Author Topic: Help me save my parents 30K$ / year in MER's?  (Read 821 times)

max9505672

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Help me save my parents 30K$ / year in MER's?
« on: September 11, 2017, 07:38:55 PM »
Hi!

I'd need some support from the community to help my parents save on crazy MER's they pay. They are both approaching their 60's and have been pretty frugal their whole life. My mom, especially, had a high income and saved a lot. My father has never been a big spender either despite a lower income.

My father is retiring in a year and plans to run a small local fitness business that he's slowly starting (no income yet and not a clue how much he could make). My mom is a self-employed profesionnal working part time (2-3 days a week) still making good money and plans to continue for a few years. I know, they could have retired waaaay before if they'd known, but they are still in a good position.

In short, I know they currently have around 2M$ in investments with Fidelity  (+ fully paid house + paid cars + other smaller possessions). The average MER they pay would be around 2% (I could confirm the exact fees) for a total of 40K$/year, which is absolutely incredible (probably their biggest ''expense'' all around). I figured if I could help them find a way to lower their MER's to a realistical 0.5% (or less) without adding much risk to their investments, that could save them around 30K$/year.

I know they don't have the interest and guts to manage their investments by themselves. I also don't feel comfortable enough to offer them to do it by myself since being a lot younger, my close to 100% stocks strategy is very different and not viable for them.

So my questions are :

- I know Vanguard offers Target Retirement Funds (with low MER's) composed of a balance of stocks and bonds depending on your age and retirement age. Being pretty close to retirement, is it too late for them? Is this a good option?

- Both being active and in good health, it's not irrealistical to believe that they will live another 20-25 years, if not more. So that's still a pretty ''long'' term. Being already financially independant and anticipating that their expenses will decrease in the next few years (I still have a brother and a sister living with them after what they'll probably sell the house and downsize), maybe a simple 3 ETF's strategy with more bonds for stability could be the answer?

- Or just look at their portfolio and replicate the same with low MER's ETF's?

I'm just starting to gather information for them. I'd like to have a solid plan before I officially introduce them to the idea.

Thanks!

sokoloff

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Re: Help me save my parents 30K$ / year in MER's?
« Reply #1 on: September 11, 2017, 08:01:52 PM »
If they can live on $50K or less from their $2MM portfolio, and intend to pass along the remainder to their kids, I don't see any reason not to have it substantially all in VTSAX (or similar broad-based equity market fund). You say that the $40K is one of their largest expenses, their house is paid off, and they're generally frugal.

If that's all the case, that money is being invested based on your lifetime, not theirs, IMO. (As they are spectacularly unlikely to outlive it.) If OTOH, their expenses are $100K+ and they need to draw 5% or more from the portfolio, it's a totally different story.

Another thing to consider in their position is stepping up their spending. They're likely to have a surplus at the end that does you good but does them no good. If they've always wanted to travel, but have put it off, there is no better time than now to do that (or whatever else will bring them joy and fulfillment).

MDM

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Re: Help me save my parents 30K$ / year in MER's?
« Reply #2 on: September 12, 2017, 12:51:10 AM »
In short, I know they currently have around 2M$ in investments with Fidelity.... The average MER they pay would be around 2%....
Even for Fidelity that seems high.

See Three-fund portfolio - Bogleheads and Fidelity - Bogleheads for some thoughts if they want to stay at Fidelity.

max9505672

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Re: Help me save my parents 30K$ / year in MER's?
« Reply #3 on: September 12, 2017, 06:09:48 AM »
If they can live on $50K or less from their $2MM portfolio, and intend to pass along the remainder to their kids, I don't see any reason not to have it substantially all in VTSAX (or similar broad-based equity market fund). You say that the $40K is one of their largest expenses, their house is paid off, and they're generally frugal.

If that's all the case, that money is being invested based on your lifetime, not theirs, IMO. (As they are spectacularly unlikely to outlive it.) If OTOH, their expenses are $100K+ and they need to draw 5% or more from the portfolio, it's a totally different story.

Another thing to consider in their position is stepping up their spending. They're likely to have a surplus at the end that does you good but does them no good. If they've always wanted to travel, but have put it off, there is no better time than now to do that (or whatever else will bring them joy and fulfillment).
I'd have to validate their yearly expenses, but I'm pretty sure it's closer to 50K$ than 100K$, but it's pretty hard to say TBH. Apart for a couple trips a year, fixed expenses on the house, they don't consume much. I'll try to approach them to know the ration between their expenses and investments, without net numbers.

I like what you about stepping up their expenses. I feel like they are very cautious and worried about running out of money, a lot of it probably has to do with the traditional financial advices they got over the years, but they clearly have more than enough to retire and keep the same lifestyle. I'll ask if they have planned to step their expenses up or not.

max9505672

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Re: Help me save my parents 30K$ / year in MER's?
« Reply #4 on: September 12, 2017, 06:12:13 AM »
In short, I know they currently have around 2M$ in investments with Fidelity.... The average MER they pay would be around 2%....
Even for Fidelity that seems high.

See Three-fund portfolio - Bogleheads and Fidelity - Bogleheads for some thoughts if they want to stay at Fidelity.
Maybe it's less. I was saying 2% because that's pretty much what I was paying when I was with Fidelity for my mutual funds. I remember my mom told me they offered her lower MER's couple of months ago, I'll have to validate with them, maybe it's substantially lower.

Thanks for the links, I'll look at them.

Catbert

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Re: Help me save my parents 30K$ / year in MER's?
« Reply #5 on: September 12, 2017, 11:51:16 AM »
Is Fidelity managing their portfolio for them?  If not those fees seem really high.  I know that Fidelity has several levels of portfolio management will different %.

I'll provide a counter perspective.  I may be ~ your parents age (mid-60s).  I manage my own portfolio and have no interest in handing over the reins to anyone else.  But...I know there will be a time that I'll need to have someone else manage things.  For me I think mid-70s will be the time to turn it over.  I may have different thoughts then.   I've read that your 50s are the sweet spot for financial decision making enough time to have gained financial knowledge/experience but before cognitive ability declines enough to be a problem).    So having Fidelity managing their accounts may not be the worst thing. 

Liberty Stache

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Re: Help me save my parents 30K$ / year in MER's?
« Reply #6 on: September 12, 2017, 12:01:44 PM »
I don't believe you mentioned where the money is being held (taxable, 401k, etc) so be very careful about creating a taxable event as you move investments around.
"Sloth, like rust, consumes faster than labor wears, while the used key is always bright" ~Benjamin Franklin, The Way to Wealth

Canadian Ben

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Re: Help me save my parents 30K$ / year in MER's?
« Reply #7 on: September 12, 2017, 12:11:02 PM »
In short, I know they currently have around 2M$ in investments with Fidelity.... The average MER they pay would be around 2%....
Even for Fidelity that seems high.

See Three-fund portfolio - Bogleheads and Fidelity - Bogleheads for some thoughts if they want to stay at Fidelity.
Maybe it's less. I was saying 2% because that's pretty much what I was paying when I was with Fidelity for my mutual funds. I remember my mom told me they offered her lower MER's couple of months ago, I'll have to validate with them, maybe it's substantially lower.

Thanks for the links, I'll look at them.

2% for fidelity, IN CANADA, is not surprising at all. They are extremely unhelpful at bringing MERs down.

There are also a whole slew of other fees. But as mentioned previously, the taxes will be a large consideration as well. At 2M, it`s worth looking at a professional who has a fixed fee, and who is willing to push ETFs/ Non-mutual funds.

max9505672

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Re: Help me save my parents 30K$ / year in MER's?
« Reply #8 on: September 12, 2017, 05:06:05 PM »
Is Fidelity managing their portfolio for them?  If not those fees seem really high.  I know that Fidelity has several levels of portfolio management will different %.
Yes they are managing the portfolio. I would guess simple rebalancing according to a fixed AA% corresponding to their investors profile / age / goals.

I don't believe you mentioned where the money is being held (taxable, 401k, etc) so be very careful about creating a taxable event as you move investments around.
I don't know about this, most probably a mix of differents types of accounts. In Canada, we have taxable, tax-free and tax defered accounts.


In short, I know they currently have around 2M$ in investments with Fidelity.... The average MER they pay would be around 2%....
Even for Fidelity that seems high.

See Three-fund portfolio - Bogleheads and Fidelity - Bogleheads for some thoughts if they want to stay at Fidelity.
Maybe it's less. I was saying 2% because that's pretty much what I was paying when I was with Fidelity for my mutual funds. I remember my mom told me they offered her lower MER's couple of months ago, I'll have to validate with them, maybe it's substantially lower.

Thanks for the links, I'll look at them.

2% for fidelity, IN CANADA, is not surprising at all. They are extremely unhelpful at bringing MERs down.

There are also a whole slew of other fees. But as mentioned previously, the taxes will be a large consideration as well. At 2M, it`s worth looking at a professional who has a fixed fee, and who is willing to push ETFs/ Non-mutual funds.
Yeah, it's Fidelity in Canada.

About taxes, I didn't mean selling anything, just transfering to a new investing medium. Or maybe you meant by the time they start selling to live on those investments, they should make sure to properly deal with taxes.

Good point bout the fixed fee professionnal. Any recommendation in Canada?

Goldielocks

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Re: Help me save my parents 30K$ / year in MER's?
« Reply #9 on: September 12, 2017, 05:31:03 PM »
I had a similar conversation with a woman I volunteer with last week.   It is a very hard conversation to get your meaning through to a person that currently is hands off and trusts their advisor.

So, you need to provide a reason for change, and not muck it up with too many words.

Boil it down to:

$2MM portfolio
2% fees to advisor and bank = $40k in fees paid out per year.
Your Average  fidelity return over past 10 years has been 5% per year...net of fees.

Your advisor is therefore taking 29% of your profits, every year, on average.     

-- {show pie chart showing 29% of profit given to advisor... if this is in a taxable or RRSP account, cut up the remaining portion to show another 20% going to taxes, leaving your parent with only 51% of the profits for their pocket}

That is a lot of money -- do you think that is fair?  Do you think your advisor spends 10% of their time just on you?  That is how much time you are paying them for.

Fully managed funds and top financial planners are available at 1% fees for your size of portfolio! This is the average that people pay in Canada for full service with your size of account.  Only small accounts should be paying 2%... it is time to update your account.   

If you change to  1% MER / fee funds  ..   you will have $621k more in 10 years, all because of the lower MER / fees.

Would you like to have another $621k in 10 years?  What would you spend that on?



[yes, these are leading / sales/ fluffy questions, but it is very very hard to get attention of people who like their  current financial advisors, and believe that they provide $40k more value than the 1% MER guy..]



Canadian Ben

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Re: Help me save my parents 30K$ / year in MER's?
« Reply #10 on: September 12, 2017, 05:45:23 PM »
What area are you in/your parents in Max?

max9505672

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Re: Help me save my parents 30K$ / year in MER's?
« Reply #11 on: September 12, 2017, 06:31:38 PM »
I had a similar conversation with a woman I volunteer with last week.   It is a very hard conversation to get your meaning through to a person that currently is hands off and trusts their advisor.

So, you need to provide a reason for change, and not muck it up with too many words.

Boil it down to:

$2MM portfolio
2% fees to advisor and bank = $40k in fees paid out per year.
Your Average  fidelity return over past 10 years has been 5% per year...net of fees.

Your advisor is therefore taking 29% of your profits, every year, on average.     

-- {show pie chart showing 29% of profit given to advisor... if this is in a taxable or RRSP account, cut up the remaining portion to show another 20% going to taxes, leaving your parent with only 51% of the profits for their pocket}

That is a lot of money -- do you think that is fair?  Do you think your advisor spends 10% of their time just on you?  That is how much time you are paying them for.

Fully managed funds and top financial planners are available at 1% fees for your size of portfolio! This is the average that people pay in Canada for full service with your size of account.  Only small accounts should be paying 2%... it is time to update your account.   

If you change to  1% MER / fee funds  ..   you will have $621k more in 10 years, all because of the lower MER / fees.

Would you like to have another $621k in 10 years?  What would you spend that on?



[yes, these are leading / sales/ fluffy questions, but it is very very hard to get attention of people who like their  current financial advisors, and believe that they provide $40k more value than the 1% MER guy..]
I feel comfortable approching them with that kind questions and to be honest, they know they pay a lot, but I just don't think they ever considered going another route. They've been with the same advisor for many decades and they trust him. It would also probably feel overwhelming to them finding another option.

That's where I want to enter into account. Yes, show them that they pay too much, but also provide a solution.

Any recommandation for full service around 1%?

What area are you in/your parents in Max?
We're in Montreal, Québec.

Goldielocks

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Re: Help me save my parents 30K$ / year in MER's?
« Reply #12 on: September 12, 2017, 06:41:55 PM »
Start here for Canada.   Licensed CFP's...  just need to figure out their fees and specialties, then interview a couple.  With a 1% fixed fee on assets, you will find quite a few.   At least your parents will get a lot more than financial asset management, they should get estate planning, tax   planning, retirement planning, etc advice too with a licensed CFP.

max9505672

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Re: Help me save my parents 30K$ / year in MER's?
« Reply #13 on: September 12, 2017, 07:40:53 PM »
Start here for Canada.   Licensed CFP's...  just need to figure out their fees and specialties, then interview a couple.  With a 1% fixed fee on assets, you will find quite a few.   At least your parents will get a lot more than financial asset management, they should get estate planning, tax   planning, retirement planning, etc advice too with a licensed CFP.
Thanks a lot!