Fire my financial planner and ditch our VUL?

[Pantsforsale]

Hey guys. Pretty new to the blog and forum but learning a ton. Here's my deal:

When Pantswife and I got married five years ago, we hired an Ameriprise financial planner who was a casual friend/acquaintance. He helped set up some investments and savings for retirement. We consult with him twice a year but haven't made any major changes since we started. It was mostly a "set and forget" kind of thing because we both know next to nothing about investing. I've recently become motivated to learn more about it myself and I now believe that we may be better off with options different from what we've been doing with Ameriprise. Here is our current situation:

Us: Early 30's, two kids, number 3 due early 2014
Annual gross income: $91K ($85K through my job and $6K through a small side venture my wife has)
low interest emergency savings account: $19.5K ($6.5K of this will be eaten up next year through childbirth expenses)
Roth IRA 1: $52.6K, maxed every year
Roth IRA 2: $19K, not currently contributing anything
Brokerage account: $27.2K (this was rolled over from a 401K I had at an old job. I don't actually know/understand how Ameriprise has invested it or what options I have to change it)
Variable Universal Life Insurance Policy (VUL) #1: $9.8K
VUL #2: $7K
Home mortgage: $156K principal balance at 3.5%. With current home value, we have about $55K in equity.
Other debt: none

I should also mention that my job provides no benefits, so all retirement investing is up to us (as well as health insurance).
I'm pretty clueless about most of this stuff, so I'm open to any and all suggestions, but my main questions are as follows:

1. The VUL seems like a pretty poor investment, but I'm basing that mostly on criticism I have read regarding VULs in general. I'm not sure what to look for in the details of my specific VUL to know if it's better than average. What I do know is that the two policies are currently valued at $16.8K and if I cancelled them now, I would "surrender" $3.6K of that, leaving me with $13.2K (and the monthly $250 contribution) to invest elsewhere. The combined value of the policies is currently only $750 greater than what we have contributed to them over 5 years because I think most of what we have contributed has gone toward the premium. Is it worth the loss to get out of this now? I'm all about "failing fast", so if it's a bad investment, I want out now while losses are minimal.

2. Should I ditch my financial planner? I am not yet prepared to cut ties completely, but would consider moving in that direction as I learn how to invest on my own. The annual fee is reasonable, but I don't really know what kind of fees and commissions are built into our investments. This is, of course, a bit awkward since we have a personal relationship with the guy, but we can bite the bullet and have that uncomfortable one-time conversation if it will allow us to be in a better financial situation. On the other hand, maybe he could be an asset if I was a little more educated and got him to help invest more strategically. Would there be more and better investment options available (vs. going on my own) if using the financial planner and his firm to their full potential?

Sorry for the long-windedness. I'm trying to learn as much as possible here and find that providing more information often yields more specific advice. Thanks in advance!

-Pantsforsale
(does not actually sell pants)

[Rust]

Good morning.

You have two questions:

1) to VUL or not to VUL

2) Fire the FA

I'll address these in reverse order.

2) Do you find value in the service provided?  Do you continue to find value in the advice received?  Have you asked question number one to your FA?  What is their opinion?  (remember your paying for that opinion)


1) For the past 5 years you've been provided life insurance coverage and as of right now you can cancel those policies and still net $750 more than what you paid in.  So basically you've had about 2MM of insurance coverage the past five years for free.  (I'm assuming it's a Million face value per policy based on the amount paying.  could be 500k regardless coverage for 5 years for free basically)

To keep or get rid of the VUL* is a more basic question to me though.  Do you feel you have a need for insurance coverage?  If the answer is yes, then you need to determine for how long do you wish to be covered.  For me that time period was until my children are grown.  So my wife and I both have term insurance policies which are cheap insurance coverage if we happen to go much sooner than either of us would like to.

So if the answer is yes I need coverage, then you say for the next 20 years.  (just an example).  Before canceling any coverage, I'd go out and get quotes for term insurance to see how much the cost of insurance (COI) would be for the next 20 years.  Also explore stopping making additional payment to your VUL and letting the cash value pay the premiums.  I'd model it out with several assumptions on returns over time, 0%, 4%, 8% to see how long that would pay the insurance portion.

The modeling can be done fairly simply by your FA. 


Edit.  Added Star to provide additional information about VUL for those who may not know.

*for a VUL, it's an investment product in an insurance wrapper.  Each month payments go in $250 (in this example)  of that a certain % covers the Cost of Insurance (COI) and the other part is invested.  Difference between a VUL and a Whole life is a VUL allows you to invest in mutual fund like sub-accounts, which are invested in the market.  a Whole life policy typically has a fixed rate of return.
Over time (and you can see this in the insurance policy documents) the cost of insurance will rise.  (typically on the anniversary of the policy).  There will be a point of inflection where the cost of insurance could exceed the funding amount.  In order to avoid the policy lapsing one of two things can occur 1) pay more premium or 2) the difference is funded from the investment portion of the account.

For some investors there are very strategic advantages from a taxable position to use a VUL, if done properly withdrawals from a VUL can be done in a way to avoid paying taxes on the growth of the money.  (Funded with non-qualified money grows tax deferred and withdrawn without paying taxes on the growth)  I'm not giving tax advice here and these are very complicated products but can make sense for the right person in the right situation.  Knowing they are out there and when they make sense is like having another tool in the tool box.  End of the day though, you don't use a hammer to drive in a screw.  Knowing when to use which tool is important.

[FuckRx]

not trying to hijack but if someone can explain VUL's it will probably help put this post more into perspective.

[Another Reader]

Buy term life and invest the difference yourself.  It's a lot cheaper than the insurance products and you control the investments directly.  In your shoes, I would fire whoever sold me that pile of garbage. 

Ameriprise is known for high fee investments that are less than mediocre in quality.  You are being sold products that benefit Ameriprise, not you.

No one will care about your money more than you.  Start by reading the books recommended consistently in the investment newbie threads.  You can manage your money yourself and get better returns. 

[Pantsforsale]

Thanks for the comments, as well as the explanation of VULs.

To clarify a couple of things;
We already have a completely separate term life insurance policy with another company that is sufficient for us and has a much cheaper monthly premium than the VUL. The VUL was presented to us as primarily an investment vehicle with the life insurance as an added benefit. The VUL death benefit is only $250K per person, which we didn't believe was enough after we had kids, so we added the term policy.

As for the FA, it has been a beneficial arrangement so far because otherwise, that cash would have been spent or stuck in a basic savings account. But now I am beginning to question the wisdom of some of the advice we have been given. The VULs were our FA's idea and I know that he would say that they offer the best tax benefit over any other investment options available to us (provided we have already maxed our Roth IRAs each year, which we actually have not done the last two years). How biased is that opinion considering the commissions received and potentially limited options offered by his company? It will be difficult for me to take his advice at face value moving forward.

I guess inherent in my question about the FA is whether it is reasonable to believe that, with a little time spent learning more about this stuff, I would be better off managing my own investments rather than than paying someone else a percentage to do it. Or would that be underestimating the complexity of competently managing my own investments? I realize that without knowing me personally, that is a difficult determination, but I am appealing to the experience of those here who may have had personal experience with FAs. In general, are they an invaluable resource for a broad range of investors, or just a money pit for those who chose to be ignorant and/or lazy about their finances?

[Rust]

It sounds like you need to inquire how your FA is being paid.

You stated you pay an annual fee, which indicates to me you are not in a "Wrap" account.

In a wrap account you pay a % each year to the FA for assets under management. 

Here is how I suspect the FA is getting paid for your products:

Roth IRA 1/IRA 2: They get a small part of the Gross Dealer Commissions (GDC) of the money invested that year.  (No trails)

Brokerage account: $27.2K:  You said this was a roll over from a 401K.  So I'm going to assume its in a Tradtional IRA.  Works the same as Roth for fees.

VUL: How the agent gets paid here depends on the option selected by the agent at issue.  Could be receiving trails or no trails.   Irregardless how the amount of $ the agent receives on a 250K policy is very little and I wouldn't consider it enough where it would influence the agents advice.

What has a greater impact is if the agent were to lose your business entirely.

*Other fee's the agent doesn't receive as payment but you've gotta pay.

Ameriprise Financial (AMP) charges a $40 account maintenance fee per IRA.  So if you've got three IRA's that's $120 in fee's each year.  This fee can be waived if you have a certain amount of assets under management with them.  Based on what you disclosed, I don't think you've hit their threshold to waive fees.

In regard to the question of if it is more or less cost effective to manage things on your own.  I truly believe this is a case by case basis.  You made a great argument in favor of having an FA yourself.  " has been a beneficial arrangement so far because otherwise, that cash would have been spent or stuck in a basic savings account."  But as your knowledge level increases the cost benefit of having an FA tilts the scale.

I personally do not employ an FA and I'd assume many here on this board do not either.  With that being said, if everyone worked with an FA right out of college I'm confident that many more people would have a better grasp on their finances, have lower debt and would have avoided many of the pitfalls others have fallen into.

[grandcanyon]

I used Ameriprise (then American Express) when I was your age and believe me this company only cares about itself. I got sucked into an annuity and they tried a VUL but luckily I didn't do the VUL. With high fees and poor performance, I ate the surrender and moved the annuity to vanguard with about 40% of what I gave them. After 10 years, it finally hit even at Vanguard.

I looked into all this after I got out and I realized that these companies try to maximize their profits at your expense with annuities and VULs. This was years ago but the cost for the VUL was horrible. They took a 5% load off the top and then they took out for their over priced insurance and then during the year they took out a Mortality & Expenses fee and then at the end of the year they hit you with sub-account fees. If the value of the VUL was too low, they hit you with another 50 dollar fee. The reason there is surrender is Ameriprise pays everyone upfront so if you left they'd be on the hook and I guarantee they'll never be on the hook. If they charge you a 3K surrender, they will make this from you over the time the surrender is in force. You can eat the surrender now or over time but you'll probably pay more over time since the COI is high and it increases as you get older.

This is Amerprise's MO. They target their "natural" market which is family and friends and they use this relationship to get people to buy VULs and in some cases multiple VULs. Amerpirise basically we'll put you in the funds up front and then they're on to the next round of people. They make a residual each year and then they charge you each year for a yearly plan that is basically a cookie cutter plan that says to keep investing. You'll will get a card on your birthday and xmas. All this comes straight out of your account. Run from this company!

[RadicalPersonalFinance]

It was mostly a "set and forget" kind of thing because we both know next to nothing about investing. I've recently become motivated to learn more about it myself and I now believe that we may be better off with options different from what we've been doing with Ameriprise...I'm pretty clueless about most of this stuff, so I'm open to any and all suggestions...

Call your financial advisor, set an appointment, and print out this blog post and take it to him/her and ask him/her to teach you about what they recommended for you originally and why.

It seems to me that you probably weren't really listening to what they originally said to you and now you're interested.  So go to them and ask them to explain what they've done and why.  Ask them about alternatives and why they've recommended what they did. 

Any advisor who has been practicing for more than 5 minutes is very familiar with each of these questions and opinions and will be able to share their viewpoint and the basis for their advice.  They'll also be able to explain to you where their advice would change.

Learn, learn, learn about options and strategies, but please start with your advisor.  That's what you're paying him/her for.  And please don't make huge changes in your situation based solely on what we say to you in a forum...you need to be knowledgeable enough to argue each side of all of these issues before you make a quick jump into another line of action.

[CorpRaider]

I would fire the guy who sold me that expensive mutual fund in a contract wrapper and get someone who charges a percentage of assets not who gets paid on selling you crap; an independant CFP or go to schwab or TD amtd if you want someone to handle it for you and basically talk you down from the ledge when you're about to sell at the bottom and buy at the top, as most people do.

[pbkmaine]

+1 for Vanguard. Call Vanguard and see if you can do a 1035 exchange into an annuity there. 1035 is a section of the Internal Revenue Code that allows for tax-free exchanges of certain types of insurance products. Also, find out what the penalties are from Ameriprise for switching.

[Rust]

A 1035 exchange is a way to avoid having a taxable event if the VUL were to be surrendered with proceeds coming directly to you.

As Pantsforsale stated there they are only ~$500 ahead of his cost basis.  If this is accurate then the 1035 exchange would only prevent a very small taxable event.