Wednesday, April 13, 2011

Financial Advisors

To remount a well-ridden horse, a constant reader writes:

I thought I'd send you an email about what ended up happening with the financial advisor a friend recommended. I finally asked that he close my account after a few red flags:

The website for tracking the investments was dated and confusing. They failed to mail me documentation disclosing a 1.3% wrap fee. The funds recommended already had a 1.5% expense ratio which he implied was how he was paid. The website for tracking the investments was dated and confusing.

I'm not eligible for a roth ira anymore because of income limits. He suggested Variable Life Insurance instead.

I've decided to go back to Vanguard and follow the bogleheads forums implementing the coward portfolio you suggested on your blog.

Here's a few dirty little secrets that I've learned the hard way.

Brokers and Financial Advisors are not putting clients into load funds because it's necessarily best for the client. They're doing it because they're in business to make a living.

I'm not saying these folks are evil. They're not. But they have divided interests. If they put people who come through their door into funds without loads (think "commissions") and 12b-1 fees -- which are generally from .25% up -- then there's no cash going into their pockets. (Financial advisors who are strictly fee-based are, of course, different.)

As I wrote back to CR:

My advice: Build an investment account at Vanguard with 40% tax exempt bonds (limited term and intermediate) and 60% stocks (split equally four ways: total stock market, total international stock market, small cap value -- or just small cap -- and international small cap.) Six funds and done. (Vanguard's Tax-managed stuff is okay, but you gotta keep the money in them for several years or you get stung.)

You don't need a Financial Advisor, in my opinion. You need a plan and discipline.

What I've concluded after years of doing it differently: The answers to building wealth are simplicity, diversification, low costs, tax efficiency (index funds that have low turnover) and sticking with it. ...

The above sounds simple, but is difficult to execute. Most people get caught up in the hot investment of the moment, and end up regretting it. Most people freak when things start going south. And start making mistakes. ...

Note: Steve is not a licensed financial anything. Steve is merely a grizzled, scarred veteran of the investing game.

6 comments:

Anonymous said...

Yes, Soon-Retiring-Baby-Boomer, but how do I pay my new gasoline and grocery bills?

Steve Hulett said...

Do what I do. Drive a small, four-cylinder car and shop carefully at CostCo.

Anonymous said...

Steve-
I realize this is a little in the weeds, but...

given that bonds seem to be in a bit of a "bubble," and are at historically high prices, do you think it wise to put 40% of your portfolio in them right now?

Anonymous said...

I drive a two cylinder and eat $1.50 Costco slices, giving me heart disease. Perhaps I should move to China to create jobs and head up a non union animation shop. And yes, El Erian is correct.

Anonymous said...

I drive a two cylinder and eat $1.50 Costco slices, giving me heart disease. Perhaps I should move to China to create jobs and head up a non union animation shop.

Since you've got a bad ticker, you probably won't be heading up the non-union shop very long. ;=)

Steve Hulett said...

given that bonds seem to be in a bit of a "bubble," and are at historically high prices, do you think it wise to put 40% of your portfolio in them right now?

I've got a pretty heavy bond allocation. I'm 55% in VG Short Term Bonds and 45% in VG TIPS. I also have a smaller position in PIMCO Total Return.

I've had a return of about 6% on the TIPS. (This is due to rising value of the holdings, NOT because of the bond yield. The Short Term bonds are paying about 1.15%.)

I'm staying away from longer duration bonds. They'll take a beating when interest rates rise.

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