Girlfriend's Money Manager--Should She Switch to Vanguard?

[ReadySetMillionaire]

My girlfriend and her dad met with their money manager yesterday and invited me along. My girlfriend's dad has used this company for 30 years and, according to him, has had great success. Her dad is a very busy guy (was a partner at a decent-size accounting firm and now does consulting for almost 100 churches), and he believes that once my girlfriend and I get married, have kids, and progress through our careers, we will want to pay a money manager in the same way we might want to hire somebody to cut the grass.

So, at yesterday's meeting, I politely asked about this money manager's fee structure. He has a "front-load" fee of 5.75% which only affects the investment when you put in money. The more you invest, the lower your front-load fee. He also has my girlfriend invested in American Fund A Class funds, which have an expense ratio of 1.44%.

To be clear, I'm a firm believer in passive investing. I've read "Boglehead's Guide to Investing," "Common Sense on Mutual Funds," and plan to read "The Four Pillars of Investing." I was pretty appalled by that fee number and structure. The load fee seemed awfully high and the graduated system (less fees the more money you invest) seems like a cheesy sales ploy to incentivize the investor to invest more and more in what is already a rigged system.

My girlfriend, her dad and I went to dinner after. I explained how those kind of fees compound and negatively affect returns over time, and he seemed to think I was right--he admitted he was always so busy that he never really researched things. My girlfriend also walked out of the meeting and said she didn't realize the front-load fee of 5.75% and wants to move her money.

So here are my questions:

(1) I know how expense ratios affect returns. But I can't quite get the math on how these front-load fees will affect her returns over time. I've looked for online calculators but can't seem to find one that combines the affects of front-load fees and expense ratios. Can somebody help me out with this?

(2) She's been with this money manager for about half a year. I think we are both leaning towards her moving her money to Vanguard or Schwab. What's the professional way to go about this? Will he charge any sort of fee for her pulling her money?

Thanks.

[johnny847]

There are quite a few calculators online that will calculate the effect of fees for you. I'd type it out the formulas but I'm on the phone at the moment.

Just have your girlfriend tell her money manager that she would like to move her funds to Vanguard or Schwab, whatever she decides on. The money manager will most likely resist but she is legally entitled to do so. Just keep pressing. If it comes to it, ask him to sign a fiduciary pledge (this would obligate him to act in her best interest instead of his own). If he signs it he's a moron because now he's opening himself up to getting sued.


Sent from my HTC One using Tapatalk

[MrMoogle]

My understanding is a front-load fee is the equivalent of a one time loss of the fee.  So the moment he takes your money, you're now at 94.25%.  Then it will grow "normally."  Over time, the 1% expense ratio will be worse.  There's really no reason for either.

[Heckler]

You know what you need to do.

[Heckler]

But does she?   Thats the key. 

[Scandium]

My understanding is a front-load fee is the equivalent of a one time loss of the fee.  So the moment he takes your money, you're now at 94.25%.  Then it will grow "normally."  Over time, the 1% expense ratio will be worse.  There's really no reason for either.

Yes you could easily show the effect of the front load just by using a compound interest calculator. Of which there are hundreds. If she will invest $10,000/year put that in with 7% growth, or whatever you feel reasonable. The do the same for $9,425/year. The final amount after 10, 20, or 30 years is what she'd loose, and the manager would get paid.

edit; using this:
http://www.moneychimp.com/calculator/compound_interest_calculator.htm
over 25 years she'd be $38,914 poorer, with the example numbers above.

I would definitely suggest she move her money to Vanguard. Depending on you relationship with her and her dad though I'd be careful not to "suggest" too hard if either resists. Lest you get blamed if the funds to worse at some point thanks to your suggestions, especially if her father stays with this guy.

[PARedbeard]

RSM-when I was younger I was in this exact situation with my father's American Funds investor. I only put 5k in originally, so I have left it there to see how it does.

I've watched it over the past few years and have compared it to my own investing attempts. Frankly, it is not worth it. Either have her look into Vanguard or have her open a low-cost brokerage account. Most AmFunds are locked into US Blue Chips anyway.

[ReadySetMillionaire]

But does she?   Thats the key.

Yes. She just kind of feels weird about taking her money out so quickly after investing it and wants to know the best way to go about moving the funds. I was hoping somebody here has moved their money in a similar circumstance and that they would share their experience.

My understanding is a front-load fee is the equivalent of a one time loss of the fee.  So the moment he takes your money, you're now at 94.25%.  Then it will grow "normally."  Over time, the 1% expense ratio will be worse.  There's really no reason for either.

Yes you could easily show the effect of the front load just by using a compound interest calculator. Of which there are hundreds. If she will invest $10,000/year put that in with 7% growth, or whatever you feel reasonable. The do the same for $9,425/year. The final amount after 10, 20, or 30 years is what she'd loose, and the manager would get paid.

I didn't think of it this way. Thanks.

My calculations:

$10,000 invested for 30 years with financial adviser (5.75% front-load) in American Fund (1.44% expense ratio) with 10.84% gross returns (return since fund was created in 1975): $1,514,699.72

$10,000 invested for 30 years in Vanguard S&P 500 (.19% expense ratio) with 10.99% gross returns (return since inception of Vanguard's S&P 500 fund): $2,122,298.80.

That's a difference of approximately $608,000.

Assume 8% gross returns and it's $1,179,546.31 (no fee adviser) - $876,808.40 (fee adviser) for a difference of about $303,000.

Is that math right?

[Scandium]

That sounds about right. Man that is a crapload of money isn't it? Although I'd use the same return for both, as you never know if the future will be like the past. And once you have >$10k the vanguard fee is even lower; 0.05% for US and 0.12% for international stocks!

I'm sure there is a fee analyzer somewhere,  but I could find one whit a quick search.
Personal capital has one, but you have to join. Free though, and I like their service
https://www.personalcapital.com/financial-software/fee-analyzer
That will let you adjust amounts and the fees.

Vanguard only show for a fixed initial amount
https://investor.vanguard.com/mutual-funds/low-cost

[forummm]

Get her to Vanguard ASAP. That's highway robbery. Costing tens or hundreds of thousands of dollars over the years.

https://personal.vanguard.com/us/insights/investingtruths/investing-truth-about-cost
https://investor.vanguard.com/mutual-funds/low-cost

[GGNoob]

I like this calculator: http://www.buyupside.com/calculators/feesdec07.htm

It shows that $10,000 invested for 30 years with a 5.75% load fee and 1.44% annual fee will have a future value reduction of 39% due to fees!

She should move ASAP to Vanguard and even a simple Target Retirement Date fund would be much better than what she is currently in.

[dandarc]

Man, he must have put her in the worst funds at American Funds - our annual fees on Class A shares were in the .5-1% range.  Which is still way, way too high, particularly with a load.

You might even show one of these fee calculators to her dad - it is a risky play, but if you convince him, you'll definitely be considered "good husband material".

[edit]Of course had I finished reading your post, I'd have noticed that you've already convinced both of them on this.[/edit]

[dandarc]

To your 2nd question.  Contact Vanguard or Shwab - tell them what you want to do, and they'll prepare the forms and such - no need to even speak to this guy again.

You may need a "Medallion Signature Guarantee" - I did when I transferred about 20K from American Funds to Vanguard recently - your local bank probably can do this for you.

[PARedbeard]

This discussion is making me think I need to switch as well. Time for this "experiment" to end.

Dandarc--can you expound on what that guarantee is?

[johnny847]

To your 2nd question.  Contact Vanguard or Shwab - tell them what you want to do, and they'll prepare the forms and such - no need to even speak to this guy again.

You may need a "Medallion Signature Guarantee" - I did when I transferred about 20K from American Funds to Vanguard recently - your local bank probably can do this for you.

Ah the Medallion Signature Guarantee. The only real reason I can think of to have an account with a brick and mortar bank.

[dandarc]

This discussion is making me think I need to switch as well. Time for this "experiment" to end.

Dandarc--can you expound on what that guarantee is?

It is like getting something notarized, except that the party doing the stamping is actually guaranteeing the transaction.  If the transfer gets challenged, the bank (or other party) that stamped the form is on the hook for the money.

As you can imagine, most banks have strict policies around using these stamps.

[laughing_paddler]

FWIW, I have a related story.

As a noob to investing, I thought I needed 'help' opening a Roth a few years back and the person I chose (more on that some other time) went ahead with American Funds. After paying more than 5% up front, 1.4% ER and a $50 annual fee, I finally made the switch in April of last year, liquidating the account and sending the money to Vanguard. 

BUT.

I was given two choices for handling the switch, either let the two institutions handle it between them, or have a check sent to me and then do the ACH transfer to Vanguard myself. I was warned about 'tax reporting' with option 2 so I went with option 1. No difference, I thought.
Mistake. It took weeks and weeks and I was left waiting and waiting for it all to happen.  I was effectively out of the market for the entire month of April and part of May in 2014.

When my wife switched her Roth to Vanguard, we had the old firm cut a check and we made the switch in 3-4 days. It was easy to prove at tax time that we had reinvested all the money.

[Capsu78]

From the perspective of the financial advisor, he must face the problem of not only losing a new add on client, but possibly also a loyal (but unaware) long term client.  He may not push back hard if her father remains satisfied with his personal relationship.  You may want to know in advance where her father stands ... not saying change your mind as I "broke up" with a financial planner for Vanguard over a year ago.  Just saying that if you are heading for a long term relationship with your GF, the father comes with it!
Just ask my SIL's!

[KittyFooFoo]

There is a much simpler way to think about the math.

Multiplication is commutative--that means it doesn't matter what order you multiply a bunch of numbers together.  2*3*5*7 = 3*5*7*2 = 7*2*3*5 and so on.

When you invest a chunk of money in the stock market, it basically multiplies each year.  On average, it multiplies by somewhere around 1.1.  A front load of 5.75% adds one initial multiplier of 0.9425.  But, as you know, even small investments turn into fuck gobs of money over 30+ years.  And since multiplication is commutative, an initial 5.75% penalty is equivalent to no initial penalty, followed by a 5.75% penalty on your fuck gobs.  This is bad.

However, we can ask a more interesting question.  Money managers charge these fees because, in theory, their investment choices give higher returns.  So how much more profitable than the market would the manager have to be to justify his 5.75% fee?

Investing P dollars every year for n years at rate of return r has a final value of:

P(r^n-1)/(r-1)

Doing the same with a up-front multipler of f (so, for your 5.75% fee f=0.9425) has a final value of:

fP(r^n-1)/(r-1)

So assuming we can earn 10% from the market each year and the manager charges a front load fee of f, what returns does the manager have to earn to break even with his fee?

(1.1^n-1)/(1.1-1) = (r^n-1)/(r-1) * f

Which, for n=30 gives the somewhat surprising answer r=1.103.  (http://www.wolframalpha.com/input/?i=%28r%5E30+-+1%29%2F%28r-1%29+%3D+%281.1%5E30-1%29+%2F+0.1+%2F+0.9425) So, if the manager's average yearly returns are even half a percent better than the market's, his front-load fee is actually worth it!

High expense ratios are actually the much bigger problem.  Very simply, to be justified, the manager must beat the market by the amount his expense ratio exceeds Vanguard's (basically the whole thing).  So, interestingly, it is much easier for the manager to justify the scary-looking front load than it is to justify the 1.4% ERs!

Whether any money managers actually achieve these goals, and whether they can be identified, is a much tougher question to answer, but many wise mustachians will advise no.

[johnny847]

In any given year only about 20% of actively managed funds beat their respective indices. And that's in one year. To actually justify holding an actively managed fund it would have to beat the market in the long term, not just one year

Sent from my HTC One using Tapatalk

[zephyr911]

So, at yesterday's meeting, I politely asked about this money manager's fee structure. He has a "front-load" fee of 5.75% which only affects the investment when you put in money. The more you invest, the lower your front-load fee. He also has my girlfriend invested in American Fund A Class funds, which have an expense ratio of 1.44%.

That's appalling.
But please clarify: The more you invest, the lower the fee? As in, it goes to something other than 5.75%?

(1) I know how expense ratios affect returns. But I can't quite get the math on how these front-load fees will affect her returns over time. I've looked for online calculators but can't seem to find one that combines the affects of front-load fees and expense ratios. Can somebody help me out with this?

The front-load fee just reduces all future numbers by 5.75%. Instead of having a million dollars on date X, she'll have $942,500. Instead of $40K in income, $37,700.

(2) She's been with this money manager for about half a year. I think we are both leaning towards her moving her money to Vanguard or Schwab. What's the professional way to go about this? Will he charge any sort of fee for her pulling her money?

Probably. You'd have to ask him.

[laughing_paddler]

Re: cost to switch, I can relate that when I switched to Vanguard the old firm charged me the full annual fee of $50 after just 5.5 months, and there was a $90 processing fee.