DH and I realized some time ago, but to be honest until educating ourselves (to some great degree through this board - thank you everyone!!) could do little about. For a few years we were in this position of deluding ourselves into thinking that these financial planners were looking after our interests - they are not - what they are interested in is lining their own pockets at our/your expense.

Hey, this could be the topic that unites the whole of this board's posting fraternity

jj

 

[REWahoo]

Hey, this could be the topic that unites the whole of this board's posting fraternity
jj

Could be. A couple of years ago I consulted a fee only FP just to get a sanity-check on what I was planning. $500 later he basically said "looks good to me". No way would I ever consider using a FP (Friggin' Parasite) who took a % of my assets to "advise" me.

REW

 

[JohnP]

What's a percent here and a percent there between friends; well, each percent of annual cost is 25% of YOUR future safe-withdrawal-rate income, especially important for RE'ers who need to think about a 'far horizon'.

No argument from me on any of the great advice above.

JohnP

 

[Yipee-Ki-O]

Regarding things to read, I'd suggest taking a look at "The Lazy Person's Guide to Investing" by Paul Ferrell and also perusing the columns by Scott Burns in the Dallas Morning News.

 

[Lance Covington]

Thanks for all the responses

I appreciate very much all the quick responses to my questions. Based on what seems to be the general consensus and my own gut feeling, I am going to tell this planner that I am not ready to commit my investments to him. I will instead continue to study, read and ask questions in this forum before deciding exactly how to allocate my investments.

Thanks again. I eagerly await any additional comments.

 

[bongo2]

I also want to echo the general comment that paying this guy a minimum of $15k to balance your portfolio is a mistake. It sounds like he may be squeezing extra fees out of the investments as well (almost certainly the annuity), and I don't know if that 1.5% includes the fees for the underlying mutual funds. You may be looking at a 2.5%+ expense hurdle that is going to be very difficult to overcome in a world of <5% bond yields.

The annuity inside the IRA is a dead giveaway that this guy is not just expensive, but also either incompetent or untrustworthy. If you want portfolio protection you can buy index puts cheaper.

If you are willing to put in a minimal amount of effort (and I mean minimal) you can manage your investments yourself. Scott Burns' articles on the "couch potato" portfolio (1/2 stock index, 1/2 bond index) give one example of a very simple, but effective, diverisfication scheme.

http://www.dallasnews.com/s/dws/bus/scottburns/couchpotato/columns/vitindex.html

If you don't think that you can (or will) keep on top of your investments you can get a better financial planner for a lot cheaper. A fee-only planner will run you a couple thousand, or you could go with a planner that would charge a more reasonable asset fee for an account like yours of around 0.5%. (I found these guys by searching the web: http://www.portfoliosolutions.com/fees.html http://www.ifa.com/aboutus/ http://www.robertsteffen.com/new/robertsteffen/ http://www.altruistfa.com/ )

The real decision at this point is not if you should use this planner or not, but how scathing a review of him you should give to your friends. I once went to a financial planner recommended by my father-in-law. He was terrible, but I just reported back that I had decided to keep doing things on my own. I feel bad now that I didn't have the courage to tell my father-in-law that he should dump the guy like yesterdays garbage.

 

[Helen]

Lance,

I agree with everyone else here, don't do it. This guy sounds like a real rip off. Read this on the Variable Annuity:

http://invest-faq.com/articles/ins-annuities.html

As others have said, it would be better for you to continue reading and educating yourself then find a CPA/CFP who will charge you an hourly fee to go over a plan that you have set up. You can also get answers to specific questions which will further your financial education.

Here is a link to another bunch of forums. I tend to like the Vanguard Diehards forum since I invest in Vanguard Index funds.

http://socialize.morningstar.com/newsocialize/asp/coverpage.asp?topnav=conversations

Best of luck,

-helen

 

[Helen]

Mutual fund expense ratios plus his take would eat up most of what you could safely withdraw from your portfolio even if you didn't buy the annuity.

This is a really, really good point. These people are in it for themselves at the cost of their "customer's" financial security.

With all the effort it takes to accumulate enough to reach FI, there is no way I will trust someone else to manage it for me.

There are way too many conflicts of interest within the financial planning industry.

-helen

 

[ESRBob]

It just occurred to me, if this guy could find 2 or 3 clients to bite on this ludicrous 'deal' he is offering you, (and stay with him), he could literally retire with no assets whatsoever, just sucking in the fees every year off your million dollar portfolio.

Lance, I wish we knew where to find this guy -- there might be a posse forming to go out and pursue a little vigilante justice... Would you mind sharing his address?

Lance, look around the posts here and you'll find some good asset allocation advice. CoffeeHouse Investor, Bernstein -- there are some good books that can help you customize it to your particular needs, and then keep the funds in no load, low-fee vehicles at Vanguard or a few other good houses, rebalance annually, and save your money for your own retirement instead of the planners.

Having said that, there are fee-only planners who can help, for instance, get you into DFA funds, or work out a plan with you. Vanguard offers something in the way of a $500-$1000 service if you are a client there (and if you aren't a Vanguard client, I think you should consider it). I don't know how good their advice is, but maybe others here have direct experience.

I've posted before on my asset allocation, sometimes with actual fund names (pm me if you don't find it) that has held up well over time, based on Bernstein and CoffeeHouse, but there are plenty of simple inexpensive ways to do this. Don't go to the dark side, Lance!

 

[bongo2]

As ludicrous as this deal is, I don't know if it's that uncommon. When I was thinking about getting into a couple of DFA funds (which are not offered direct) I called a few financial planners that offer them in my area. My impression is that these guys are generally better and more reasonably priced than most, and still most of them wanted to charge me 1% on all my assets. Apparently the $1k that they might get from their fee off of $100k or so that I might want to put in these funds just wasn't interesting for them. Other planners that I've talked to, and the stories that I've heard from some of my friends and family have been much worse.

 

[nwsteve]

Our friends have recommended a financial planner who they have used for 15+ years..

Lance
Seems like you have a received a rare thing on this forum--CONSENSUS.
Now your dilemma is how much of this is do you want to share with your friends who have been using this Turkey for 15 years?
Tough call--how close of friends are they? Maybe share the this thread and see if they pick up on the message.
Best wishes for more wise choices in 2005!
nwsteve

 

[brewer12345]

Lance,

As others have said, it would be better for you to continue reading and educating yourself then find a CPA/CFP who will charge you an hourly fee to go over a plan that you have set up.  You can also get answers to specific questions which will further your financial education.


-helen

Just a quibble here: CPAs can do a lot of stuff and there are exceptions, but typically they are not trained in investing and portfolio management. Some of them are actually in bed with the annuity companies, too. You should be looking for a CFP or a CFA if you feel the need to have someine look over your shoulder.