Author Topic: Fiduciary That Charges 1.2% and Selects High ERs  (Read 2477 times)

TheThirstyStag

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Fiduciary That Charges 1.2% and Selects High ERs
« on: November 06, 2016, 07:20:44 AM »
I'm trying to wrap my head around this.  I'm helping out a near-retirement relative who is on her own after a death in the family by looking at her investments (taxable, IRA, and Roth IRA).  She is with a CFP who has her in a myriad of actively managed funds, so I became suspicious and agreed to meet with the CFP.  The first thing I asked her was whether she was a fiduciary and she said yes. 

Then I saw the portfolio numbers.  Not only is she charging 1.2% of assets under management, the average expense ratio of the investments is 1.3%! 

My question is not another active versus passive management debate (I myself am a stalwart Vanguard three-fund portfolio guy), but rather about fiduciary responsibilities.  My understanding is that a fiduciary is bound by law to act in his client's best interests, but these numbers seem egregious to me.  Can a fiduciary legally steer a portfolio above 2% in fees and expenses?

Regardless, I am switching this relative over to Vangard ASAP.  I'm just curious about the fiduciary thing because I always tell family and friends who insisted on using an adviser (against my advice) to make sure they're at least a fiduciary.

MustacheAndaHalf

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Re: Fiduciary That Charges 1.2% and Selects High ERs
« Reply #1 on: November 06, 2016, 08:05:40 AM »
I might be wrong, but I think your relative would have to take it to court - sue for damages.

The most prudent thing (including the "prudent investor rule") would be to switch to passive indexing as you described, dropping the planner who pushes such high fee funds.

You might have noticed some large companies dropping profitable things like load changes - I think American Funds stopped asking for over 5% on many funds.  That's not because they suddenly feel like giving back - next year the rules get more strict, and any large company violating them would be an easy target for lawsuits.

Indexer

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Re: Fiduciary That Charges 1.2% and Selects High ERs
« Reply #2 on: November 06, 2016, 12:09:11 PM »
A fiduciary has to act in a client's best interest, but they can still charge reasonable fees for their service. WE might disagree, but 1.2% is common in the industry, it's above average, but not by much.

The industry average for professional advice is about 1%. I've seen these fees in the 1.5-2% range.
The industry average for an actively managed fund is just under 1%. Normally a fiduciary will use lower cost investments, but it isn't a given.

Conclusion: total fees over 2% is actually pretty common, not ideal, but common...

These fees are above average, but not by enough to draw a regulator's attention. It's also not enough to pursue legal action unless there is something else also going on.

The advisor will probably just say they believe those funds will perform well enough to offset the high cost. Whether that happens is questionable.

Are any of these funds 'loaded' funds(a shares, b shares, c shares)? Sometimes fiduciaries will still use these and just refund the commission. So it isn't automatically bad. Some companies only use loaded funds, so if the advisor wants to use them they just refund the commission they get back to the client. C shares commonly have fees north of 1.5%, but if the advisor is rebating the cost then they might only be 0.5%.  Now, if the fiduciary is charging a AUM fee AND also collecting the commissions and/or 12b-1 fees that is questionable. I'm not sure if they can do it. I am sure it would have to be disclosed that they were doing it.

Mighty-Dollar

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Re: Fiduciary That Charges 1.2% and Selects High ERs
« Reply #3 on: November 07, 2016, 12:57:25 AM »
The first thing I asked her was whether she was a fiduciary and she said yes. 

Then I saw the portfolio numbers.  Not only is she charging 1.2% of assets under management, the average expense ratio of the investments is 1.3%! 
What this advisor says and what they agree to in writing are two different things. And if you asking someone "Are you a fiduciary" isn't specific enough. They could be dually licensed! So "Yes I'm a fiduciary, but I also work as a non-fiduciary with some clients". Did they agree in writing? Did they provide a form ADV?

Also "fiduciary" is not enough. They must be a fee-only fiduciary. Until you legally eliminate their ability to earn back door commissions, you might as well be working with a broker because they will continue to double dip by selling commission-based products.

Report them to the SEC. Can't hurt.
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The advisor will probably just say they believe those funds will perform well enough to offset the high cost.
And that's all they have to do. Again, if they aren't fee-only then you simply aren't protected from conflict of interest.
« Last Edit: November 07, 2016, 12:59:05 AM by Mighty-Dollar »

Goldielocks

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Re: Fiduciary That Charges 1.2% and Selects High ERs
« Reply #4 on: November 07, 2016, 01:08:14 AM »
There is a chance that the ER (if the CFP is getting a portion of them) are being refunded to the account...

I would just ask the CFP why the funds picked, and their ER are a better option than Vanguard funds for the client.

TheThirstyStag

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Re: Fiduciary That Charges 1.2% and Selects High ERs
« Reply #5 on: November 07, 2016, 07:57:01 PM »
There is a chance that the ER (if the CFP is getting a portion of them) are being refunded to the account...

I would just ask the CFP why the funds picked, and their ER are a better option than Vanguard funds for the client.

I asked for a comparison of my family member's portfolio to a vanguard three-fund portfolio with equivalent ratios of domestic and foreign equities to bonds.  She provided a 10-year comparison in which the Vanguard portfolio outperformed the non-IRA part of the portfolio, but underperformed the IRA by 1.5 points.  I have since inquired about whether that takes fees and expense ratios into account (assuming the answer is 'no') and haven't heard from her yet.  I asked for evidence that her current strategies not only beat a comparable low-cost passive stately, but also offsets the much higher fees/expenses. 



Indexer

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Re: Fiduciary That Charges 1.2% and Selects High ERs
« Reply #6 on: November 07, 2016, 08:07:13 PM »
I asked for a comparison of my family member's portfolio to a vanguard three-fund portfolio with equivalent ratios of domestic and foreign equities to bonds.  She provided a 10-year comparison in which the Vanguard portfolio outperformed the non-IRA part of the portfolio, but underperformed the IRA by 1.5 points.  I have since inquired about whether that takes fees and expense ratios into account (assuming the answer is 'no') and haven't heard from her yet.  I asked for evidence that her current strategies not only beat a comparable low-cost passive stately, but also offsets the much higher fees/expenses.

Fund returns are quoted after the expense ratio is taken out.

However, it is a good question whether the returns she gave you were after the management fee was taken out.

Goldielocks

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Re: Fiduciary That Charges 1.2% and Selects High ERs
« Reply #7 on: November 07, 2016, 09:39:03 PM »
There is a chance that the ER (if the CFP is getting a portion of them) are being refunded to the account...

I would just ask the CFP why the funds picked, and their ER are a better option than Vanguard funds for the client.

I asked for a comparison of my family member's portfolio to a vanguard three-fund portfolio with equivalent ratios of domestic and foreign equities to bonds.  She provided a 10-year comparison in which the Vanguard portfolio outperformed the non-IRA part of the portfolio, but underperformed the IRA by 1.5 points.  I have since inquired about whether that takes fees and expense ratios into account (assuming the answer is 'no') and haven't heard from her yet.  I asked for evidence that her current strategies not only beat a comparable low-cost passive stately, but also offsets the much higher fees/expenses.

To be fair, financial advisors also work as consultants - helping the client set goals, making the trades on their behalf, keeping them actively updated, in addition to choosing funds..   many clients would NOT be self-directed without a third party to assist or encourage them to stay on track.   

With that in mind, a CFP may add more value than just the return on the investments.

chasesfish

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Re: Fiduciary That Charges 1.2% and Selects High ERs
« Reply #8 on: November 08, 2016, 05:23:00 AM »
I went through this arguing with the "adviser" who had the Simple IRA my wife was participating in.  This is not unethical/wrong, it just greedy and on the upper end of what active advice should cost.   Managed portfolios with face to face advice should cost between 1% and 1.5% all inclusive.

There needs to be more than $100,000 or so to make this model work.  Just my opinion, I could be wrong.

TheThirstyStag

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Re: Fiduciary That Charges 1.2% and Selects High ERs
« Reply #9 on: November 08, 2016, 07:45:57 AM »
There is a chance that the ER (if the CFP is getting a portion of them) are being refunded to the account...

I would just ask the CFP why the funds picked, and their ER are a better option than Vanguard funds for the client.

I asked for a comparison of my family member's portfolio to a vanguard three-fund portfolio with equivalent ratios of domestic and foreign equities to bonds.  She provided a 10-year comparison in which the Vanguard portfolio outperformed the non-IRA part of the portfolio, but underperformed the IRA by 1.5 points.  I have since inquired about whether that takes fees and expense ratios into account (assuming the answer is 'no') and haven't heard from her yet.  I asked for evidence that her current strategies not only beat a comparable low-cost passive stately, but also offsets the much higher fees/expenses.

To be fair, financial advisors also work as consultants - helping the client set goals, making the trades on their behalf, keeping them actively updated, in addition to choosing funds..   many clients would NOT be self-directed without a third party to assist or encourage them to stay on track.   

With that in mind, a CFP may add more value than just the return on the investments.

Agreed, but I think over 2% all-in is a lot for this type of advice/action. 

I'm interested to see what she says in response to my questions.

Goldielocks

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Re: Fiduciary That Charges 1.2% and Selects High ERs
« Reply #10 on: November 08, 2016, 03:53:17 PM »
I went through this arguing with the "adviser" who had the Simple IRA my wife was participating in.  This is not unethical/wrong, it just greedy and on the upper end of what active advice should cost.   Managed portfolios with face to face advice should cost between 1% and 1.5% all inclusive.

There needs to be more than $100,000 or so to make this model work.  Just my opinion, I could be wrong.

Agreed...   and the 1.5% is a bit rich... under $100k in assets, the FA should just be charging a lump sum fee for additional personal planning services, and 1% on the account management.

gj83

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