Author Topic: Help! I want to fire my financial adviser.  (Read 5259 times)

Logic_Lady

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Help! I want to fire my financial adviser.
« on: April 24, 2015, 11:22:01 AM »
Hi! I need help sorting out my finances. I have a taxable investment account and a Roth IRA that are managed by my family's financial adviser. Some of the money was invested by the current adviser and some by a previous adviser (who was an idiot). I don't think the current adviser is doing a terrible job, but I also don't think he's adding enough value to be worth the approx 0.7% fee I'm paying. The problem is, while I feel confident of my ability to invest the new money I deposit (in low-cost index funds of course) I feel much less confident about sorting out the mix of stock, bonds and various funds that my money is currently in (a nice problem to have, I know).

The way I see it, I have the option to sell my current holdings and buy index funds, or leave them as they are and just invest the new money in index funds, or something in the middle. This account was set up by my parents ages ago, and some of the stocks and funds are mostly capital gains. Based on my tax bracket I would pay 15% on capital gains now, plus state income tax; I anticipate being in a lower bracket when I FIRE, so I think it may make sense to keep those funds even though they have higher expense ratios, but I'm not sure. Obviously for the stuff in my Roth there aren't tax implications so I want to sell the high-cost funds asap. But the whole situation is a bit overwhelming to be and I've been hesitating to actually fire the guy and take over.

I plan to FIRE in 5-10 years (I know this is not very precise--it depends a lot on whether my income stays the same or increases, and how the market does). At that point I would sell my highest-cost holdings first and make sure I'm in a tax bracket where I don't have to pay capital gains.

Here is a summary of my current investments (both in Schwab):

Taxable Account: $150,000

$60,000: various individual stocks, all large well-known companies
$10,000: Short term US treasury ETF (0.08% expense ratio)
$10,000: US TIPS ETF (0.07% expense ratio)
$6,000: Short-term bond fund (0.1% expense ratio)
$25,000: American Fund New Prospects (0.76% expense ratio, but cost basis is only $8,000, so it's mostly cap gains)
$10,000: "fixed income," I don't know what this means
$29,000: Cash (mostly recently deposited, to be invested over time for dollar-cost averaging)

Roth IRA: $35,000

$1,000: American Fund Europacific (0.87%)
$1,500: American Fund New World (1.02%)
$1,500: Oppenheimer Developing Markets Fund (1.32%)
$2,000: International Index Fund (0.19%)
$14,000: S&P 500 Index Fund (0.09%)
$3,000: Small Cap Index Fund (0.17%)
$500: Bond Fund (0.55%)
$11,500: Cash

I also have about $40,000 invested with a family member in bonds (no fee); he's very good at bond trading so I think it makes sense to keep most/all of the money I have in bonds with him, and have my other accounts be mostly or all stock.

Anyone have any advice?

RWD

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Re: Help! I want to fire my financial adviser.
« Reply #1 on: April 24, 2015, 12:22:50 PM »
I recommend reading JL Collins stock series, if you haven't already:
http://jlcollinsnh.com/stock-series/

Is there any reason you don't have investments in a 401k and/or traditional IRA? The tax benefits will help you retire sooner.
http://www.madfientist.com/retire-even-earlier/

Logic_Lady

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Re: Help! I want to fire my financial adviser.
« Reply #2 on: April 24, 2015, 12:31:00 PM »
I recommend reading JL Collins stock series, if you haven't already:
http://jlcollinsnh.com/stock-series/

Is there any reason you don't have investments in a 401k and/or traditional IRA? The tax benefits will help you retire sooner.
http://www.madfientist.com/retire-even-earlier/

I don't have investments in a 401K because my employer doesn't offer one, and as far as I know there's no way to set one up myself (However, I do get a significant tax-free living expense stipend). I think it would make sense to open a traditional IRA but I have just been contributing to my Roth because that's what I already had, I do plan to open one for next year.

I will check out that link, thank you.

forummm

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Re: Help! I want to fire my financial adviser.
« Reply #3 on: April 24, 2015, 12:46:30 PM »
Your advisors are doing a terrible job. What an ugly mess. They've really screwed you. Not as bad as some people who've posted here, but still incompetence.

For the taxable, I have no idea why you have so many bonds in there. If you want to own bonds, then they should be held in your Roth. That's asset allocation 101.

For the Roth, just roll it over to Vanguard. You can put it in whatever you want, but Target Retirement for around the year you turn 65 is an easy choice. Or if you want to own a bunch of bond funds, you can have the Roth be bonds and the taxable be mostly or all stocks.

For the taxable, you can keep holding the individual stocks if you want to. As long as you don't have to pay fees (to Schwab or to your advisor) to keep them there, you can keep them at Schwab. If you want to move them you can do an in-kind transfer to another brokerage and you won't have to pay capital gains taxes until you actually sell them.

Why are you keeping cash in an IRA? That doesn't make any sense. If you want something risk free, at least put it in short-term Treasuries. But if this is for long term investing and you won't use the money for a long time, you probably want an asset allocation similar to Target Retirement for your age.

Dollar cost averaging doesn't make sense here. Once you figure out a good asset allocation strategy for your risk tolerance and investment timeline, just buy the index funds that you need to meet your allocations.

Logic_Lady

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Re: Help! I want to fire my financial adviser.
« Reply #4 on: April 27, 2015, 09:54:19 AM »
Your advisors are doing a terrible job. What an ugly mess. They've really screwed you. Not as bad as some people who've posted here, but still incompetence.

For the taxable, I have no idea why you have so many bonds in there. If you want to own bonds, then they should be held in your Roth. That's asset allocation 101.

For the Roth, just roll it over to Vanguard. You can put it in whatever you want, but Target Retirement for around the year you turn 65 is an easy choice. Or if you want to own a bunch of bond funds, you can have the Roth be bonds and the taxable be mostly or all stocks.

For the taxable, you can keep holding the individual stocks if you want to. As long as you don't have to pay fees (to Schwab or to your advisor) to keep them there, you can keep them at Schwab. If you want to move them you can do an in-kind transfer to another brokerage and you won't have to pay capital gains taxes until you actually sell them.

Why are you keeping cash in an IRA? That doesn't make any sense. If you want something risk free, at least put it in short-term Treasuries. But if this is for long term investing and you won't use the money for a long time, you probably want an asset allocation similar to Target Retirement for your age.

Dollar cost averaging doesn't make sense here. Once you figure out a good asset allocation strategy for your risk tolerance and investment timeline, just buy the index funds that you need to meet your allocations.

There actually is a reason for some of this. The taxable account was originally a college fund, so a lot was in less-risky stuff like bonds and some cash since I would have to take it out soon. This strategy saved me when I started college in 2009; I can only imagine the damage if I'd had to sell a lot of stocks to pay tuition. I only recently decided against ever going to grad school. So that's why the bonds were in the taxable. However you are totally right that this allocation makes no sense for my FIRE goals. I don't know why my adviser still hasn't invested most of the cash I deposited months ago, but I will take care of that myself this week!

I just sent my adviser an email saying I want to take over my own accounts. I feel like such a weight has been lifted honestly. Thank you so much for your advice!

forummm

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Re: Help! I want to fire my financial adviser.
« Reply #5 on: April 27, 2015, 10:14:16 AM »
There actually is a reason for some of this.

Yes. The reason is so that your advisor and their employer can make more money off of you. A lot of time they invest the cash and earn interest off of it while it's sitting there doing nothing for you.

Logic_Lady

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Re: Help! I want to fire my financial adviser.
« Reply #6 on: April 27, 2015, 10:20:09 AM »
There actually is a reason for some of this.

Yes. The reason is so that your advisor and their employer can make more money off of you. A lot of time they invest the cash and earn interest off of it while it's sitting there doing nothing for you.

How would that work? My adviser doesn't work for Schwab, which is where my money is.

forummm

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Re: Help! I want to fire my financial adviser.
« Reply #7 on: April 27, 2015, 10:30:24 AM »
There actually is a reason for some of this.

Yes. The reason is so that your advisor and their employer can make more money off of you. A lot of time they invest the cash and earn interest off of it while it's sitting there doing nothing for you.

How would that work? My adviser doesn't work for Schwab, which is where my money is.

Maybe not in this case. Or maybe Schwab gives incentives somehow based on how much Schwab makes off of you. There's another thread here about how Schwab builds in cash holdings on purpose to some of their products in order to make money off of it. I've seen a lot of posts about the ways advisors and brokerage firms make money off of clients in ways that are not transparent to the clients and are not in the client's interests.

mohawkbrah

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Re: Help! I want to fire my financial adviser.
« Reply #8 on: April 29, 2015, 03:59:26 AM »
never really understood the point in financial advisers. unless you need help figuring tax efficient ways, but i think that's more a personal accountants job (not like i could afford one).

Im 19 and do all the investing myself and i handle all my finances. google is your friend when you need information.


Scandium

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Re: Help! I want to fire my financial adviser.
« Reply #9 on: April 29, 2015, 07:32:19 AM »
Ouch, sounds like that would be some ugly cap gains taxes. Not sure what I would do either.

Quick math for the American Fund:
Tax if sold now: $2,550
Cost over Vanguard 0.71%/year x $25,000 = $177.5/year. Over 10 years (*17) ~ $3,018.

So it kinda makes sense to sell it and transfer, but that's an unpleasant tax hit. Your time horizon is hopefully more than 10 years too though. Of course you could wait for a correction and sell some then, but who knows when that will be.

MDM

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Re: Help! I want to fire my financial adviser.
« Reply #10 on: April 29, 2015, 10:06:31 AM »
I don't have investments in a 401K because my employer doesn't offer one....
I think it would make sense to open a traditional IRA but I have just been contributing to my Roth because that's what I already had, I do plan to open one for next year.
Why wait until next year?

If you have already put the $5500 into a Roth for this year, recharacterize it to a traditional.  E.g., see http://fairmark.com/retirement/roth-accounts/recharacterizations/recharacterization-rules/.
That will save you at least 25% * $5500 in taxes for 2015.

Logic_Lady

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Re: Help! I want to fire my financial adviser.
« Reply #11 on: April 29, 2015, 12:17:05 PM »
Ouch, sounds like that would be some ugly cap gains taxes. Not sure what I would do either.

Quick math for the American Fund:
Tax if sold now: $2,550
Cost over Vanguard 0.71%/year x $25,000 = $177.5/year. Over 10 years (*17) ~ $3,018.

So it kinda makes sense to sell it and transfer, but that's an unpleasant tax hit. Your time horizon is hopefully more than 10 years too though. Of course you could wait for a correction and sell some then, but who knows when that will be.

I actually plan to FIRE within the next five-ten years though, so would it make sense to wait until then to sell it? My income should be low enough that there won't be any cap gains tax.

Logic_Lady

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Re: Help! I want to fire my financial adviser.
« Reply #12 on: April 29, 2015, 12:25:57 PM »
I don't have investments in a 401K because my employer doesn't offer one....
I think it would make sense to open a traditional IRA but I have just been contributing to my Roth because that's what I already had, I do plan to open one for next year.
Why wait until next year?

If you have already put the $5500 into a Roth for this year, recharacterize it to a traditional.  E.g., see http://fairmark.com/retirement/roth-accounts/recharacterizations/recharacterization-rules/.
That will save you at least 25% * $5500 in taxes for 2015.

I read this article and did some googling but it's still not clear exactly how I would do this. Do I have to contact my financial institution and have them do this? Can I just take the $5500 out and put it in a traditional IRA, or would that cause problems? (It hasn't been invested in anything yet)

MDM

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Re: Help! I want to fire my financial adviser.
« Reply #13 on: April 29, 2015, 12:33:13 PM »
I read this article and did some googling but it's still not clear exactly how I would do this. Do I have to contact my financial institution and have them do this?
Working through the financial institution should be the easiest in the long run, as that ought to minimize the likelihood of any problems come tax time next year.  It may be the first time for you, but it is something they will have done many times.

forummm

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Re: Help! I want to fire my financial adviser.
« Reply #14 on: April 29, 2015, 01:15:30 PM »
Ouch, sounds like that would be some ugly cap gains taxes. Not sure what I would do either.

Quick math for the American Fund:
Tax if sold now: $2,550
Cost over Vanguard 0.71%/year x $25,000 = $177.5/year. Over 10 years (*17) ~ $3,018.

So it kinda makes sense to sell it and transfer, but that's an unpleasant tax hit. Your time horizon is hopefully more than 10 years too though. Of course you could wait for a correction and sell some then, but who knows when that will be.

I actually plan to FIRE within the next five-ten years though, so would it make sense to wait until then to sell it? My income should be low enough that there won't be any cap gains tax.

In that case, then you can keep the fund. If the market crashes, maybe the math makes sense to move it. But you can always just make it the first thing you liquidate the year after you quit your job.

MrsOz

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Re: Help! I want to fire my financial adviser.
« Reply #15 on: May 02, 2015, 01:40:48 PM »
I don't think the current adviser is doing a terrible job, but I also don't think he's adding enough value to be worth the approx 0.7% fee I'm paying. The problem is, while I feel confident of my ability to invest the new money I deposit (in low-cost index funds of course) I feel much less confident about sorting out the mix of stock, bonds and various funds that my money is currently in (a nice problem to have, I know).

I realize you've already fired him and it's a moot point, but how could he 'add value' when it sounds like he was operating on completely outdated information?  Those are not crazy high fees if you had no idea what you were doing and needed the help.  If the presumption was that you were going to grad school and now you're not, then it's kinda your fault for not communicating with someone who works for you.  While 50% cash/fixed income is ridiculously high in accumulation mode, it's not totally unreasonable for someone with a large planned expense. 

You said you feel confident investing new cash but not dealing with what you have.  That's a huge red flag for holding onto a portfolio you're not comfortable with for 5 years just to avoid cap gains.  Feel free to do the math on taxes now versus later all you want but market risk and opportunity cost is high with a scenario like that.

Either suck it up and reposition it all for maximum alignment with your goals now, or start with low hanging fruit that has little to no gains and reposition the rest over time.  I'm guessing those bond funds are a good place to start.  In the mean time educate yourself about what you have so you can better prioritize what to jettison first.

Logic_Lady

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Re: Help! I want to fire my financial adviser.
« Reply #16 on: May 02, 2015, 03:46:05 PM »
I don't think the current adviser is doing a terrible job, but I also don't think he's adding enough value to be worth the approx 0.7% fee I'm paying. The problem is, while I feel confident of my ability to invest the new money I deposit (in low-cost index funds of course) I feel much less confident about sorting out the mix of stock, bonds and various funds that my money is currently in (a nice problem to have, I know).

I realize you've already fired him and it's a moot point, but how could he 'add value' when it sounds like he was operating on completely outdated information?  Those are not crazy high fees if you had no idea what you were doing and needed the help.  If the presumption was that you were going to grad school and now you're not, then it's kinda your fault for not communicating with someone who works for you.  While 50% cash/fixed income is ridiculously high in accumulation mode, it's not totally unreasonable for someone with a large planned expense. 

You said you feel confident investing new cash but not dealing with what you have.  That's a huge red flag for holding onto a portfolio you're not comfortable with for 5 years just to avoid cap gains.  Feel free to do the math on taxes now versus later all you want but market risk and opportunity cost is high with a scenario like that.

Either suck it up and reposition it all for maximum alignment with your goals now, or start with low hanging fruit that has little to no gains and reposition the rest over time.  I'm guessing those bond funds are a good place to start.  In the mean time educate yourself about what you have so you can better prioritize what to jettison first.


Hi! Thanks for your input. I think you may have misunderstood some of what I said though.  I didn't fail to communicate with him, I always kept him updated on my plans. Of course I don't expect the portfolio to make sense for retirement when much of it was invested when he knew I was considering going to grad school in a few years.  But I told him several months ago I wasn't going to grad school. Additionally, I am not a child anymore, obviously I couldn't manage my own money when I was a kid. Just because I needed help in the past does not mean I'm obligated to keep paying him my whole life. I didn't fire him because I think he did a bad job or screwed me over, I fired him because I want to manage my own money.  In fact I included all that info because some commentators were saying he cheated me and I wanted to explain that he had a good reason for some of it.

I have no idea why you think I was considering holding onto my whole portfolio to avoid cap gains. I was only considering holding on to a specific fund and some specific stocks since the cap gains bill would be so high for them versus what it would cost to keep them.  If I can offset the gains with losses and sell them earlier I will.

In fact I have already sold some stuff--bond funds in the taxable and high cost mutual funds in my Roth--and am putting the money into Index funds. Not to mention investing all that cash that was sitting around. I feel so much better now that I have some control over my own money, rather than hoping my adviser will listen to me.

Druid

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Re: Help! I want to fire my financial adviser.
« Reply #17 on: May 02, 2015, 08:49:05 PM »
Logic_Lady,

The capital gains tax is a legitimate concern.  If you are in the 15% tax bracket you will not have to recognize any capital gain tax. So if this is your situation then I would sell just enough stock to stay in the 15% bracket. If you are in a higher tax bracket you may just want to take the tax hit, or you may want to hold on to them and get rid of them on the next market dip. Also if there are any losses in your stocks it may be a useful tool selling the loss stock with appreciated stock so they offset each other.

I would focus on investing the cash asap in index funds. I would sell the bonds that are not in the roth account right away and move the money to index funds, because the difference in future gains should make up for the capital gains tax pretty quickly. I would also start maxing out a traditional IRA for as long as you qualify. Traditional IRAs are not taxed to the extent of your exemptions and deductions, so they have the potential to be tax free going in and coming out. Also if you have access to an HSA account I would max that out as well. I don't know what Industry you are in, but a company not having a 401k plan would be a deal breaker for me.

TomTX

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Re: Help! I want to fire my financial adviser.
« Reply #18 on: May 02, 2015, 08:52:13 PM »
Create an account at Vanguard now.

Roll over your Roth immediately (possibly you will need to call Vanguard Concierge Services on Monday) Put it all in one fund. I like VTSAX, but a target retirement is fine too.

Under $50k, you really shouldn't be wasting time on multiple funds.

THEN spend time sorting out taxable. At the very least get $5,500 of the cash over to Vanguard as your 2015 Roth contribution.