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My wife and I are looking for a financial advisor. I am 52 and she is 48. We have a million plus in assets, with most of that in 401k... about 500,000 in a brokerage account.

We have found a company/person we like. Our choices seem to be financial advice (goal setting/asset allocation...etc.) for a monthly fee, or asset management for 1% of our portfolio (this would also include the financial advice).

My research makes it appear that all of this is standard so far. My wife feels we should turn everything over to the asset management service. I am not so sure, because they would only actively manage our brokerage account... where we would be paying a 1% fee on all of our assets. Their pitch is that their investment philosophy would likely help us do 1% better on our investments.

The ultimate question is whether or not asset management would be money well-spent. What am I missing?

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    You only need to consider one factor in making your decision: the objective of any financial advisor is to maximize his or her income. Maximizing your portfolio value is a secondary consideration. – alephzero Aug 29 '18 at 16:45
  • @moscafj, How did you respond to the 2008 crash? Did you sell, buy more, or stay the course? – stannius Aug 29 '18 at 18:59
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    If their claim is that their stock picks will get 1% better performance than your picks, but this comes at a cost of 1%, then there is zero incentive to take them up on the offer. It's only a good deal if their selections outperform by more than their costs. Not a great pitch IMO. – CactusCake Aug 29 '18 at 19:01
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    @alephzero I think that's an overly broad, cynical characterization. Advisors must put out a good product (their advice) or they won't survive the market. – D Stanley Aug 29 '18 at 21:11
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    @moscafj fair enough, same here. Reason I ask is as some other answers have alluded, about the only reason to hand over portfolio control is if you can't be trusted with it. That is, if you would panic and sell in a downturn, or get greedy and take too much risk in an upturn. Even if that is true, you might be able to find such a service for less than 1%, especially since it should be invested in index funds if the advisor is ethical, and managing an index fund portfolio does not take much of an advisor's time every year. – stannius Aug 30 '18 at 16:13
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If you have $1 million, it makes no sense to pay a 1% of the $1 million annually for asset management on only $500k (the brokerage account). That is basically paying 2%. I agree with the other answers here, but they seem to assume a 1% fee based on the assets under management, which is not the situation you describe. I would refuse the asset management.

What am I missing?

In the US, there is a concept of a fiduciary. A fiduciary financial planner is legally obligated to look out for your best interests. It is personally appalling to me that non-fiduciary financial planners are allowed; I would only hire a financial planner who was a fiduciary.

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    +1 for being the first answer to mention the magic word, "fiduciary". – ChrisInEdmonton Aug 29 '18 at 23:28
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After doing it myself for 35+ years, I considered turning it all over to an asset management company last year. After meeting with a number of them, I found a knowledgeable financial adviser that I really liked and came close to doing it. The 1.00 to 1.25 pct annual fee troubled me because in this era of deep discount commissions, that's a nice chunk of change that would come out of my pocket. What has always bothered me the most was your line:

"Their pitch is that their investment philosophy would likely help us do 1% better on our investments."

Likely?? They all make that claim but the proof in the pudding for me was examining what their draw downs were in down markets, particularly in 2008 (and in 2000 if their audited numbers went back that far). None of the results impressed me and given that I avoided most the damage during those bear markets, I decided not to hand over the keys to the kingdom.

The short answer is that I would want to see an audited track record from them across several market cycles that demonstrates that they outperformed the market by more than 1%. 1% a year on $500k for another 15-20 years is a lot of bleed. Even more if your assets appreciate.

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    If the managed money does outperform by more than 1%, one way to avoid the performance drag of the fee might be to open the smallest possible managed account possible ($25k ?) and duplicate the managed money trades in your own account. – Bob Baerker Aug 29 '18 at 23:57
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    "duplicate the managed money trades in your own account" might not be possible, depending on how the managing works. There are economies of scale and hedging possibilities that only apply to certain amounts of money, so they way they handle a 25k account might be different to 250k that's different to 2.5m... etc. – Benubird Aug 30 '18 at 15:05
  • I seriously doubt any fee-only AUM advisor would accept managing a $25k portfolio, earning $250 per year for their services. Especially if they know their client has $1 million net worth. – stannius Aug 30 '18 at 16:19
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    Why not change the pay to 10% (or something else) of the annual increase? That should be on average 1% of the portfolio. Then add additional clauses that if they lose money, then you depreciate that loss over some time scale as a deduction from their pay. – aidan.plenert.macdonald Aug 30 '18 at 18:48
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    Perhaps something like that might fly with a hedge fund but traditional brokers are not going to bite on that idea. – Bob Baerker Aug 30 '18 at 19:02
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This is a very opinion based question, but it has a lot of merit. IMHO, you do not need a FA. You guys have done really well up until this point and you are probably astute at picking mutual funds and riding out the inevitable lows.

The thing you have to be careful with FAs is that the fees do not stop at 1%. Lets say your FA recommends MDLHX, which has a front end load of up to 5.25% and an expense ratio of 1.13%. However, if you were doing this on your own, you would have picked FOCPX which has no load and an expense ratio of .81%. The kicker is the latter outperformed the former over the past three years. In this case, you would have lost out on the 1% management fee year after year, the 5.25% front end load fee, and an additional .32% of expenses. That is a lot!

The cases where these differences are very dramatic are in index funds. They tend to perform the same as they are not actively managed, but fees can vary drastically between companies. FAs will steer you toward index funds with loads, as it makes them more money, but these same funds are almost free from companies like Fidelity, Vanguard, and Schwab. No loads and fees less than .2%.

To further exacerbate this for you, the three brokerages mentioned above give discounts for "large" balances, typically above 25k. You would certainly qualify.

If I were you, I would study asset allocation and do it yourself. One resource to look at is bogleheads.org.

Financial Advisers have a lot of merit for certain people. Those that need encouragement to take more risk, those that are spooked by every whim of the market, those that need coaching on how and when to save. Judging by your nest egg alone, I feel that you do not fit into this demographic.

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    The 2nd and 3rd paragraphs are my primary grievance with most FA's I've encountered/heard of. I'd be much more tempted if they took a percentage of gains rather than percentage of portfolio, but as is I'd rather pay for advice once in a while at a set fee than fork over percentages in perpetuity. I recommend a financial planner. – Hart CO Aug 29 '18 at 15:39
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    It's essential to choose an advisor who is a fiduciary, which will mean they are also compensated fee only. (I don't think it's even possible to have a commission-based or so-called "fee-based" advisor who is a fiduciary, because the commissions create a fundamental conflict of interest). That at least gives you a chance of avoiding biased advice and/or double-dipped fees. – stannius Aug 29 '18 at 19:07
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    Yeah, unless an FA is a fiduciary, an FA is just a broker. They have been shying away from that term because everyone knows brokers are out there to collect commissions. I cannot imagine a broker sitting on a nonprofit board and recommending the endowment's capital into funds he gets a commission on, or even his firm's own funds. That'd be, like, jail. Likewise a 401k, which is an endowment-like trust fund! that's what makes it protected from lawsuits and why there's an excise tax for early withdrawal. – Harper - Reinstate Monica Aug 29 '18 at 22:47
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    One final category for your last paragraph - those who would just rather pay someone else to do it than spend even a day looking into fund portfolios and other finance paraphenalia. – Dragonel Aug 30 '18 at 19:30
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Beware: two-handed financial advisor

Nobody seems to have picked up on this. But the "financial advice fee-based advisor and the "asset management" commission-based advisor are the same guy.

This doesn't work. Believe me, I've tried. The interaction went like "I'm looking for a fee-based advisor". "Okay, give me $2000.”

Heh, literally.

Over the next several sessions, he gave me exactly the same advice he'd have given me for commission, recommended exactly the same house-brand financial products, just B-class shares instead of A-class shares. On a variable annuity I was to receive the commission back.

This is the difference between a fee-based advisor (defined by taking fees to serve you) and a fee-only advisor (defined by taking fees to serve all her clients). The two types are trained very differently, and have different ways of thinking.

The broker with one hand in the "commission" jar and one hand in the "fee" jar simply can't give you good advice. That is especially true if he is an employee of a firm where he must justify to his bosses why he put you into VOO with 0.1% expense ratio instead of their house-brand GYPUU index fund with ”saver" 0.9% ratio. He simply won‘t put you into VOO, he literally does not know the product, and ther'd be no earthly reason for him to know the product.

What he does know is a great many very inefficient products which are designed to putatively do one thing, but actually to snow-job and confuse the living daylights out of anyone who isn't an investment banker. The inefficiency/complexity (usually one runs with the other) is added to make consumers throw up their hands and say "I give up!", and relent financial control over to "people who can understand this stuff". Now, you know who doesn't buy any of that junk? University endowments.

I finally met a real fee-only advisor. She had a lovely office with a coffee bar with real baristas who could make anything, pastries, breads, soup, salads, sandwiches, (all "fee" but reasonable especially with their "you pick two" option), soft jazz playing, open WiFi and cute little tables for people to sit and talk.

University endowments

I have the usual 401K, and I was annoyed at the, like, 8 financial products I get to choose from. Later, I joined the board of a nonprofit. This nonprofit had a $10 million endowment. This is a bloc of funds from which 4-7% a year is drawn to support operations perpetually. The endowment capital (whoops, almost said corpus) must be managed for maximum long term growth (damn the short-term volatility). There are legal consequences for board members who fail to manage this fund competently.

How can there be consequences for bad decisions if all investment is gambling? Turns out, it's not. There's a gold standard for how to invest an endowment. Just as an example of one that meets gold standard: 10% cash 10% muni bonds 10% REITs 15% international index funds and 55% domestic index funds. Yeah, super boring, and doesn't really surprise anyone who knows a bit about investing.

In fact it sounds a lot like the advice Suze Orman gives a 25-year-old on investing their IRA. Because the investment goals are the same.

Back to you

Suffice it to say, I now understand the limited choices in my 401K account. It had all the choices I needed to invest the endowment well, so why did my 401K need more? It doesn't.

Now, things get a little more complicated when retirement is within 20 years, because you need to start reducing your exposure to big market crashes. But still, you don't need magic hokum products only pro financial "advisers" (brokers) can recommend.

Containing costs is the surest financial investment. I'll recommend John Bogle's book "Common Sense on Mutual Funds" for more on that. Aside from that endowment, I have my own Donor Advised Fund. Despite a 0.6% per year custodial fee, my DAF outperforms the endowment, because I pick lower fee funds and am not paying for professional asset management.

Find that fee-only advisor and have a meeting with them. I recommend the Frontega chicken and tomato soup in a bread bowl.

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Decades ago I read a brochure put out by Vanguard titled "The Triumph of Indexing". It focused on the returns of managed funds vs a low cost S&P index.

The concept to grasp is that if the index return is 10% (for example), and fees are 1%, the average return to investors is 9%. 1% to the 'house'.

I took that to heart and stuck with the index. VIIIX is an institutional flavor S&P fund that sports a .02% annual fee. Between now and the day I meet my maker (I am 55) I won't have a cumulative cost of even 1%. There's that.

Perhaps more important, I retired at 50, and stuck to the 4% rule, more or less. It occurs to me that if your advisor had 4 retired clients, he'd be living on the equivalent of 4% of the average retiree's retirement account. Which begs the question - Can his long term returns possibly be 1% better than my lazy mix of index and cash? And if it's exactly 1% better than mine, he's gaining 0 for you, but 1% for himself.

Last - you are considering paying $15K/year for advice. I'd invest 1000 hours over the next 2 years reading, learning, and asking questions, instead. That's what I did, in my late 20's.

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    Note that Vanguard will now manage your investments for you (their Vanguard Personal Advisor program) at a fee of 0.3% of assets under management. – Jon Custer Aug 29 '18 at 22:01
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You may not be missing anything, but here are the questions I'd be asking -

  • Do they have results that show that they have received greater then 1% higher return than your current allocation (with equivalent risk) in the past?

  • Do they have a specific strategy that performs better? Why? What are the specifics of their strategy?

  • Do they explain things to you so that you understand them or are just "selling" you their service?

If you're not satisfied with the answers, then you are right to be cautious. Can they do a split (say 80% advice, 20% management) until you are satisfied that their strategy is worth the extra 1%?

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For me, of the 2 options: Monthly fee; Percentage of assets - I don't like either one. I make all the trades myself on my accounts, and I have used financial advisors a couple of times.

I simply paid for an hour or two of their time - one I recall was $250 US/hour. They recommended asset allocation, recommended sets of mutual funds or ETFs to consider, would have given insurance advice etc. if I wanted.

If you have time and inclination to figure out your present asset allocation on a regular basis, and are comfortable directing your own stock/ETF/bond/mutual-fund trades, perhaps you don't need either the monthly fee or percentage of assets person. However if you want to pay an advisor do decide on trades and then direct those trades, not sure I can advise how best to approach that.

I would also wonder about a financial advisor in the USA who calls themselves "either fee-only OR percentage of assets under management". Seems to me fee-only is just that, that is the type of advisor we used.

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Between the two? I suggest an advisor with a binding fiduciary duty to you. Ask him/her how they uphold their fiduciary duty during trying times or when conflicts arise.

Answers will vary since it's based on circumstances, personal skill/time and involvement bu I suggest engaging them for a month/year and then taking a 5 year break since most of the work in getting things into order happens upfront. I know this isn't one of two choices you asked but ...

I suggest copycat portfolios to skip fees

Copycat portfolios simplify self-management. In today's market, the math converges where most retirement portfolios are actually very similar structurally and are constructed with similar basic building blocks. Fees do differ though. For a simple copycat strategy:

  1. Get Asset Allocation template: Look at a robo advisor (e.g. Fidelity's Intelligent portfolios) or use something like Vanguard Target Retirement 2045 fund and see their holdings to get a template portfolio. You should find between 4-12 asset classes with asset allocation listed like large cap domestic: 11% etc, high yield bonds: 4% etc. Note: You could just invest directly into Vanguard's Retirement 2045 (0.14%) and be done!
  2. Find ETFs to embody asset allocation: Using this copycat template, reallocate your own IRA and brokerage holdings into copycat ETFs. For example if Fidelity's Intelligent portfolios template suggests 11% in SCHX but have VV then use that as a good substitute. Or if you already have IVV, stay there because selling IVV (and triggering possible capital gains tax) to buy SCHX isn't worth it (very similar). xtf.com is great for finding substitutes. For cash components of a portfolio, I prefer leaving that in my savings account instead of a cash-equivalent in my brokerage account.
  3. Optimize other retirements: If you have multiple 401K (prev employers), switch to an IRA. You have a MUCH better selection of ETFs in IRAs compared to most 401k, so your copycat portfolio can be better reproduced more faithfully.

This should take care of most of your non-real-estate investment assets. For remaining items like estate planning or creating a trust, you can approach specialists who can set it up for you for one time charges (e.g. attorney can setup a trust for $500 in CA).

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