Seeking Advice - Leaving Wealth Manager/High Cost Funds/Capital Gains

[saltywalden]

Hi All, I'm seeking advice and opinions on how to handle taking over control of some assets I have with a wealth manager.

Background:

I've had a wealth manager for the past few years with control of about 25% of my investable net worth. He was great, no complaints, but I've learned more about investing and frankly have become a boglehead so it is time to drop the 1% fee drag. (It was actually kind of hard to break up with him, but it went well.)

Where we are now:

I will have all of those assets he was managing, which are already at Fidelity transferred to a Fidelity account under my control. It is currently invested in about a dozen different funds, mostly iShares ETF, but also at least one individual stock and one Fidelity managed fund. The funds are "fine" I guess, but it seems none of them beat the S&P 500 over the last 5 or 10 years and they have expense ratios ranging from 0.2 - 0.8+%. As a boglehead, this makes me sad.

I'd like to get them all into FSKAX, but here is my dilemma. I'm sitting on about $100,000 in gains in that account. Liquidating it all right now would lead to $25,000 in federal taxes. That seems like a bad move, even with the fees and slightly lower return, it will be hard to make up that $25k.

Some information that may be helpful for advice giving:

I intend for this money to sit un-touched (no withdrawals, no contributions) for at least 10 years. It represents about 25% of my total equities including all 401(k)s, IRAs, and a Vanguard taxable account. If I liquidated it all at once, some of the gains will be short term gains.

What do you think? Just leave it all in those funds? Move a little bit, say $15-20k of the gains per year out of the most expensive funds? Something else entirely?

Thanks for taking the time to read through!

 

[Finance Dave]

So I assume this is not within an IRA.

I'd look at your tax bracket and maybe sell some to just get you near the next higher bracket...and do that each year until you get where you want to be. Some funds will charge higher fees and that's ok...such as international funds. But .8% is quite high..so that's probably a managed fund.

You mention being unhappy because you haven't beat the S&P500, but the fund you mention doesn't either. I would not be too upset about not beating the S&P...the tech-heavy S&P has been hard to beat in recent history. Myself, I'm a bit afraid of tech due to the volatility, and if we have another tech bubble like we did back in the old days (can't recall the year, I think 2000) then you'll get hammered. I have moved to more value funds and small cap recently, and an equal-weighted S&P fund to minimize tech risks.

Also, I invest in passive funds, so mine are all pretty low fee.

Good luck and I'm sure you'll get lots of good advice here.

 

[OldShooter]

A dozen funds is, as you say, too many. The problem the FAs have is that they have to make investing look complicated because, when people figure out it is not, they do exactly what you are doing. In our case we have finally worked down to the ultimate IMO equity strategy. One fund. VTWAX.

If you're not familiar with PortfolioVisualizer, that is a good new hobby for you. (https://www.portfoliovisualizer.com/) I would start by just looking at the dozen funds individually to get familiar. From that point, I'd start looking hardest at the ones with the narrowest sector focus, since those are the riskiest regardless of past performance. Looking over my shoulder at the tax man, I'd try to get rid of some or all of those.

Broad funds, like S&P, total US, total International, EAFE, etc. are safe to hold and the first two will behave like FSKAX anyway, so no reason to sell.

I'd also look at all your equities in total to identify any accidental concentrations aka tilts and clean those up in the tax sheltered account. Also look at this dozen funds in context. One that is 2% of your total equity position isn't going to affect things anyway, so no reason to worry much about it.

Edit: Regarding beating broad market indexes, fuggidaboutit. Search for S&P "SPIVA" and "Manager Persistence" reports that come out semi-annually. They all say the same thing: stock pickers hardly ever win over the long term and managers' past performance does not predict future results. So no surprise you're not beating the S&P, especially now.

Then maybe sail into the tax question, remembering to be careful to not let the tax tail wag the portfolio strategy dog.

 

[saltywalden]

Thank you Finance Dave!

Correct, this is not in an IRA, it is a taxable account.

I mention the S&P as a benchmark, only to say if it were beating it by a lot then it has at least offset the fees I guess. Too bad they weren't ARK funds but I suppose I'd still have the same questions right now only with much higher gains I'm also a passive investor and don't want to have to worry about when is the optimal time to sell those funds.

I think I made the first good step in eliminating the wealth advisor fee, now just want to optimize the portfolio....

 

[saltywalden]

@OldShooter

Thanks! This is exactly what I was hoping to get from this awesome forum. I was not familiar with the PortfolioVisualizer, I'm looking forward to playing with that, then looking at each fund one by one. I know a big chunk, (around 20%) is already in the iShares S&P 500 fund which is a low fee so I can just leave that one alone.

Great advice!

 

[Ready]

I’m in the same situation with some actively managed Fidelity funds that I’ve owned for more than 20 years. I have most of my money in index funds but I don’t want to get hit with the massive capital gains taxes on the actively managed funds just to move them to index funds. So I just keep the money invested there but any new purchases go to index funds.

If you are retired, making no income, and can stay within the 0% LTCG bracket, that would be a good time to consider moving some of the money. Until then I would just leave it where it is.

 

[SecondCor521]

Two thoughts:

1. If you're charitably minded, you can gift the most appreciated and/or highest expense ratio shares. If you've held them more than a year, then you get a charitable deduction for the full value of the shares, and the charity can sell them at a stepped up basis. If you don't have a charity in mind, you can donate them to a DAF. Pretty sure Fidelity has a DAF you can use.

2. You've mixed dollar amounts and percentages. Here's how I would look at it: The tax bill is a payment of $25,000 today. On the 0.8% fund, you'll save about 0.785% of your investment per year going forward. Let's assume you have $100K invested and it's all in the 0.8% fund. So you'll save 0.785% of $100K per year. If I did my math right, that's $785 the first year, which is just a hair above 3% before-tax (I think) risk-free rate of return, which is not really that bad in today's environment. And the savings goes up every year as the investments grow, so it'd be about 3.3% in year 2 and so on.

Your actual IRR will be different because you'll have more or less than $100K invested. If you had $200K invested then that would be a 6% rate of return, and I'd almost certainly take that myself. But this general math would be a good sanity check on whether it's a good idea or not. The longer you can have the money growing in the lower cost investments (i.e. the sooner you're able to do this and the later you actually end up selling the FSKAX) the better off you'll be. And I was using the 0.8% fund as an example; the 0.2% fund may not make as much sense to sell using this math.

 

[target2019]

I know a big chunk, (around 20%) is already in the iShares S&P 500 fund which is a low fee so I can just leave that one alone.

It will be satisfying to sell the highest expense fund and put the proceeds into your designated index ETFs.

If you have very small positions in some funds it is usually not sweat to sell those either. But take time as you are doing and consider each decision.

When I've done this kind of consolidation it worked best to just get one move accomplished, sit back and admire, and go to the next decision. In a spreadsheet you can list what you have on the left, where you want to end up in the right, and map out your consolidation steps.

 

[OldShooter]

... You've mixed dollar amounts and percentages. Here's how I would look at it: The tax bill is a payment of $25,000 today. On the 0.8% fund, you'll save about 0.785% of your investment per year going forward. Let's assume you have $100K invested and it's all in the 0.8% fund. So you'll save 0.785% of $100K per year. If I did my math right, that's $785 the first year, which is just a hair above 3% before-tax (I think) risk-free rate of return, which is not really that bad in today's environment. And the savings goes up every year as the investments grow, so it'd be about 3.3% in year 2 and so on.

Your actual IRR will be different because you'll have more or less than $100K invested. If you had $200K invested then that would be a 6% rate of return, and I'd almost certainly take that myself. But this general math would be a good sanity check on whether it's a good idea or not. The longer you can have the money growing in the lower cost investments (i.e. the sooner you're able to do this and the later you actually end up selling the FSKAX) the better off you'll be. And I was using the 0.8% fund as an example; the 0.2% fund may not make as much sense to sell using this math.

This is an excellent example of an approach to analyzing the dog-and-tail problem. The objective of the exercise is to maximize the money in your pocket, not to minimize income tax. If paying more tax gets you more money, you win.

Another factor, albeit less quantitative, is the Morningstar analysis concluding that low fees are an excellent predictor of fund performance: https://www.morningstar.com/articles/752485/fund-fees-predict-future-success-or-failure.html

 

[pb4uski]

Are you sure that your capital gains tax rate is 25%? For most people it is 15% or less, but perhaps you are in the high income category where LTCG are 20% and also subject to NII tax where you could get close to 25%, but that would be unusual.

Do you have any positions in any of your taxable accounts with unrealized losses? Those could be sold and other gain positions sold to offset the losses and the combination would be tax neutral.

 

[saltywalden]

@pb4uski thanks! you're right! I was told 25% and without looking thought, "oh that's right over $80k income is 25," but then looked again at it is 15% at $80-496k for married filing jointly. I'm still working, income is less than $200k for us both in 2021.

Fortunately? no unrealized losses right now in the taxable accounts.

@target2019 great words/advice thank you! Come to find out, about half of the money, representing about $70k of the gains are in iShares IVV (S&P 500 ETF, 505 holdings, 0.03% expense ratio) and IVW (iShares Growth ETF, 233 holdings, 0.18% expense ratio). I don't love the IVW but that may just end up being one that I keep.

My plan now is to tackle each of them one at a time. My first three priorities will be the two fidelity managed funds and one high 0.42% expense REIT fund. I'll take my time to consider each one individually as you had suggested. I think this will work best for me.

Thanks again for the thoughtful advice.

 

[pb4uski]

Another thought.... when you look for unrealized losses you should look by purchase lot and not by ticker... but with the nice run of late it wouldn't be surprising if all purchase lots are unrealized gains.

 

[Trooper]

Thanks again for the thoughtful advice.

Isn't this forum great?!?!

 

[target2019]

@target2019 great words/advice thank you! Come to find out, about half of the money, representing about $70k of the gains are in iShares IVV (S&P 500 ETF, 505 holdings, 0.03% expense ratio) and IVW (iShares Growth ETF, 233 holdings, 0.18% expense ratio). I don't love the IVW but that may just end up being one that I keep.

My plan now is to tackle each of them one at a time. My first three priorities will be the two fidelity managed funds and one high 0.42% expense REIT fund. I'll take my time to consider each one individually as you had suggested. I think this will work best for me.

Thanks again for the thoughtful advice.

0.08% is not gonna sink your account, and IVW could be the better choice to keep in taxable brokerage. It does overlap IVV 100% (I am guessing).

That REIT fund probably has little gain. Maybe I'm a good guesser? And you don't need unqualified dividends for sure. Give it the axe!