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Recently my wife and I have decided that we make enough money to go see a financial advisor and see how we can be smarter with our money. The most important topic we discussed with the advisor was how to best invest our money so its not sitting in cash earning 0.7% but rather keeping ahead of inflation. We are in our early 30's so we can afford to be slightly aggressive in our portfolio. We have about $200K to play with and his recommendations are:

  1. $40K in a health-care related REIT managed by Griffin Capital
  2. $70K in a moderate investment account managed by Horizon Investments. There is a 1.25% fee for this
  3. $70K in another moderate investment account. Don't recall who manages this but I do remember the name "LG Balanced" if that means anything. There is a 1.25% fee for this that includes a "principal protection" feature to sell off if things go south real fast.
  4. Maintain $20K in a checking account to handle the inflows & outflows of day-to-day living: income, mortgage, bills, etc.

Note: My advisor told me that the $140K in the investment portfolios can be withdrawn without any additional fee within a week.

This is the first time my wife and I have ever invested money in anything other than a savings account and so we are fairly paranoid as this is a lion's share of our savings.

I've done some due diligence to the best of my ability by:

  • Verifying my advisor's CFP & CPA certifications are valid and in good standing with the state of California.
  • He has very good reviews on yelp which is where we found him. There are only 5 but they are all 5 stars.
  • He is with an independent broker/dealer called Gateway Financial Advisors which I understand is a good thing as he is not tied to pushing any particular investment vehicle. According to the advisor, Gateway has won best broker/dealer for the last 8 or so years. I'm not exactly sure where to look to verify this.
  • The two $70K checks I will be issuing will be made out to "National Financial Services" and not to him personally. As far as I can tell, National Financial Services is a subsidiary of Fidelity investments -- a name I recognize.

Now to my questions that I would extremely appreciate any responses to:

  1. To those of you who live and breath finance, does anything I stated above raise any red flags, or do things seem legit?
  2. I've never heard of "Horizon Investments" or "LG Balanced" so that gives me some pause, but then again I'm new to this world. Would I be better served by mandating that my money be invested with a big-name investment bank instead?
  3. Is a REIT a good diversity strategy?

All-in-all I'm just looking for some additional warm fuzzies from an outsiders perspective.

Thank you!

Updates in bold italic

  • 1
    It doesn't sound as a scam or a fraud, but I'm with Joe - passive index ETF's will track the broad index quite well, and the chances that your investment account will outperform over decades so that the additional strain of compounding 1.25% fee will still make it worth the effort look to me pretty slim. – littleadv Jul 3 '13 at 2:06
  • Thank you for your comments, I will certainly bring up this question to the advisor and see what he has to say. One thing that I didn't mention is that $180K we will be investing is enough for him to waive all future fees for semi-annual follow up meetings which I see as essential part of having a financial planner as things don't stay static. That in and of itself may still not make it as attractive as a 5bps fee for investing in an ETF, but I think it makes the effective fee less than 1.25% By the way, where does one go to only be dinged 5bps? – SiegeX Jul 3 '13 at 17:38
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    @Joe is talking about VOO - Vanguard's publicly traded ETF that tracks S&P 500 index. You can buy it through any broker. – littleadv Jul 3 '13 at 17:44
  • @SiegeX Why not open a self-managed brokerage account and save the fees and nervousness? Then you can buy what you want for $5 and sell for $5, unlimited shares. Here is a list of dividend yielding ETFs over 7% finviz.com/… There are some REIT funds in there. Stay away from the 2x, "leveraged", "ultra" funds. Those decay over time. – Randy Jul 5 '13 at 7:28
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    Also, if things go south in a hurry, you want to buy, not sell. If you don't want to buy at a cheaper price, then don't buy at the higher price now. You don't make money buying high and selling low. The market run we've had is getting old. You have to imagine what a 10-20% haircut would feel like and decide if you could stomach that and sleep at night. Just because you pay someone to manage your money will be no consolation if your statement shows a loss for a time. You may be thinking the original .7% was a good deal. Only you know you and nobody can predict the market. – Randy Jul 5 '13 at 7:36
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I'm of the belief that, long term, fees eat away at your performance. If you chose an ETF, say VOO, with its .03% expense, and a short term bond fund or money market fund, you are going be ahead, long term. It's pretty much accepted fact that money managers are not beating the average long term.

For you to simply do as well as I do (S&P less .02%) your guy has to beat the market year in, year out, by 1.2%. Not going to happen. Yes, in hindsight, some funds have done this. Over the decades, losing funds are closed, or merged into performing ones. But, in the end, the average fund lags the average market return quite a bit. To pay someone 25% over two decades isn't what I'd recommend to anyone.

There was recently a PBS Frontline special, The Retirement Gamble, (and this link to my article reviewing the show).

enter image description here

I put up an image which shows the effect of 50 years' impact of expenses. The Vanguard S&P ETF, linked earlier has just a .05% fee. In my chart I show .1%, and then a total 1% or 2% fee. $447K return for .1%, $294K for 1%.

I'm painfully aware that 3/4 of US taxpayers aren't saving at all. For those that are savers, the value in learning about investing is huge. This isn't a onetime $150K saved, but the savings on just that $10K deposit. Meanwhile, before you learn this, a pay-for-his-time fee-only planner is worth it, for a meeting and first year follow up.

  • @JoeTaxpayer so if I'm reading between the lines correctly, you're essentially saying use the financial advisor for planning but leave him out of the management of your money and instead just invest in an ETF yourself? Where do I go to invest in an ETF that only has a 5bps fee? – SiegeX Jul 3 '13 at 17:29
  • A fee-only planner can add value if you really don't know what you are doing. I just added a bit to my answer. – JTP - Apologise to Monica Jul 3 '13 at 18:03
  • @JoeTaxpayer Thank you for all your insight, I became a finance machine over the last two weeks and soaked in as much as I could. I watched the Frontline expose, I read the Vanguard white paper on Active vs Passive fund performance and I posed these questions to my advisor. His answer was basically "if you have the constitution to hold fast when the market does poorly and have the time to rebalance your portfolio then, yes, you can increase your performance by incurring much lower fees, however, many working professions don't have the time nor passion to learn, so that's where I come in." – SiegeX Jul 24 '13 at 17:44
  • @JoeTaxpayer It was a fair enough answer and it made me realize that I do want to learn, I will set aside the time because it will pay off in spades in the long run. So have said that, what would be the easiest way for me to do a "Nifty 50/50"? Can I do it all through Vanguard? Do I need to get a 3rd party involved to set it up. like a fee-only advisor or can I handle it all? Thanks! – SiegeX Jul 24 '13 at 17:47
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You have received much good advice, but based on 53 years investing and the first 25 getting my nose bloodied and breaking even I very strongly offer the following.

Before doing so let me first offer this caveat: I am not questioning your broker or the advice, but it is only valuable to you if history proves correct. No one, not even Bernanke can predict how stock will perform in the future. Maybe if he sees a depression.

My advice to someone new to stock investing is to purchase a index fund from a discount broker, e.g. Fidelity or Vanguard, and then study the market and economics. The Wall Street Journal and the web are my favorites. I started with a hell of a lot less than you have saved, I would not turn $200K over to anyone until you know exactly the risk and cost involved.

Also, I wouldn't depend on one person or firm to advise or manage my money. I like to balance one against the other. I do not recall different firms recommending the same stocks. One must remember everyone in the business of recommending stock or any investment is selling something and must be compensated. That's how they earn a living.

  • I second the WSJ subscription idea. They keep up to date on things related to personal finance, even for people who cant devote too much time to it. Example: There are many article on active/passive investing, and they mention that as index funds become more popular, they will likely lose their edge, if they havent already. Two I recommend are: wsj.com/articles/… wsj.com/articles/the-only-six-stocks-that-matter-1437942926 A person can read these articles and decide for him/herself what is best – von Mises Aug 12 '15 at 21:34
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While you want it to grow faster than inflation, there are things like I-bonds that can carry some inflation protection with them for an idea that may make sense for part of this.

There are now some more details and I'd think this seems alright initially though I would suggest considering having some kind of on-going plan to handle periodically seeing how much more to invest here and what kind of taxes will this generate for you as taxable accounts can carry a mix of dividends, interest and capital gains that you may have to pay even though you didn't see the gain yourself.

Keep in mind that if you do go with a big-name investment bank, this could well add more fees as well as other stuff. Lehman Brothers was a big name investment bank once upon a time and they went broke. While you may want to be hands-off, I'd still suggest having some kind of timeline for how often are your investments to be reviewed and things re-allocated. Each quarter, semi-annually, or annual? There isn't so much a right or wrong answer here as much as I'd point out that one should be aware of the trade-offs in each case. If you take annual and wonder each week how it is doing, then something a bit more frequent may make sense. On the other hand, some people may well "set it and forget it" which can work as long as there is something to know about where to go if something does go broke. As these are managed investments, the SIPC check I'd make may not hold though this would be the equivalent of FDIC for deposits when dealing with securities.

The REIT can be useful for diversification, sure. You do realize that there may be some interesting taxes for you in the next few years given the nature of a REIT investment, right? The "Return of Capital" that a REIT may pass through as a REIT to maintain its tax status must distribute 90% of its net income each year that can be quite a off shoot of funds. Where would those proceeds be invested? This isn't mentioned in your post and thus I'm curious as if the REIT passes out a dividend yield of say 5% then this is $2,000/year that could go somewhere.

  • Thanks so much for your response and additional questions. I tried to answer as much as I could in my original question in bold italics. Two things that I didn't address are the following: 1) It was my impression that the two investments portfolios (Horizon & LG Balanced) are actively managed in a "tactical" manner and won't require much, if any, involvement from me. The dividends of the REIT is something he did discuss and had forgotten about until you mention it. IIRC, his advice was to reinvest it back into the two investment portfolios. – SiegeX Jul 2 '13 at 22:11
  • I completely understand it's hard for somebody to give a 2nd pair of eyes on an investment strategy, especially without the same detailed knowledge of my finances like the advisor has. However, my main concern was to make sure I didn't get any responses like STOP, RED ALERT, SCAM!!!. Making the decision to make my money work for me is the easy part, however, issuing ~$200K in checks is extremely nerve racking. – SiegeX Jul 2 '13 at 22:18
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The diversification offered by the advisor can easily be duplicated at Vanguard with something like the Ivy Portfolio. Simplify it or complicate it to your liking, with Vanguard index REITs, index stock funds, international, bond, etc. Set up automatic contributions and don't watch your money like a hawk. Set it and forget it, or maybe rebalance your holdings once a year.

The main thing advisors are good for (at your level of assets) is persuading investors to stay in the market during a crash. Most investors will sell after a crash, and completely miss out on the rebound. It's human nature to be a terrible market timer. But if you can really promise yourself never to sell in a panic, then you don't need an advisor at your asset level.

Fees like "1.25%" sound like a okay deal but should be viewed in context. With an average annual return of, say, 7%, a 1.25% fee represents nearly 18% of your gain for the year. And 1.25% may be the least of your fees - what about fees when you get out of the funds? (Neat trick, huh, calling a fee "1.25%" instead of "~18%"..).

Is active management worth 18% of your yearly gain? Your advisor's fee and the active funds' fees compound year after year, because they take the fees out of your account every year (or month).

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