Author Topic: Meeting with Brokerage house rep  (Read 4977 times)

Insanity

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Meeting with Brokerage house rep
« on: October 06, 2013, 10:05:45 PM »
Warning: Long.

Recently my wife and I rolled over our 401K accounts into roll over IRAs.  The amount was pretty significant, but no where near what it needs to be.  My wife couldn't go to the meeting last week with the rep to see what we are going to do with it.  The guy we met with was the same one that helped us with the roll over process (we had a couple that were complicated due to types of accounts and how the account was managed).

The meeting started with the rep asking what whether we had done any planning.  Told him the "planning" I had done was more along the lines of those worksheets you get at an employer for 401Ks.   So, he starts off by saying that he thinks at our age, the amount we have in IRAs is very good considering our age.  And he starts talking about three buckets of accounts:

Emergency (cash), Protected (CDs/Bonds), and Growth (stocks).

Their recommendation was 6-12 months in cash for emergency and then based on risk profile split between the others. 

He asked for my thoughts: 
1) Emergency only needs to be 3-6 months, and it doesn't need to be cash.  We have enough credit sources that we can rotate around and play some games to where one of us can find income.  I am losing money having that money sit in cash and am in a hot field where I can find a job quickly if I need it.  Our problem will be medical disability where if the money in that 3-6 month fund is doing well, it won't matter we'll still be covered.

2) Protected is a "nice" thing, but the reality is it is still losing value.  Yes, it is losing slower but it is still losing to inflation.

3) My risk aversion is significantly different than my spouse.  She is much more conservative than I am.

Then we started talking about retirement plan and what my goal is.  I responded with:
I want to be able to have enough accessible so that when both of my kids are in school 5-7 years from now, I only have to work 6-9 months out of the year.   If that means being riskier now to get there, so be it.  If that means working more to get there, so be it.  If that means dropping expenses now, so be it. 

He gave me this look like I was nuts.  Ironically, it is the look my wife gives me as well.

So we started doing the retirement plan and set it up so that I retire at 60 (20 more years of working? no thanks) and my wife at 62.  Then he started pitching the Managed Services the brokerage house has.  Basically, it does all the purchasing for you and collects a nice fee (of course varying based on how much money you have) on top of any fees that any investment item has.   He then proceeds to tell me that he does it that way because when he gets home, the last thing he wants to think about is managing their investments.  He'd rather spend time with this kids and wife.

I find it very hard to say yes to this.  I really do.  I kept pushing that if all I do is buy index funds with the money in there, I feel like I should be pretty safe for the long run.  Not that it won't be up and downs in a given shorter time frame.   

he counters with three words: time, will and skill.  If you have the time and the will and the skill to do it, then it is worth it to do it on your own.  If you don't have the time, will, or skill than you should have someone else do it.  Which is true. 

So now I am left undecided.  I mean, thinking about the amount of money in those accounts and the amount of fees they'll collect is scary.  I almost went in with about 1/3 of the amount to see how it played out, but I haven't committed to that either.  Seems like I'd be pushing my "retirement" off further if I did that.

Argyle

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Re: Meeting with Brokerage house rep
« Reply #1 on: October 06, 2013, 10:58:17 PM »
What would the advantage be over Vanguard index funds?  They don't take any time or will, and the skill is from the people who make the funds correlate to the market.

I think you're entirely right that this guy is trying to extract big bucks in management fees from you.  Of course he's not going to acknowledge that index funds are a good deal.  His salary gets paid by not acknowledging that they're a good deal. 

You say, "I find it very hard to say yes to this."  Why should you say yes to it?  You could probably get ripped off cheaper some other way.  I don't understand why you would be even tempted to swallow this guy's insinuations about how you should buy his expensively managed product.  Plus if the idea is to "set it and forget it," his funds are going to be more stressful and require more attention than index funds, because you're going to have to keep tabs on how they're doing and whether the fees are skyrocketing and whether you're really doing better than index funds.  (And his funds would have to do a lot better than index funds to compensate for the much higher fees.)  Just Say No.

dragoncar

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Re: Meeting with Brokerage house rep
« Reply #2 on: October 06, 2013, 11:06:45 PM »
As you seem to suspect, these "advisors" have one job only: to extract as many fees and commisions from your portfolio as possible. 

People here can probably give you good advice, or roll on over to bogleheads or gyroscopic investing to ask more questions.  Or go elsewhere... just don't ask the people who profit from telling you how to invest.

Why would you keep your emergency fund in an IRA???  And even traditional advice has your emergency fund in a CD ladder.

Insanity

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Re: Meeting with Brokerage house rep
« Reply #3 on: October 06, 2013, 11:21:31 PM »
As you seem to suspect, these "advisors" have one job only: to extract as many fees and commisions from your portfolio as possible. 

People here can probably give you good advice, or roll on over to bogleheads or gyroscopic investing to ask more questions.  Or go elsewhere... just don't ask the people who profit from telling you how to invest.

Why would you keep your emergency fund in an IRA???  And even traditional advice has your emergency fund in a CD ladder.

That emergency fund conversation was separate to the IRA. It was more analyzing all the accounts at the brokerage house.  I have a brokerage account which has roughly 4 months expenses in it (as of now invested in various stocks and mutual funds).  The rep felt this was not a wise choice given what sounds like the brokerage facilities dictated plans -- I guess.

The reason I am tempted is literally - time.  They do have various index funds (large cap, large value, small value, large cap, etc).   He kept trying to change the argument form you can't compare the managed services accts versus the index funds as they are apples to oranges.  In a great year, the index funds will almost always beat the managed funds (they have CDs and Bonds in them), but in a down year the managed funds will most likely beat the index funds (they don't have the CDs to buffer a loss).  Do I just split the money evenly across some combination of the funds offered?  Or do I weight based on risk (i.e.: in my wife's account go for more large cap/large value because there's less volatility there)?

Do I throw some bond funds in there?

I can research the funds available, just not sure how to split it up.  I know Vanguard is a large fee for purchasing since I'm not with Vanguard ;)

dragoncar

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Re: Meeting with Brokerage house rep
« Reply #4 on: October 06, 2013, 11:35:31 PM »
Which brokerage are you with?  They all have low-cost funds or access to ETFS.  A typical boglehead portfolio is something like 50% VTI (total stock market index), 50% BND (total bond market index).  That's like two trades, depending on your current positions, and expense ratios under 0.1%.  Of course the mix is up for debate: 60/40, 70/30, cash portion, etc.  But you don't need to pay ten times the fees to work out that strategy.

The permanent portfolio is similar, but adds a gold portion.  Other approaches add some international funds, although I personally think the total US stock market has sufficient international exposure due to multinational corporations.

superannuationfreak

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Re: Meeting with Brokerage house rep
« Reply #5 on: October 07, 2013, 04:48:13 AM »
The reason I am tempted is literally - time.  They do have various index funds (large cap, large value, small value, large cap, etc).   He kept trying to change the argument form you can't compare the managed services accts versus the index funds as they are apples to oranges.  In a great year, the index funds will almost always beat the managed funds (they have CDs and Bonds in them), but in a down year the managed funds will most likely beat the index funds (they don't have the CDs to buffer a loss).  Do I just split the money evenly across some combination of the funds offered?  Or do I weight based on risk (i.e.: in my wife's account go for more large cap/large value because there's less volatility there)?

Do I throw some bond funds in there?

I can research the funds available, just not sure how to split it up.  I know Vanguard is a large fee for purchasing since I'm not with Vanguard ;)

There's no evidence that actively managed funds beat index funds in down years.  The best collection of information I've found on the evidence is the book 'The Quest for Alpha' by Larry Swedroe but there are plenty of free threads and links at bogleheads.org that you can refer to.  Actively managed funds can't time the market.  And you can get index funds with the same broad asset allocation at lower cost.

If you want lower volatility (particularly if one of you is more conservative) then having some of your IRA in short-term bond funds, CDs, etc. may be wise.  But it's a completely separate decision from active management/paying high fees without any expectation (based on the best evidence available) of better performance.
« Last Edit: October 07, 2013, 05:17:40 AM by superannuationfreak »

iamlindoro

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Re: Meeting with Brokerage house rep
« Reply #6 on: October 07, 2013, 09:13:47 AM »
The reason I am tempted is literally - time.  They do have various index funds (large cap, large value, small value, large cap, etc).   He kept trying to change the argument form you can't compare the managed services accts versus the index funds as they are apples to oranges.  In a great year, the index funds will almost always beat the managed funds (they have CDs and Bonds in them), but in a down year the managed funds will most likely beat the index funds (they don't have the CDs to buffer a loss).  Do I just split the money evenly across some combination of the funds offered?  Or do I weight based on risk (i.e.: in my wife's account go for more large cap/large value because there's less volatility there)?

Do I throw some bond funds in there?

I can research the funds available, just not sure how to split it up.  I know Vanguard is a large fee for purchasing since I'm not with Vanguard ;)

I guess it depends in what respect you mean "time." 

If you mean "I don't want to be managing my investments daily, sheesh!" then we agree with you.  You shouldn't be.  You should be making your scheduled investments and then ignoring them other than to rebalance your investments according to your plan annually (or semi-annually, or however you prefer to do it, but no more often than quarterly or so). 

If you mean "time" in terms of "Oh crap, time is running short!" and hope to squeeze some extra gains out of an actively managed portfolio, then you're falling into just the trap they want you to fall into and I suggest reading:

http://www.bogleheads.org/wiki/Three-fund_portfolio

And allocating according to your level of risk tolerance.  Bogleheads is also good at helping pick alternate funds to Vanguard that might be cheaper to invest in at a given company.  I am a little younger than you, but also tend towards a more aggressive portfolio, using the above investment style, and have been quite happy with the returns and am on track to retire after about 8-10 years of total mustachianism.  It took me about a year to stop tracking the markets all day every day and just let it alone.  I do still check once a week but never pull my money out no matter what.

Insanity

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Re: Meeting with Brokerage house rep
« Reply #7 on: October 07, 2013, 09:19:43 AM »
The reason I am tempted is literally - time.  They do have various index funds (large cap, large value, small value, large cap, etc).   He kept trying to change the argument form you can't compare the managed services accts versus the index funds as they are apples to oranges.  In a great year, the index funds will almost always beat the managed funds (they have CDs and Bonds in them), but in a down year the managed funds will most likely beat the index funds (they don't have the CDs to buffer a loss).  Do I just split the money evenly across some combination of the funds offered?  Or do I weight based on risk (i.e.: in my wife's account go for more large cap/large value because there's less volatility there)?

Do I throw some bond funds in there?

I can research the funds available, just not sure how to split it up.  I know Vanguard is a large fee for purchasing since I'm not with Vanguard ;)

I guess it depends in what respect you mean "time." 

If you mean "I don't want to be managing my investments daily, sheesh!" then we agree with you.  You shouldn't be.  You should be making your scheduled investments and then ignoring them other than to rebalance your investments according to your plan annually (or semi-annually, or however you prefer to do it, but no more often than quarterly or so). 

If you mean "time" in terms of "Oh crap, time is running short!" and hope to squeeze some extra gains out of an actively managed portfolio, then you're falling into just the trap they want you to fall into and I suggest reading:

http://www.bogleheads.org/wiki/Three-fund_portfolio

And allocating according to your level of risk tolerance.  Bogleheads is also good at helping pick alternate funds to Vanguard that might be cheaper to invest in at a given company.  I am a little younger than you, but also tend towards a more aggressive portfolio, using the above investment style, and have been quite happy with the returns and am on track to retire after about 8-10 years of total mustachianism.  It took me about a year to stop tracking the markets all day every day and just let it alone.  I do still check once a week but never pull my money out no matter what.

Thanks for that link! 

Another question to follow up - when people do roll overs, do people generally invest all that in one shot or still do a certain amount over time for cost averaging?

iamlindoro

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Re: Meeting with Brokerage house rep
« Reply #8 on: October 07, 2013, 09:26:12 AM »
Another question to follow up - when people do roll overs, do people generally invest all that in one shot or still do a certain amount over time for cost averaging?

I think it's mostly a matter of personal preference.  The advice I've seen here and elsewhere is basically "whichever you do, do it consistently."

Frankies Girl

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Re: Meeting with Brokerage house rep
« Reply #9 on: October 07, 2013, 10:02:12 AM »
I just finished setting up my portfolio, and I had one (inherited) account in professional management set up by my father (he was pretty sick the last few years, so that explains why he just let them deal with it).

I basically left everything alone until I got all the basics figured out - asset allocations, the basics on how stocks and the stock market and index funds work, advice on early retirement from all of the awesome posters on here, and what exactly were my goals.... MMM's blog helped, but the stock series over on jlcollins' site is awesome and I of course asked quite a few questions right here, which was REALLY helpful.
http://www.mrmoneymustache.com/2011/05/18/how-to-make-money-in-the-stock-market/
http://jlcollinsnh.com/stock-series/
http://jlcollinsnh.com/2011/06/14/what-we-own-and-why-we-own-it/

So I got my other accounts set up to echo the AA I had decided on, and then rolled the professionally managed account to self-managed. My adviser looked at what I'd selected (and it's the Fid equivalents of the AA that jlcollins uses) and said that I seemed to have got a good plan in place and that he would absolutely be there if I had any questions but agreed that moving the professional managed account into my control made sense for what my AA and goals were. No trying to talk me out of it and he was very encouraging, as he could clearly see I did my homework. So I've had a good experience with my adviser, and I'm quite happy to leave the money invested there; but if they'd have been pushy or otherwise tried scare tactics, I'd have been out of there so fast...

Your adviser is playing off the idea that professionals are PAID to do what you'd be doing in your precious spare time. That's true. But you need to examine just how much time you'd actually be devoting to managing your accounts. If you are day trading or trying to hit super big returns, then that would take up a huge chunk of your time... but index funds are "lazy" funds.

I honestly think that if you are going into index funds, you don't need to hedge your bets with a little in that fund or this fund that is professionally managed. Just set it and forget it for the most part. If you want less volatility because you're planning on retiring soon, then put in an AA that is weighted more towards the bond index (again, see jlcollins' site for what he has as a good mix), but there's not reason to over complicate things with adviser management funds.




Insanity

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Re: Meeting with Brokerage house rep
« Reply #10 on: October 07, 2013, 10:39:07 AM »
Thanks for the pointers.

I have gone with the fully self-directed approach using the recommendations from the bogleheads on the three funds for my service, plus a couple others that I have had from before.  I also put all the money in the funds now.  Left a little bit in cash.



pom

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Re: Meeting with Brokerage house rep
« Reply #11 on: October 10, 2013, 04:40:58 AM »
Fantastic,

The point that I wanted to make it that by doing it yourself you get to learn some about finance and it will empower you immensely.




Insanity

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Re: Meeting with Brokerage house rep
« Reply #12 on: October 10, 2013, 10:59:19 AM »
Fantastic,

The point that I wanted to make it that by doing it yourself you get to learn some about finance and it will empower you immensely.

That is definitely true.  It is just there is a lot of information out there and without having the background it seems kind of overwhelming and shot in the dark. Getting the tips on the specific funds from bogglehead really did help.


Le Dérisoire

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Re: Meeting with Brokerage house rep
« Reply #13 on: October 10, 2013, 11:31:08 AM »
TIME: 30 minutes every months, that's what you need. If you don't have 30 minutes of free time every months, you're a robot.

WILL: Let's say you have 300K$ to invest. I'm not sure I understand how your brokerage house collects the fees, but let's say they charge 2% every year. That means you will have to pay 6000$ in fees every year (that's what most people do). Now, if you do it yourself and invest in index funds, you'll pay something like 600$ in fees every year (0,2%). Do you have the will to work at your job to earn 5400$ more every year in order to have 30 minutes of free time per month? Do you earn 900$/hour at your current job? I don't. The easy way is to do it yourself.

SKILL: You can use the internet, read english and do basic maths. You have the skills.

WageSlave

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Re: Meeting with Brokerage house rep
« Reply #14 on: October 10, 2013, 03:11:51 PM »
I would also suggest reading William Bernstein's The Four Pillars of Investing.  Most of the content is indirectly available on the bogleheads.org site, either on the Wiki or buried in the forum threads.  The book has the advantage of laying it all out in a logical manner.  (I personally like Bernstein's prose, as I find it conversational yet informative.)

In particular, he has all kinds of information and stats on active management, and chances are you're more likely to do better with passive index investing.

I have gone with the fully self-directed approach using the recommendations from the bogleheads on the three funds for my service, plus a couple others that I have had from before.  I also put all the money in the funds now.  Left a little bit in cash.

Sounds like you're doing the right thing.  Once you learn more, you might find you want to "slice and dice" or tweak your asset allocation one way or the other.  But even if you never have such an inclination, I think you're all but guaranteed to do better than with whatever active management your brokerage house was trying to sell you.

It seems to me you could end this conversation quickly if you define a super-simple benchmark allocation: say 65% S&P500 index and 35% total bond market.  There's enough data out there that you could easily compute the returns for such a portfolio for the last 20 years.  Take that to the potential active manager and say, "Show me how you've achieved superior results over the last 20 years, or the same results with lower volatility, net of fees.  Also, show me your last five years' tax returns so I can confirm you use your own investment management scheme."

No one's going to agree to that, of course.  But I'm sure they'll have a 100 excuses to get around your questions.

Based on everything I've read, I think self-directed investing could be as simple as buying a Vangard target retirement fund, and auto-depositing into it as much as you can every month.  Takes effectively no time or skill, and if you mostly forget about it, takes no will either.  (Heavily equity-weighted portfolios will go down, quite possibly by great amounts, over time.  You arguably need willpower to stomach that.)  Certainly you can do a little better with some time and effort, but you can also do a lot worse with active management.