SELLING BUSINESS, NEED ADVICE

[MOfire]

Background: I am 33 years old and have been involved in a family business for the last decade. We recently made the decision to divest from the business and I will be receiving an extremely nice windfall of ~$7,500,000. I have $822,000 saved in my personal accounts from the period since I started following MMM around the age of 26. My portion of the proceeds will be placed in a trust. The trustee has vehemently insisted that the proceeds be placed under the control of 3 financial advisors (to fulfill his duties as trustee). After meeting with the first firm, they charge anywhere from .65%-.85% AUM + estimate .30% of fees from the funds that they hold. Additionally, the portfolio that they proposed has under-performed the S&P 500 by 3-4% (after fees) over the last decade. I plan to withdraw $150,000-$175,000/yr from the trust for the next few years, with withdrawals likely increasing as I enter my 40s. I am trying to assess whether or not to fight to have the trustee changed to someone that would be at ease with me self-managing "my" money in a simple 3-4 ETF portfolio and need opinions on whether or not I'm being nitpicky. From a principles standpoint, thinking of paying such fees to a FA (+mutual funds in portfolio) makes me sick. I'm a type A/INTJ and worry a lot by nature and also worry about the money running out with such low after fee returns and my time horizon. Is it worth confronting the trustee and grantor about changing the arrangement? I got into an argument with the trustee (who is a long time trusted family friend) after he indicated that this was the plan. I'm just wondering if it's worth pushing the envelope.

[Rdy2Fire]

I'd push the envelope... Ultimately it's your money and if they rules of this family transaction are it needs to be in a trust then fine but I'd want to manage my own piece of it or, if for some reason it CAN NOT be self managed I'd want to be able to choose the manager.

[mozar]

I got into an argument with the trustee

It's not what you say, but how you say it. Look into negotiation books before you try again.

Can the trustee assign financial advisors without you signing off on it? I don't know much about trusts but it seems like all he has to do is put the money in a trust. I don't understand why the trustee can assign financial advisors that you will be stuck with forever.

I would be worried about a conflict of interest if the trustee is insisting on going with a particular firm. Is he getting kickbacks?

[MOfire]

I'd push the envelope... Ultimately it's your money and if they rules of this family transaction are it needs to be in a trust then fine but I'd want to manage my own piece of it or, if for some reason it CAN NOT be self managed I'd want to be able to choose the manager.

The inherent problem with having ANY financial advisor is that it seems that the best fee structure you can find is ~65-85 basis points, all things considered. With the drag that's going to create in addition to their under-performance, it's just highly frustrating when you believe in the investment principles (I assume) that most of us here do, so I'm just not sure how to approach.

[MOfire]

I got into an argument with the trustee

It's not what you say, but how you say it. Look into negotiation books before you try again.

Can the trustee assign financial advisors without you signing off on it? I don't know much about trusts but it seems like all he has to do is put the money in a trust. I don't understand why the trustee can assign financial advisors that you will be stuck with forever.

I would be worried about a conflict of interest if the trustee is insisting on going with a particular firm. Is he getting kickbacks?

I more or less have to sign off on the actions that he takes. At this point I'm somewhat ambivalent to the advisors that he plans on choosing because it seems as if all of them have the same "value proposition" (which in my highly skeptical view is not much) and substantially the same fee structure. We wouldn't be stuck with any of them forever and could change whenever I instructed him to do so, so long as he approved of a new advisor. 
He's not getting any kickbacks, but the first firm that he chose (out of the 3 he plans to divide assets among) is the investment/wealth management arm of his former employer where he was a CPA for 40+ years.

After meeting with the first advisor and challenging their asset allocation/risk profile/returns/fees/etc., the only thing that I feel most financial advisors can say as far as the value that they can provide is either:
 a.) 'We can do a lot in the way of tax planning and increasing your net after-tax returns beyond what you're currently doing with your personal brokerage accounts'; I don't see this offsetting their fees and apparent 3-4% under-performance of the S&P for the last decade
or
b.) 'We're here to make sure you don't make bad decisions during times of volatility, i.e. selling in a downturn, trying to time the market, etc. etc.'; I've been investing my own money since high school and have no problem with volatility or 40%+ downturns as I've weathered two such periods and am completely comfortable.

Is there any scenario in which these CFP/CFA types can provide value beyond simple index fund investing that would justify their fees? I just can't see it and I feel like they just prey upon the inexperienced/uneducated masses or those that simply have no interest in performing the due diligence and investing the necessary time to competently manage their own money. The trustee made the comment that he has numerous high net worth friends and ALL of them use a financial advisor to invest their assets. I feel like this is a mindset that was pervasive in past generations, but the dynamic has changed and I'm not willing to pay millions of dollars to someone who's going to under-perform while sticking my money in a generic ETF/mutual fund portfolio.

[bacchi]

Get your own lawyer. It's very important that the trust documents let you change the trustee.

You should also find a FA/CFP that lets you use index funds. There are some around.

[mozar]

From my understanding of the high net worth "world" 8 million dollars isn't enough money to need fancy financial advisors.
Once you get to the hundreds of millions then you're looking at complicated tax evasion management strategies.

[TomTX]

Get your own lawyer, break the trust if necessary. Don't let these vampires bleed you for the next 70 years.

You will be perfectly fine with any reasonable asset allocation at Vanguard. Or getting Vanguard ETFs via the low-cost broker of your choice.

[Fuzz]

You would qualify for Vanguard Flagship Select--they have advisors and may meet whatever the trustee's requirements are.

Where is the requirement for the trust coming from? Your parents/family biz partners?

[Proud Foot]

Where is the requirement for the trust coming from? Your parents/family biz partners?

I second this. You are not a minor so I don't see a reason why a trust would be needed from what you have said.

 

[socaso]

I don't see why a person in their 30's who has managed to save very nearly $1 million of their own money in about 6 years needs to have a trust? Maybe this is a tax avoidance thing but it still seems to me that you've proven yourself deserving of an active role in managing your own money.

[NextTime]

Where is the requirement for the trust coming from? Your parents/family biz partners?

I second this. You are not a minor so I don't see a reason why a trust would be needed from what you have said.

Thirded. You are 33 years-old for heavens sake.

[trollwithamustache]

For what its worth, the fee structure for high net worth individuals should be ~ 0.5 %, so ask for that with polite confidence.

I suspect OP is stuck with a trust because someone in the family with the controlling interest wants there to be trusts... for the other members of the family not as responsible.  The whole point of a trustee is so that OP can't manage his money and the trustee has to use the advisor or manage it themselves to live up to their duties.

How high can you run your withdrawals? It may be best to suck up to the trustee, not knowing the trust language, there is often fair amount of leeway given to the trustee. At least as the money comes out, you can invest it as you see fit.

[honeybbq]

Please post this on bogleheads. This is realllly up their alley.

[ReadySetMillionaire]

Where is the requirement for the trust coming from? Your parents/family biz partners?

I second this. You are not a minor so I don't see a reason why a trust would be needed from what you have said.

Thirded. You are 33 years-old for heavens sake.

I am an attorney and I fourth this. Obviously I do not know all of the facts, but I have absolutely no earthly idea why your proceeds would need to go into trust other than your family being extremely overbearing and paternalistic.

You are talking $8M here. Hire a lawyer, and a good one. He or she will be far less expensive than the basis points that these financial advisors will charge you.

[TomTX]

@MOfire

*ping*

Coming back to the thread?

[MOfire]

You would qualify for Vanguard Flagship Select--they have advisors and may meet whatever the trustee's requirements are.

Where is the requirement for the trust coming from? Your parents/family biz partners?

The trust "requirement" (as I understand) is coming from my father

[MOfire]

For what its worth, the fee structure for high net worth individuals should be ~ 0.5 %, so ask for that with polite confidence.

I suspect OP is stuck with a trust because someone in the family with the controlling interest wants there to be trusts... for the other members of the family not as responsible.  The whole point of a trustee is so that OP can't manage his money and the trustee has to use the advisor or manage it themselves to live up to their duties.

How high can you run your withdrawals? It may be best to suck up to the trustee, not knowing the trust language, there is often fair amount of leeway given to the trustee. At least as the money comes out, you can invest it as you see fit.

The trust was formed 8-10 years ago when a majority owner (father) transferred 50% of his stake into the entity; I believe for tax avoidance reasons. Why its existence remains necessary, I do not know as I'm ignorant on the topic.
As far as I know, I can run withdrawals as high as the grantor is willing to approve, which I believe he would be agreeable to any number within reason. That's the current trajectory I plan on pursuing to get as much $ as possible out of the hands of financial advisors.

[MOfire]

Where is the requirement for the trust coming from? Your parents/family biz partners?

I second this. You are not a minor so I don't see a reason why a trust would be needed from what you have said.

Thirded. You are 33 years-old for heavens sake.

I am an attorney and I fourth this. Obviously I do not know all of the facts, but I have absolutely no earthly idea why your proceeds would need to go into trust other than your family being extremely overbearing and paternalistic.

You are talking $8M here. Hire a lawyer, and a good one. He or she will be far less expensive than the basis points that these financial advisors will charge you.

I am extremely ignorant when it comes to trusts, so I know nothing as to why it has to continue to exist. My family (father) is not anywhere near overbearing and is amenable to my opinions and suggestions on the matter. Despite founding and growing an extremely successful business, his knowledge as to the actual dynamics of the trust (trusts, in general) is scant and he's probably operating under the advice of his business advisor (who happens to be the trustee). I would understand the necessity of the trust if myself or the other beneficiary had ever exhibited remotely irresponsible financial behavior, but this has never been the case as my frugality seems ridiculous to the rest of my family (I've been saving 50-60% of my pay for several years/refuse to participate in gift giving/etc. etc.).

[mozar]

Have you talked to your father directly?

[trollwithamustache]

Where is the requirement for the trust coming from? Your parents/family biz partners?

I second this. You are not a minor so I don't see a reason why a trust would be needed from what you have said.

Thirded. You are 33 years-old for heavens sake.

You are talking $8M here. Hire a lawyer, and a good one. He or she will be far less expensive than the basis points that these financial advisors will charge you.

 he's probably operating under the advice of his business advisor (who happens to be the trustee). I would understand the necessity of the trust if myself or the other beneficiary had ever exhibited remotely irresponsible financial behavior, but this has never been the case as my frugality seems ridiculous to the rest of my family (I've been saving 50-60% of my pay for several years/refuse to participate in gift giving/etc. etc.).

ooo this is a spicy meatball. how much is the trustee being paid? doe he have any equity in the business or does his gravy train end when the trust ends?

[MOfire]

Have you talked to your father directly?

No- it's one of those things where yes, I did contribute to growing the business for the last 10-12 years (working weekends/60+ hour weeks at times/managing almost every facet of the business), but I hate engaging in this conversation and risking coming off as entitled.

[MOfire]

Where is the requirement for the trust coming from? Your parents/family biz partners?

I second this. You are not a minor so I don't see a reason why a trust would be needed from what you have said.

Thirded. You are 33 years-old for heavens sake.

You are talking $8M here. Hire a lawyer, and a good one. He or she will be far less expensive than the basis points that these financial advisors will charge you.

 he's probably operating under the advice of his business advisor (who happens to be the trustee). I would understand the necessity of the trust if myself or the other beneficiary had ever exhibited remotely irresponsible financial behavior, but this has never been the case as my frugality seems ridiculous to the rest of my family (I've been saving 50-60% of my pay for several years/refuse to participate in gift giving/etc. etc.).

ooo this is a spicy meatball. how much is the trustee being paid? doe he have any equity in the business or does his gravy train end when the trust ends?

The trustee has received nothing in the way of compensation for his duties as trustee over the last 2-3 years...he's a retired partner at a large CPA firm (with, what I assume is a large nest-egg) and maintains that he's "just doing this as a favor to your dad...". He has no equity in the business and just became a trusted family friend after serving as our CPA for 30 years.

[JGS1980]

I'd suck it up for a few years and collect impeccable data on costs and returns. After 3 years of this, I'd compare costs to a good old Vanguard S&P Fund as a benchmark and present this to your father for comparison. He sounds like the one you need to convince. Be very particular about the $$$ paid directly to the financial advisors.

If he balks, you are stuck, as you don't want to rock the boat.

If he sees the data and GETS IT, then he'll make the argument himself for using Vanguard Trust services in the future.

Basically, it's his money, he's being pretty darn generous (ask me how much I'm getting from my dad and his business), and he's the one that needs to see the light.

A lawyer now may make things more than a little awkward, I'm not sure whether trust beneficiaries can be changed...

[yachi]

The trustee has received nothing in the way of compensation for his duties as trustee over the last 2-3 years...he's a retired partner at a large CPA firm (with, what I assume is a large nest-egg) and maintains that he's "just doing this as a favor to your dad...". He has no equity in the business and just became a trusted family friend after serving as our CPA for 30 years.

I don't think that means he's not entitled to compensation: https://www.thetaxadviser.com/issues/2010/aug/clinic-story-04.html  But at the same time, he might be putting a lot of work into this: filling taxes, keeping up on accounting, selecting money managers, liquidating assets.
I think having professional money managers invest the funds, greatly reduces the trustee's liability over the management of the cash assets.

[mozar]

The way I see it you have two choices:

1. Pay advisor fees
2. Have an awkward conversation with your dad

You won't come off as entitled if you frame it as preserving his hard earned money

[JGS1980]

The way I see it you have two choices:

1. Pay advisor fees
2. Have an awkward conversation with your dad

You won't come off as entitled if you frame it as preserving his hard earned money

Mozar, you are not wrong, and neither is the OP. However, does Dad the long term business owner sound like someone who will “get it”?

[TomTX]

I'd suck it up for a few years and collect impeccable data on costs and returns. After 3 years of this, I'd compare costs to a good old Vanguard S&P Fund as a benchmark and present this to your father for comparison. He sounds like the one you need to convince. Be very particular about the $$$ paid directly to the financial advisors.

Why wouldn't you use the last 3/5/10 years of actual returns and have the conversation now?

[JGS1980]

I'd suck it up for a few years and collect impeccable data on costs and returns. After 3 years of this, I'd compare costs to a good old Vanguard S&P Fund as a benchmark and present this to your father for comparison. He sounds like the one you need to convince. Be very particular about the $$$ paid directly to the financial advisors.

Why wouldn't you use the last 3/5/10 years of actual returns and have the conversation now?

Why didn’t the Dad who set up this trust do the same? What the OP suggests is that the Dad just doesn’t know enough about this stuff and doesn’t seem too interested in learning about it. He asked his friend his long term CPA who he trusts to set something up, and that’s what happened. Again, this isn’t a math and equities thing, it’s a “who does Dad trust the most” thing. Hard to overcome. I think it’s inherently hard for parents to listen to their kids advice. Maybe especially successful parents.

[trollwithamustache]

Where is the requirement for the trust coming from? Your parents/family biz partners?

I second this. You are not a minor so I don't see a reason why a trust would be needed from what you have said.

Thirded. You are 33 years-old for heavens sake.

You are talking $8M here. Hire a lawyer, and a good one. He or she will be far less expensive than the basis points that these financial advisors will charge you.

 he's probably operating under the advice of his business advisor (who happens to be the trustee). I would understand the necessity of the trust if myself or the other beneficiary had ever exhibited remotely irresponsible financial behavior, but this has never been the case as my frugality seems ridiculous to the rest of my family (I've been saving 50-60% of my pay for several years/refuse to participate in gift giving/etc. etc.).

ooo this is a spicy meatball. how much is the trustee being paid? doe he have any equity in the business or does his gravy train end when the trust ends?

The trustee has received nothing in the way of compensation for his duties as trustee over the last 2-3 years...he's a retired partner at a large CPA firm (with, what I assume is a large nest-egg) and maintains that he's "just doing this as a favor to your dad...". He has no equity in the business and just became a trusted family friend after serving as our CPA for 30 years.

is the CPA still doing the family taxes? or is the business using his old firm? He may be ethical, but I 100% don't believe he isn't getting paid at all...  Note it may be this guy is being fully ethical, even it if its not what you think is in your best interests.

But yeah, as others have said, you need to have a good long talk with your dad.

I'd take the angle of a talk leading up to a talk with the CPA. ie you need/want to understand the tax implications of why its a good idea its structured this way. things going forward, you looking out for your family/future family. Biden winning, changes the tax landscape,  Trump winning causing tax chaos.  People with money and their advisors ALWAYS want to talk about that stuff, so its totally safe.

But yeah good long chat with Dad for the goals behind the decision, then get into the details.

[MOfire]

I'd suck it up for a few years and collect impeccable data on costs and returns. After 3 years of this, I'd compare costs to a good old Vanguard S&P Fund as a benchmark and present this to your father for comparison. He sounds like the one you need to convince. Be very particular about the $$$ paid directly to the financial advisors.

Why wouldn't you use the last 3/5/10 years of actual returns and have the conversation now?

I approached it from this angle and, despite the glaring under-performance from the first advisor chosen over L10Y VS a simple index fund, he didn’t necessarily care about the figures nor does he fully grasp the magnitude of 3-4% (fees+underperformance) over 5/10/25/50 years. I think I just need to bring it up again and have a solid alternative to propose.

[TomTX]

I'd suck it up for a few years and collect impeccable data on costs and returns. After 3 years of this, I'd compare costs to a good old Vanguard S&P Fund as a benchmark and present this to your father for comparison. He sounds like the one you need to convince. Be very particular about the $$$ paid directly to the financial advisors.

Why wouldn't you use the last 3/5/10 years of actual returns and have the conversation now?

I approached it from this angle and, despite the glaring under-performance from the first advisor chosen over L10Y VS a simple index fund, he didn’t necessarily care about the figures nor does he fully grasp the magnitude of 3-4% (fees+underperformance) over 5/10/25/50 years. I think I just need to bring it up again and have a solid alternative to propose.

Instead of just % per year, how about "If we switch, the trust will be twice as big in 15 years" (or whatever)

Alternately: "Changing to an efficient fund will allow us to draw 50% more while maintaining the same value"

[Proud Foot]

The trust was formed 8-10 years ago when a majority owner (father) transferred 50% of his stake into the entity; I believe for tax avoidance reasons. Why its existence remains necessary, I do not know as I'm ignorant on the topic.
As far as I know, I can run withdrawals as high as the grantor is willing to approve, which I believe he would be agreeable to any number within reason. That's the current trajectory I plan on pursuing to get as much $ as possible out of the hands of financial advisors.

I am extremely ignorant when it comes to trusts, so I know nothing as to why it has to continue to exist. My family (father) is not anywhere near overbearing and is amenable to my opinions and suggestions on the matter. Despite founding and growing an extremely successful business, his knowledge as to the actual dynamics of the trust (trusts, in general) is scant and he's probably operating under the advice of his business advisor (who happens to be the trustee). I would understand the necessity of the trust if myself or the other beneficiary had ever exhibited remotely irresponsible financial behavior, but this has never been the case as my frugality seems ridiculous to the rest of my family (I've been saving 50-60% of my pay for several years/refuse to participate in gift giving/etc. etc.).

Reading back through since my first comment and I think the first thing is to figure out the structure of the trust. Depending on how the trust is set up depends on whether it can be terminated or not before the stated termination event in the trust. Your comments also read as if you are only a beneficiary of the trust.

You need to find a good lawyer to help you interpret and understand the details of the trust and what control you may have as well as helping you understand the fiduciary duties of the trustees. You may have a case to push for removal of the trustee for not acting solely in the interest of the beneficiaries.