Hired a FA

[DatumPoint5]

Yup, because the annual "loss" due to the fee is compounded each year.

If your portfolio (historically) returned 6% each year, it will now return 5%. That's a 17% decrease.

As Jack Bogle would say, "The magic of compounding interest, is offset, by the tyranny of compounding fees"!!!!!

[BR][/BR]

 

[Big_Hitter]

Sorry that is my point not expressed clearly.
Unlike your investments with your FA, if the OP would go with some simple index fund with a 40/60 AA, then there really wouldn't be much that the FA could bring to the table over and above.

agreed!

 

[RobbieB]

Mine has trading authority too. I would certainly hope so, I'm hiring him to make me dough and trust him to do his job.

 

[tulak]

40% VTI, 60% BND and a possible annual rebalance is not 10 hours work for anyone.
-ERD50

Even easier: buy Vanguard’s LifeStrategy Conservative Growth Fund and they’ll handle the rebalancing for you.

The biggest issue I’d have with an FA is the WR reduction. Going from a safe 3.4% to a 2.4% means I’d need a much bigger nest egg.

And that’s assuming he’d match performance. I’m generous though and I’ll give him the benefit of the doubt on that point. Even though it goes against all of the studies.

 

[FreeBear]

I see two outcomes. I’m happy and making money and all is good and I leave well enough alone. Or, I don’t see the value and I bail. I’ll reevaluate every quarter but I think I’ll give him a year to get me set up, get me through some major decisions and then, as ERD50 said, things may be straightforward forward enough that I’ll take over.

Wow! Lots of discussion...


I personally can't afford an FA. I would have had to w*rk maybe 5-10 more years just to pay for one. I can see, however, why you or someone else would want one if they don't want to bother with it, at least for now.

Sure, a FA may seem to be "inefficient" from a strictly financial viewpoint. Another way to look at it, though, is that a FA is a luxury that some are rich enough to afford. Perhaps this should be moved to the popular "Blow Some Dough" thread

We blow $10K a year on eating out. Rationally, some would argue that this is crazy, but I guess I feel too rich and lazy to care. When the recession comes, I'll probably feel relatively poor and we'll spend more time making instapot chilli and soup. Others blow this much on flying 1st or business class instead of economy-cattle class. To each, his own...

My weathy friends use FA's and still attract money like a magnet attracts iron filings! They can't seem to Blow Some Dough, in large part because of very modest tastes given their $$. One guy has SEVERAL different FA's! Why so many?? He doesn't trust any one of them! Oh, he knows his way around money, but is too rich to care about managing it...

 

[GTFan]

Just so you know, many of us only spend a few hours a year managing our investments, maybe an hour a month and a few more annually.

I did spend a year or two getting up to speed finance-wise in preparation for retirement, but after that didn’t need to learn more. Keeping it simple works well with investments, so it’s not necessary to get up to speed on any exotic assets. A few low-cost cost mutual funds providing adequate diversification and a simple AA is all that is needed. Probably most of the work goes into preparation for retiring, like figuring out if you have enough to retire, and understanding your retirement spending.

This is me, all I do now is reconcile NW to a spreadsheet every so often then rebalance once a year. As audrey said there was a significant time investment to learn how to do all this before I retired but now it's basically on autopilot.

 

[GTFan]

This is why the OP said he'd get flogged. I'm of the mind that if you don't have something nice to say, don't say it.

Telling someone that they're paying $10k a year is a useful reminder, not a bad remark.

 

[pb4uski]

....The biggest issue I’d have with an FA is the WR reduction. Going from a safe 3.4% to a 2.4% means I’d need a much bigger nest egg. ....

The impact isn't a direct reduction of the WR by the amount of the FA fee... it is a 1% reduction in net investment return... the impact on WR is about 0.5% for a 1.0% increase in expenses.

Take Firecalc with default assumptions, change stock from 75% to 40% and solve for spending at 95% success... result is $29,583 or 3.94% WR. Then change fees from 0.18 to 1.18 and recalculate... result is $25,986 or 3.46% WR.

 

[target2019]

We had something like 12 investing spaces (23 funds) at end of 2017, with 4 to be added by EOY 2018 (due to inheritance). At completion, the number of holdings will double (at least). There will be a few headaches as we integrate and simplify into existing portfolio and AA.

It did take more than a few years to gain confidence to do this. We've gradually come to an understanding of the concepts and theories,

One size does not fit all, though.

 

[HI Bill]

This is why the OP said he'd get flogged. I'm of the mind that if you don't have something nice to say, don't say it.

I don't see the statement as not nice, I see it as realistic. Most of us posting here aren't here to comfort people or make them feel good, we're here to learn and give advice to improve others outcomes and make better choices. If you're too worried about hurting someone's feelings, you'll never be able to give solid advice, especially if one is making costly choices.

Know and understand what you're paying for. If the 10 hours, or whatever level of effort they provide, are worth the peace of mind, and the results, then go for it! It's not about $/hour, it's about the service they provide.

 

[HI Bill]

Telling someone that they're paying $10k a year is a useful reminder, not a bad remark.

+++++

 

[HI Bill]

Many years ago we had a FA, so I am not going to flog you. Here is why we left the FA...

That 1% (or so) fee is about 1/3 of our annual withdrawal rate. That is a huge fraction of what we are earning in portfolio return to pay someone. In effect, it means I either need to increase our withdrawal rate from 3% to 4% just to cover the FA expense, or I need to keep our withdrawal rate at 3% and lower our other spending to 2%. Neither of those worked for me, so I took it on myself.

Wow, what a way to look at it! Buy VTI and BND, set it on autopilot with automatic withdrawals, and be able to spend 25 to 33% more!

 

[pb4uski]

Mine has trading authority too. I would certainly hope so, I'm hiring him to make me dough and trust him to do his job.

Trust, but verify. [emoji4]

 

[ugeauxgirl]

I appreciate this thread- as an FA, at times I have felt unwelcome here. I completely agree that there are bad ones out there- I spent a lot of time yesterday explaining some bad investments (courtesy of their former advisor) to some new clients. There are some great FAs too, who manage to be a great value to clients who don't want to, or don't have time to manage their own investments.

 

[COcheesehead]

I appreciate this thread- as an FA, at times I have felt unwelcome here. I completely agree that there are bad ones out there- I spent a lot of time yesterday explaining some bad investments (courtesy of their former advisor) to some new clients. There are some great FAs too, who manage to be a great value to clients who don't want to, or don't have time to manage their own investments.

Best screen name I've seen in a while.

 

[MichaelB]

I appreciate this thread- as an FA, at times I have felt unwelcome here.

That’s unfortunate. You are most welcome here, and you shouldn’t let that affect your participation.

While you can’t teach an old dog new tricks, I have learned as I age, we all don’t have the same aptitudes or math skills, some people need help where others do not, and there is definitely a place for financial services to help people plan for their financial futures.

 

[audreyh1]

The impact isn't a direct reduction of the WR by the amount of the FA fee... it is a 1% reduction in net investment return... the impact on WR is about 0.5% for a 1.0% increase in expenses.

Take Firecalc with default assumptions, change stock from 75% to 40% and solve for spending at 95% success... result is $29,583 or 3.94% WR. Then change fees from 0.18 to 1.18 and recalculate... result is $25,986 or 3.46% WR.

Yes, that’s the way to accurately model the effect on how it lowers the SWR.

 

[audreyh1]

Their sliding scale works like tax brackets. Starting at 1.2% for the first $500K and then .9% for the next bracket. I didn’t figure out the exact percentage but I think I’ll be close to 1%. Yes, that hurts, but Fido wanted .8% and I just couldn’t get comfortable with them. This company is much broader in their support. They are not tax experts, but they know how taxes work, they also seem more holistic in that they’re encouraging use to get all are other paperwork in order (will, trust, etc).

Once you get up to $2M it 1% just seems like a whole lot of dough.

$2M - $20,000 annually
$3M - $30,000
$4M - $40,000
$5M - $50,000 annually for managing the assets.

0.9% of AUM - $45,000 on $5M

Even if you get a break to .75% of AUM because of a larger portfolio, it still seems like a huge amount. $37,500 annually on $5M.

The amount of work involved in going from managing a $2.5M portfolio to a $5M portfolio does not even begin to double, IMO. So seeing fees double seems harsh.

 

[flintnational]

General question to the group - All else being equal (similar experience and skill level), is there ever an advantage to a commissioned FA compared to a fee based FA?

 

[COcheesehead]

General question to the group - All else being equal (similar experience and skill level), is there ever an advantage to a commissioned FA compared to a fee based FA?

If they are your spouse, they can make more money.

 

[flintnational]

If they are your spouse, they can make more money.

That's 1.

 

[RobbieB]

Trust, but verify. [emoji4]

Yes, I trust him because I've verified that he beats his benchmark with fees included. Merrill does their own thing, I don't own any mutual funds or ETF's, just about 80 different common stocks which get traded regularly according to Merrill's analysis and the "broker brainstorms"

There is no churning to worry about as there are no trading fees.

 

[target2019]

General question to the group - All else being equal (similar experience and skill level), is there ever an advantage to a commissioned FA compared to a fee based FA?

IMO, there is clear advantage when the investor is not capable of maintaining the portfolio, and may fall victim to scams and fraud. I'd much rather have a trusted relative watch, but if none are around, pick an institution like Schwab, Vanguard, Fidelity, and pay for the AUM. That assumes the picking has happened before becoming vulnerable.

 

[gerntz]

This really shouldn’t be overlooked imo. Not saying this is the only reason for us going with a FA, but in a few ways I’m already on borrowed time. Both of my brothers barely made it into their 40s for instance. DW could figure out investments if she wanted to, but the interest to do so just isn’t there.

I sleep a whole lot better at night not only having our FA available when needed, but for continuity for when I’m eventually gone.

+1

 

[flintnational]

IMO, there is clear advantage when the investor is not capable of maintaining the portfolio, and may fall victim to scams and fraud. I'd much rather have a trusted relative watch, but if none are around, pick an institution like Schwab, Vanguard, Fidelity, and pay for the AUM. That assumes the picking has happened before becoming vulnerable.

I agree with the scenario you have outlined and the firms mentioned for that purpose.