Is my financial advisor ripping me off?

[NickleNurser]

Question for the forum--

My financial advisor recently advised me NOT to max out my retirement account through my job and instead invest part of this $$ in "non-qualified" investments. Is this advice in my best interest?

Background--Just recently became eligible to contribute and was ramping up contributions with the goal of maxing out. It's a gov 401k (TSP) so my understanding is that the fees are low.

Said advisor suggested I contribute enough to receive the match, then divert funds to non-qualified accts. He explained that having the funds accessible (rather than locked into 401k) may benefit me because I may have large expenses in the next few years--wedding (not yet engaged), kids (not yet considering), etc. I'm 30. Have about 3k in emergency savings. Very few expenses.

I currently have a Roth through this advisor. He receives biannual fees from my account, which he failed to mention when I initially set up the acct with him. He did let me know that he receives a small percentage of my earnings.

I realize many variables impact the answer to my question, but do folks have advice or opinions on if this guy is looking out for his best interests vs. mine? I'm financially naïve and this feels slimy to me.

Thank you in advance!

[boarder42]

1. Roll your accounts over to vanguard.

2. Max out your 401k - his advise is basically so he can dip his hand into the accounts he set up for you

3. Fire your advisor.

4. Read JLcollins stock series

5. Invest in VTSAX. 

6. be thankful you found this before you let that leach take more of your money

[BarkyardBQ]

As a Mustachian, you will buy low cost index funds to hold forever, and only chip away your yearly expenses during FIRE.

As a Mustachian, weddings, kids and big ticket items will likely be handled frugally and can be paid for with cashflow or by holding back some contributions til it's paid for, but not by selling shares.

Your advisor want's his fees. We want you to keep them.

http://www.madfientist.com/retire-even-earlier/
http://rootofgood.com/make-six-figure-income-pay-no-tax/

[2Birds1Stone]

Run from the advisor ASAP

[neo von retorch]

Your advisor is betting that you're "like everyone else" - that you will spend all this "retirement" money long before retirement, and you won't catch on that you're losing most of your dividends and growth to advisor fees. But you're not - you're here to learn. You want to keep expenses low now and in early retirement so you can maximize your tax savings. He's not advising you based on your best interests. "No one cares more about your money than you do." - J.D. Roth Get Rich Slowly

[RWD]

Yes, you are being ripped off.

4. Read JLcollins stock series

Link: http://jlcollinsnh.com/stock-series/

[NickleNurser]

Amazing. You all are fantastic. Thank you for the supportive advice and information. I am so appreciative. I'm following up on the reading advice

4. Read JLcollins stock series

and will look into the other suggestions of rolling the money over into Vanguard. I was just researching Vanguard last night and rereading MMM's post on Vanguard from long ago.

Thank you.

[I'm a red panda]

I've heard a number of advisers recommend to not max out 401ks.  The "money is locked up" seems to be the most common reason, but there are ways to get at the money in an emergency, so I'm not sure I buy it.

I've also heard a number of advisers say that you are gambling on if the tax rate is lower now or then.

Of course, if your 401k fees are really high, then maxing it may not make sense. Investing on your own in a very low cost index fund could actually work out better.  But not through your adviser.

[Drifterrider]

Background--Just recently became eligible to contribute and was ramping up contributions with the goal of maxing out. It's a gov 401k (TSP) so my understanding is that the fees are low.

Federal TSP have lower fees than any place I've ever seen.  If you can afford to max, MAX.  If you can't afford to max, MAX anyway and cut out something else.

Until you feel confident enough to risk your TSP contributions, I would recommend the G fund.  Usually very slow growth but ZERO risk of loss.

[boarder42]

Background--Just recently became eligible to contribute and was ramping up contributions with the goal of maxing out. It's a gov 401k (TSP) so my understanding is that the fees are low.

Federal TSP have lower fees than any place I've ever seen.  If you can afford to max, MAX.  If you can't afford to max, MAX anyway and cut out something else.

Until you feel confident enough to risk your TSP contributions, I would recommend the G fund.  Usually very slow growth but ZERO risk of loss.

I just dont like using the term "risk"

I would replace it with the term "earn Money" 

risk IMO implies you're taking a risk.  The stock market has proven to be anything but a risk over a long term investment horizon. i would assume this G Fund you speak of being 0 risk of loss is actually losing money to inflation.

[LeRainDrop]

1. Roll your accounts over to vanguard.

2. Max out your 401k - his advise is basically so he can dip his hand into the accounts he set up for you

3. Fire your advisor.

4. Read JLcollins stock series

5. Invest in VTSAX. 

6. be thankful you found this before you let that leach take more of your money

I echo everything that boarder42 just said.

[Drifterrider]

Background--Just recently became eligible to contribute and was ramping up contributions with the goal of maxing out. It's a gov 401k (TSP) so my understanding is that the fees are low.

Federal TSP have lower fees than any place I've ever seen.  If you can afford to max, MAX.  If you can't afford to max, MAX anyway and cut out something else.

Until you feel confident enough to risk your TSP contributions, I would recommend the G fund.  Usually very slow growth but ZERO risk of loss.

I just dont like using the term "risk"

I would replace it with the term "earn Money" 

risk IMO implies you're taking a risk.  The stock market has proven to be anything but a risk over a long term investment horizon. i would assume this G Fund you speak of being 0 risk of loss is actually losing money to inflation.

You don't have to like the term "risk".  If your TSP contributions go in any fund other than the G fund, they are at risk for loss.  If you buy BP stocks, your money is at risk for loss.

If you don't understand what is in the other TSP funds, don't RISK your money until you do know what is in them.

During the melt down in 2008 I didn't lose ANY money in my TSP.  NONE.  \

I believe my G fund kept pace with inflation last year.


YMMV

[robartsd]

If the money being "locked up" argument has any weight with you, then a Roth IRA may be the ticket (but not one under the management of an advisor). All your Roth contributions may be withdrawn at any time without penalty, so they're not "locked up" (but earnings have to wait until "retirement age"). If you plan to retire early, you'll need about 5x annual expenses in Roth contributions and taxable accounts combined to cover the time it takes to set up your Roth conversion pipeline. If you already have 5x annual expenses available in taxable and/or Roth contributions, you have plenty of money that is not "locked up", max the 401k. Either way, move your Roth IRA to Vanguard and save yourself the fees.

[boarder42]

Background--Just recently became eligible to contribute and was ramping up contributions with the goal of maxing out. It's a gov 401k (TSP) so my understanding is that the fees are low.

Federal TSP have lower fees than any place I've ever seen.  If you can afford to max, MAX.  If you can't afford to max, MAX anyway and cut out something else.

Until you feel confident enough to risk your TSP contributions, I would recommend the G fund.  Usually very slow growth but ZERO risk of loss.

I just dont like using the term "risk"

I would replace it with the term "earn Money" 

risk IMO implies you're taking a risk.  The stock market has proven to be anything but a risk over a long term investment horizon. i would assume this G Fund you speak of being 0 risk of loss is actually losing money to inflation.

You don't have to like the term "risk".  If your TSP contributions go in any fund other than the G fund, they are at risk for loss.  If you buy BP stocks, your money is at risk for loss.

If you don't understand what is in the other TSP funds, don't RISK your money until you do know what is in them.

During the melt down in 2008 I didn't lose ANY money in my TSP.  NONE.  \

I believe my G fund kept pace with inflation last year.


YMMV

i dont know how TSP funds work i would assume they are pretty similar to a 401k with offerings.  and keeping pace with inflation is not what the game is about. 

congrats on keeping pace with inflation but i'm sure you did the same in 2013 when we all made 30% so you probably should re-evaluate your stance on risk. and opportunity cost(lost)

[I'm a red panda]

i dont know how TSP funds work i would assume they are pretty similar to a 401k with offerings.  and keeping pace with inflation is not what the game is about. 

congrats on keeping pace with inflation but i'm sure you did the same in 2013 when we all made 30% so you probably should re-evaluate your stance on risk. and opportunity cost(lost)

Guaranteed savings, that keep pace with inflation, can be a very valuable part of a savings strategy. It beats hiding the money under your bed where it will lose value.  Even if you put 100% here, you'd be much better off than someone who did nothing.  I wouldn't recommend 100%, but I'd put some money into this sort of fund.

[boarder42]

i dont know how TSP funds work i would assume they are pretty similar to a 401k with offerings.  and keeping pace with inflation is not what the game is about. 

congrats on keeping pace with inflation but i'm sure you did the same in 2013 when we all made 30% so you probably should re-evaluate your stance on risk. and opportunity cost(lost)

Guaranteed savings, that keep pace with inflation, can be a very valuable part of a savings strategy. It beats hiding the money under your bed where it will lose value.  Even if you put 100% here, you'd be much better off than someone who did nothing.  I wouldn't recommend 100%, but I'd put some money into this sort of fund.

so we're inticing a new guy to investing with "YAY!, my $1.00 from 2015 is worth $1.03 in 2016 but wait it still buys me the same thing so I made no progress"

Fixed income assets play no roll in wealth accumulation.  if you are so risk averse that you'd like some to not ride a roller coaster in retirement go ahead and add some in.  but over time you will end up with less if you're using them on while youre still working.

[mxt0133]

For the record, I myself max out my 401k and tIRA, from there maximize HSA or FSA contribution, then fill up my Roth accounts, and then put the rest in non-qualified accounts or taxable accounts.

I agree that the advisor is benefiting from having you put money into accounts that he manages.  The bigger your accounts get the larger his fees are.  However, that does not mean that what he is saying does not have merit.  Yes you can access your money without penalty from your qualified accounts, (401k, tIRA, and Roth) however the are not as simple as just withdrawing the funds whenever you need them.  For example the Roth ladder takes 5 years for the distributions to avoid the penalty, that is assuming it doesn't bump you up a tax bracket.*  A lot of people assume that they won't have other income you might still have a job.  And in certain scenarios long term capital gains are more tax efficient than income that your conversions will fall under.

The other strategy is a 72(t), which requires you to take equal distribution amounts for a minimum of 5 years or until you are 59 1/2, which ever is longer. ** Again this doesn't allow you take out whatever amount you need at anytime you want.

So what the advisor is saying, based on your goals which we don't know other than you want to FIRE because you are on this site.  If FIRE is your only goal then yes maxing out you qualified accounts is the way to go, but what are your short term goals?  Do you want to buy a house?  Will you need the money for any other expenses in the near future?

If you can give us details on those then we give a better answer to your question.  I don't think that your adivisor is intentionally ripping you off per se, but understand where his incentives are.  Unfortunately they are aligned with having you increase your accounts that he manages to collect higher fees.



*http://retireby40.org/roth-ira-conversion-ladder-minimize-taxes/
**http://www.401khelpcenter.com/401k_education/Early_Dist_Options.html#.Vvrb_eIrLq4

[Jack]

Federal TSP have lower fees than any place I've ever seen.  If you can afford to max, MAX.  If you can't afford to max, MAX anyway and cut out something else.

Quoted for truth!

i dont know how TSP funds work i would assume they are pretty similar to a 401k with offerings.  and keeping pace with inflation is not what the game is about. 

congrats on keeping pace with inflation but i'm sure you did the same in 2013 when we all made 30% so you probably should re-evaluate your stance on risk. and opportunity cost(lost)

Guaranteed savings, that keep pace with inflation, can be a very valuable part of a savings strategy. It beats hiding the money under your bed where it will lose value.  Even if you put 100% here, you'd be much better off than someone who did nothing.  I wouldn't recommend 100%, but I'd put some money into this sort of fund.

Apparently TSP fund choices look like this. I recommend getting comfortable with risk (and learning not to underestimate inflation risk) and then investing in some combination of the C, S, I, and F funds. Something like 40% C, 30%I, 10% S and 20% F would be relatively appropriate. (I'm trying to approximate cap-weighting between C, S, and I, but those percentages are just wild guesses.)

[boarder42]

For the record, I myself max out my 401k and tIRA, from there maximize HSA or FSA contribution, then fill up my Roth accounts, and then put the rest in non-qualified accounts or taxable accounts.

I agree that the advisor is benefiting from having you put money into accounts that he manages.  The bigger your accounts get the larger his fees are.  However, that does not mean that what he is saying does not have merit.  Yes you can access your money without penalty from your qualified accounts, (401k, tIRA, and Roth) however the are not as simple as just withdrawing the funds whenever you need them.  For example the Roth ladder takes 5 years for the distributions to avoid the penalty, that is assuming it doesn't bump you up a tax bracket.*  A lot of people assume that they won't have other income you might still have a job.  And in certain scenarios long term capital gains are more tax efficient than income that your conversions will fall under.

The other strategy is a 72(t), which requires you to take equal distribution amounts for a minimum of 5 years or until you are 59 1/2, which ever is longer. ** Again this doesn't allow you take out whatever amount you need at anytime you want.

So what the advisor is saying, based on your goals which we don't know other than you want to FIRE because you are on this site.  If FIRE is your only goal then yes maxing out you qualified accounts is the way to go, but what are your short term goals?  Do you want to buy a house?  Will you need the money for any other expenses in the near future?

If you can give us details on those then we give a better answer to your question.  I don't think that your adivisor is intentionally ripping you off per se, but understand where his incentives are.  Unfortunately they are aligned with having you increase your accounts that he manages to collect higher fees.



*http://retireby40.org/roth-ira-conversion-ladder-minimize-taxes/
**http://www.401khelpcenter.com/401k_education/Early_Dist_Options.html#.Vvrb_eIrLq4

HSA's should be maxed immediately after you meat company match on 401k's due to the fact that they typically avoid FICA if you have one thru work.  If they dont then its 6 one half dozen the other.  Need to find MDMs order of what to do and why and i'll post it here.

[boarder42]

WHAT
0. Establish an emergency fund to your satisfaction
1. Contribute to 401k up to any company match
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.
3. Max HSA
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level
5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA, swap #4 and #5)
6. Fund mega backdoor Roth if applicable
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.
8. Invest in a taxable account with any extra.

WHY
0. Give yourself at least enough buffer to avoid worries about bouncing checks
1. Company match rates are likely the highest percent return you can get on your money
2. When the guaranteed return is this high, take it.
3. HSA funds are totally tax free when used for medical expenses, making the HSA better than either traditional or Roth IRAs.
4. Rule of thumb: traditional if current marginal rate is 25% or higher; Roth if 10% or lower; flip a coin in between (or see   
   http://forum.mrmoneymustache.com/investor-alley/deciding-between-roth-and-traditional-ira-based-on-marginal-tax-rate/
   if you want even more details on that topic).  See also
   http://forum.mrmoneymustache.com/ask-a-mustachian/case-study-overwhelming-student-loan-debt-how-would-you-get-started/msg868845/#msg868845
   and other posts in that thread about exceptions to the rule.
5. See #4 for choice of traditional or Roth for 401k   
6. Applicability depends on the rules for the specific 401k   
7. Again, take the risk-free return if high enough   
8. Because earnings, even if taxed, are beneficial   

[wenchsenior]

Just adding a comment that TSP is one of the greatest 401K deals on earth...the fees are unbelievably low. MAX IT if you can. There are quite a few investment options in it, but not so many that a newbie is likely to feel overwhelmed.

[Jack]

There are quite a few investment options in it, but not so many that a newbie is likely to feel overwhelmed.

Are there? It looks like it's just the S&P 500 and extended market indices, an international stock index, a bond index, a stable-value fund, and some target-date funds (predefined combinations of the previous funds). That's pretty much the bare minimum that could possibly be offered.

[wenchsenior]

There are quite a few investment options in it, but not so many that a newbie is likely to feel overwhelmed.

Are there? It looks like it's just the S&P 500 and extended market indices, an international stock index, a bond index, a stable-value fund, and some target-date funds (predefined combinations of the previous funds). That's pretty much the bare minimum that could possibly be offered.

Ok, point taken. Plenty for people who aren't trying to get too fancy. So maybe just me then?

[Jack]

There are quite a few investment options in it, but not so many that a newbie is likely to feel overwhelmed.

Are there? It looks like it's just the S&P 500 and extended market indices, an international stock index, a bond index, a stable-value fund, and some target-date funds (predefined combinations of the previous funds). That's pretty much the bare minimum that could possibly be offered.

Ok, point taken. Plenty for people who aren't trying to get too fancy. So maybe just me then?

I wouldn't call it "quite a few," but I would certainly call it "enough." Sector funds, REITs, slice-and-dice international, etc. are all nice to have, but hardly necessary.

[kpd905]

Just curious, what funds did he put you in within your Roth?

[NickleNurser]

Just curious, what funds did he put you in within your Roth?

this fund--

https://www.mfs.com/wps/portal/mfs/us-investor/products/mutual-funds/!ut/p/a1/04_Sj9CPykssy0xPLMnMz0vMAfGjzOL9A40C_c09jAzcjYOdDYxcTPyNTUONDV2cjYEKIlEU-Fg4AhX4u4V5mwUYuFsaEqffAAdwNCCk30s_Kj0nPwns1EjHvCRji3T9qKLUtNSi1CK90iKgcEZJSUGxlaqBqkF5ebleen5-ek6qXnJ-rqoBNi0Z-cUl-hGoKvULckMjqnxSwwFECetL/dl5/d5/L2dBISEvZ0FBIS9nQSEh/?productLineId=97&viewMode=profile&productId=1954

[Another Reader]

Yes, this fund is a rip-off.  He gets an up front commission of up to 5.75 percent of your investment to sell you this fund.  You do not have a financial adviser.  You have a financial product salesman.   In your shoes, I would fire him tomorrow.  You can initiate an account transfer to Fidelity or Vanguard and they will fire him for you.

ETA:  The fund is a fund of funds.  It has a high expense ratio and you are paying that on top of an outrageous commission.  The fund is a 2 to 3 star fund as rated by Morningstar.  Fire this fellow at 8 AM sharp.

[PFHC]

Yes, he's ripping you off. Fucking bastard.

I find this answer proves true for almost 100% of the financial advisers my colleagues have used. Fuck that shit and learn about it yourself. You can always trust you!

[LeRainDrop]

Yes, this fund is a rip-off.  He gets an up front commission of up to 5.75 percent of your investment to sell you this fund.  You do not have a financial adviser.  You have a financial product salesman.   In your shoes, I would fire him tomorrow.  You can initiate an account transfer to Fidelity or Vanguard and they will fire him for you.

ETA:  The fund is a fund of funds.  It has a high expense ratio and you are paying that on top of an outrageous commission.  The fund is a 2 to 3 star fund as rated by Morningstar.  Fire this fellow at 8 AM sharp.

Crap, that sucks, and I agree.  Call Vanguard or Fidelity and have them initiate the account transfer for you.

[Heckler]

Only in 6 of 10 years did the return exceed the up front sales charge.  Yikes. 

Get out.  Im super happy I learned how to control my own future.  Start here:

https://www.bogleheads.org/wiki/Getting_started

[NickleNurser]

GAWD. I'm wincing.

This guy was a friend before he became my advisor. I'm NOT looking forward to the process of firing him. I do plan to keep learning as much as possible before jumping ship. A few days while I get my knowledge feet more firmly planted underneath me will ease the anxiety before I fire him.

Thanks all for the continued info/advice. We live and we learn, I guess!

[ShoulderThingThatGoesUp]

Vanguard, Fidelity, or Schwab will be happy to fire him for you without you having to say anything to him. Just get it done ASAP.

[Zamboni]

^This. Just get the new account set up over the phone with $0 and they will roll the money without you ever having to talk to him about it. All you'll have to do is sign some forms with the new company.

Don't feel too bad about it. At this point it is just one tiny thing. If anything, you should feel great that you educated yourself while still young, because this industry fleeces most people for most of their careers, delaying their retirement for years and years or in the worst case even making it impossible despite their savings rates. That is not going to happen to you. Congratulations.

[boarder42]

Yeah one thing I've never understood is in life is people who are loyal to someone obviously ripping them off. 

This is a perfect example.  Yeah you feel bad telling him you're going to go with someone else.  But how good a friend was he really putting you in a fund like that.  He knew full well what he was doing.

Another example: Real Estate Agents.  I found an agency that charges a flat fee to sell your home none of this 6-7% crap.  You do have to agree to pay the buyers agent fee of 3%, but their listing fee for full service just like you would get thru anyother agency is sub .75%, i've told numerous friends about it who are moving homes, about 10% actually call her, the rest "feel too loyal" to their agent,  yeah lets go ahead and wast 4% of what we could make on the value of our home on loyalty to some shark essentially providing no added value anymore now that the internet exists.

[BlueHouse]

so we're inticing a new guy to investing with "YAY!, my $1.00 from 2015 is worth $1.03 in 2016 but wait it still buys me the same thing so I made no progress"

If the goal is to use the money in 6 months for a house downpayment, then yes, that is a good strategy.

I also want to add:  when the advisor tells you that "you don't want your money locked away where you can't touch it", make sure to ask why not?  That's exactly how I want to save my money. Someplace that I can't access it easily, where advisors can't eat away at it, and where creditors or plaintiffs cannot reach it. Your retirement is for your retirement!  Save your e-fund somewhere else, save your downpayment for a house somewhere else, and save your kids'college funds somewhere else. This is just for taking care of you when you can no longer earn it yourself (including because you've given up working for whatever reason). Don't start thinking of retirement savings as a bank account that you can borrow money from whenever life throws a curve. It should be the very last place you raid for funds.

[CorpRaider]

Yeah, I wouldn't feel too bad about firing him if he put you in that load fund.  Maybe he has to do that at the shop where he works, but he probably has other lower cost options he could have told you about.  Combine that with the self serving advice on the TSP (which maybe is what he was taught in his big two week long training session) and I wouldn't feel bad about canning him at all.  Just tell him your cousin got a gig at Vanguard, if you feel the need for a cover story.

[kpd905]

Sorry to hear about that fund.  I figured it would be bad when he told you he was getting "a small percentage".  As you probably know, 5.75% is not a small percentage, it is enormous.  My mother in law was suckered into a fund like this from an Edward Jones guy that went door to door.  All the while she was proud of herself for starting a Roth IRA.

Just looking at some numbers to see what those fees would do over time:

Crap Fund: 

5.75 up front fee means you are only really investing $5183.75 per year instead of $5500, the rest goes to the adviser
Expense ratio of 1.06% is also very high

So let's say you max out the IRA for 20 years with this fund, and assume market returns of 7%, which means a 5.94% return after your expense ratio is paid.

You will end up with $198,980 after 20 years.

Better fund:

Let's say you just throw everything into VTSAX, the Vanguard Total Stock Market index fund.  There is no up-front fee, and the ongoing expense ratio is only 0.05% instead of 1.06%, or 21 times lower.

Now you get to invest $5500 a year instead of $5183.  So after 20 years, assuming a 6.95% return (7%-your expense ratio), you end up with $238,354. 

A difference of $39,374.

The difference is actually much bigger than that if you assume that you would keep it in that fund for the rest of your life, even if you stopped making contributions in 20 years.

After 40 years (20 years contributions, 20 years just growth), you'd have $956,770 with the Vanguard fund. 
You'd have only $652,664 with the crap fund over the same time period.

So over $300,000 difference over a lifetime.

[rubybeth]

Just for fun, you can also listen to this: http://www.npr.org/sections/money/2016/03/04/469247400/episode-688-brilliant-vs-boring

[robartsd]

I think a lot of financial advisors feel that they are helping people because they are getting them to save, thus justifying their outrageous fees to themselves.

I wish both financial advisors and buyer's real estate agents were "fee for service" providers - no commissions allowed (I'm OK with a seller's real estate agent being commission based because seller and agent's interests are fairly well aligned). Of course, I don't care all that much about how financial advisors are compensated as they don't seem to provide anything of value to me - my basic thought when I saw the thread subject was "Yes, of course."