Author Topic: Financial advisor package vs. self-chosen ETFs (with an international twist)  (Read 839 times)

SproutingStacheHK

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Hello all!  After lurking on the MMM blog and forums for a year, I'm venturing out into the open to ask for perspectives or advice on a choice I'm facing about my financial planning. 

I'd be so grateful for any thoughts from anyone with the time for a long ‘case-study’ read - I find the discussions on here so useful to my thinking.

FACTS:
I'm 34, single and have just moved to Hong Kong for my first permanent academic post; I'll be here for at least the next 6-8 years, but will likely move internationally (no idea where) over the course of my career, as many academics do. I'm Australian, but recently came from 6 years in the US for my PhD.

Years of frugal and joyful grad-student living have happily atrophied most of my spending muscles, and the combination of very slow but determined saving in my twenties and a sudden blast of real wages over the past year have left me with a financial situation as follows (I think in Aussie dollars, but you can do the maths as though they're US dollars):

$105k in savings (straight-up cash - zero interest savings and 2.7% term deposits - MMM has taught me that this is an insane amount to have not invested; all I can offer in my defense is that a fair bit of it came out of nowhere in the last year!)
$25k in retirement fund (Australian version of kinda-tax-sheltered 401k)
-$30k in Australian education loan from undergrad (no interest except inflation tracking (currently 1.5-2% p.a.), and no need to repay at all while not earning in Australia)

I have nothing else to my name, and I'm pretty sure that by aiming hard at a good happy mustachian lifestyle, even this "high cost of living city" with crazy-high rent will allow for a 60% ongoing savings rate (about 70k p.a.): 7 weeks in, I'm hitting that target sustainably.

GOAL:
To be able to retire if I want at 50-55, and to buy a house at some point in the next 20 years.  So I’m figuring on a target of 3 million: 2 million stache to sustain an $80k cost of living (working off a living cost of 40k in today’s dollars, adjusted up for 20 years of 3.5% inflation), and a generous 1 million for a house.  So far, my maths and FI calculator use suggests that I should hit exactly this in 20 years – much sooner if I buy a cheaper house.

PROBLEM:
As all that hoarded cash suggests, I know nothing about investing. I'm on my own to devise a long-term plan for where to put this money; and with a lump sum of 100k, and more savings piling up to scare me further each month, it’s urgent I get a plan into action.

The plan I’ve been able to come up with is this: put pretty much all my money and future monthly savings (except for a very small emergency fund) into the cheapest-fee ETFs available in Hong Kong (Vanguard and BlackRock products mostly), exposing myself to a diverse array of markets, and hoping for about a 6% return over the long term.

I can get 3 local market ETFs through my bank’s low-brokerage-fee monthly investment scheme, and others (S&P500; FTSI; Asia; Europe) I can buy each month, in a dollar-cost averaging kind of way, also through my bank’s brokerage service.  Going through the bank for these has higher fees to buy/sell than independent online brokers, but is straightforward for a scared newbie. 

I believe I can buy stocks myself for an average entry cost of about 1% - or less if I save a bigger sum before I invest. (Is this normal?? Does this entry cost sound ok??)  ETF annual fees for the funds I’ve selected are on average .17%: the cheapest rates available in Hong Kong. 

I tested the waters with about 5k into 6 ETFs over the past fortnight (brokerage fees waived for this month on mobile banking, and there was a little dip in the market) and think I’ve roughly got the hang of the process itself, though I have to confess, all the “p/e ratio”, “spread”, “lot size” information tends to play on my anxiety (I worry: should I be using this information?  what don’t I know that others do?  am I even doing this right?)

BUT!

I went to see a financial adviser today, because MOVING this money might be a thing I’ll want to do if I take a job in the US or Australia or Europe, and Hong Kong’s amazingly low tax rates will not follow me.  Little as I know about shares, I know even less about international tax laws.  For this stuff, I know I’ll need help from a professional at some point before I retire.

The financial adviser (seems a decent, sensible person; older guy, very generous with his time in a 2.5-hour (!) free meeting today; is also an Australian in HK, so has insight into retiring to Aus) charges a 1% fee for his services; the offer is that he comes up with an ‘investment package’ which is actively managed by an outsourced brokerage/management team.  This team then charges at least .6% and “up to” 2% to manage the funds; which will (mustachians all together: “TRY TO”) have returns 4-5% over straight savings returns even inclusive of these fees.

The financial adviser would therefore compute the total amount of fees at 1% - he doesn’t think the other fees “count”.  With my mustachian training from a year of lurking, I would compute the total amount of fees as at least 3%: even if there aren’t other fees being passed on to me through the purchase of mutual funds etc. within the portfolio.  There is also a $1200 setup cost.

Here’s my dilemma: because it’s not as simple when moving internationally is involved, is it worth having a financial adviser taking care of investments – even with these un-mustachian fees?  Might that not save me enormously in helping with moving money/dealing with tax implications/doing tricksy things like having Australian dollars as part of my HK portfolio even though the currency here is different?  What if in my ignorance of this stuff I screw up royally, or even screw up just picking which ETFs to buy?  Might these advisory considerations make the fees “worth it” even if the active managers don’t beat the market by at least their fee amount?

Or what about this: should I give over 50% of my portfolio to this financial adviser, and do the rest in ETFs myself, lowering the total fee percentage and still getting advice if I need it when moving?

(Jesus, I didn’t think this would be this long to write out!  Sorry sorry sorry!)

Weary traveller, if you’ve made it this far and still have the strength to type: what would you do? 

SproutingStacheHK

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Thanks for this, L.A.S.!

It's reassuring to hear my concerns about the fees confirmed - and your sense of financial advisors.  I was wavering partly because he seemed so nice.

Also, after posting last night, I went over the numbers again, and found even more hidden fees: the advisor told me "That 2% for the active managers is never really anywhere near as high as 2%, because you get it back in discounts, since they have the institutional power to buy funds at discounts." What this means in reality, now that I think about it for more than a second, is that even the active managers are buying actively managed funds which have their own fees! So it's not a "discount", it's additional fees, making it potentially well over 3% in total fees.  Ugh. Clever sales tactic, but ugh.

I'll just screw up my courage to manage ETF picking myself, and tackle tax advice for moving as a separate concern when the occasion arises. 

(And re. investing through the bank being expensive - I was just talking about their higher minimum brokerage fee, which as you say I can deal with by saving up more to invest at at time.  Thanks!)

Freedomin5

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Hi there. I am not Australian and don’t live in Hong Kong...but, I am Canadian and live in China...so part of the same Commonwealth and living in the same country as you, I guess?

I actually did something similar to what you suggested...about two years ago, I put $70000 into a managed portfolio with a fee of 2.XX% (can’t remember the exact amount) that advertised returns of 10%+, offered through my bank’s financial advisor. I took another $70000 and purchased index ETFs. I then compared the performance between the bank managed portfolio and my self-managed portfolio. I tried to replicate as much as possible the bank’s underlying holdings. Guess what? My self-managed portfolio outperformed the bank’s portfolio by the difference in management fees, approximately.

I know that we will be moving back to Canada in the future, so I purchase everything in my home country. I transfer money back to Canada on a monthly basis and only purchase 2-3 times per year to minimize commission fees. We’ve been doing this for several years already, as we are living abroad long term.

I don’t know if there is an Australian equivalent, but I didn’t randomly pick ETFs myself. I followed the Canadian Couch Potato’s sample portfolio which consists of Canadian Equity ETF, international/US Equity Index ETF, and Bond index ETF.

SproutingStacheHK

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Cheers for that, Freedomin5 (hope that 5's counting down!).

You've fortified me in my decision to go it alone - I didn't know about Canadian Couch Potato or even that there were tools like this, but I'll try to dig up an equivalent for Hong Kong.  There's sure to be something, now that I know what I'm looking for. (Thanks for the tip!)

Your system of buying at home in Canada sounds ideal - if it weren't for the massive tax discrepancy between Hong Kong and Australia in capital gains, I'd do the same.  But I did take the time to project the total amount of fees over 20 years in ETFs vs. the financial adviser option: the difference is over $100,000 - just in fees.  This fact has also helped me feel much better about the potential cost of my own mistakes.

I really appreciate you sharing your experience and clever experiment - I won't try to replicate your data!