Author Topic: Trying to help mother with her portfolio, but I'm still a newbie myself  (Read 3937 times)

engineermom21

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Hello fellow Mustachians.

I am still new to learning about the world of investing, but my mother has enlisted my help/advice on what to do with her current portfolio.  It's managed by an adviser right now, at a fee of 1% of the annual worth of the overall portfolio.  This equates to about $7,500 in fees she is paying annually.

Her 12 month yield on the portfolio as of the end of February was 1.46%.

According to her adviser, the portfolio is performing at a rate similar to the S&P 500, and is comprised of 36 different holdings.  She is currently invested in 20% cash, 56.5% US stocks, 10.25% non-US stocks, and 11.75% bonds (with 1.5% not classified....not sure what the means).

My mother is almost 60, but plans to work for at least another 5 years.  Her current NW is close to $1.6M (I've tried telling her she could easily retire now, but she doesn't want to do that). 

Should I advise her to keep her funds managed by someone else, or would it make more sense for her to pull everything out and put it in Vanguard index funds? 


 

Trip

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I'm another of the many Vanguard fans on this site. Paying 1% to match the S&P performance is insane to me. I would ask her adviser why she should pay 1% to match the S&P 500 when she could do that for 0.05% with the Vanguard 500 Index Fund Admiral Shares (VFIAX). I'm not saying to put everything into this fund at her age. I would probably split it up over a few asset classes.

However, if the 1% fee is preventing your mother from pulling out everything during a market downturn, then I suppose it could be justified to an extent. I personally would try explaining that the adviser really isn't doing anything special. She could get greater diversification for a smaller price with Vanguard funds.

thedayisbrave

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The obvious answer is to pull out due to high fees.  But is she willing to read up on investing and learn how to self-manage? (It's not that difficult, but does require some reading).  Are you?

If not, then perhaps it is better to have it managed.  She could switch to a lower cost advisor though.  Vanguard offers a Personal Advisory Service for 0.3% which is much better than 1%. 

I manage my family's $ but if anything happened to me, that's where I'd tell them to go.

Felicity

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I'd second the advice here.

Also, I'd definitely recommend reading more about investing, asset allocation, and planning by checking out sites like the Bogleheads Wiki https://www.bogleheads.org/wiki/Main_Page

If you're looking for something in between self-managed and crazy advisement fees, some people seem to like using Betterment: https://www.betterment.com, which sounds like it might be a good option at 0.15% annually if you and your mother are not comfortable with taking on all the planning responsibility.

Jim2001

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+1 on the Vanguard suggestions.  If you want to do some research, look up what Warren Buffet has instructed his trust to do for his wife when he passes (spoiler alert, it's an S&P 500 index fund). Or, you can buy a copy of Tony Robbin's Master the Money Game, then give it to your Mother (spoiler alert, again it's low cost index funds).




mskyle

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If she pulls it all out and puts it into index funds she will likely owe a lot of capital gains taxes (assuming at least part of her account is taxable). She needs to be very thoughtful about how she transitions the accounts, taking advantage of loss-harvesting opportunities, etc.

I totally get why you would want to get her into a lower-priced product, and it would absolutely work for her, but the taxes on the transition could be way more than 1% of the account worth (they would be a one-time hit though). Depending on what she's holding in the account, it could be simple to make the transition or it could require the use of industrial-strength software.

mskyle

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Oh and Betterment is probably not a great option because you have to start from cash as far as I know - your mom can likely make a much more tax-efficient transition if she doesn't have to liquidate everything.

Jim2001

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If she pulls it all out and puts it into index funds she will likely owe a lot of capital gains taxes (assuming at least part of her account is taxable). She needs to be very thoughtful about how she transitions the accounts, taking advantage of loss-harvesting opportunities, etc.

I totally get why you would want to get her into a lower-priced product, and it would absolutely work for her, but the taxes on the transition could be way more than 1% of the account worth (they would be a one-time hit though). Depending on what she's holding in the account, it could be simple to make the transition or it could require the use of industrial-strength software.

Great point on the taxes!

If nothing else she can use the "so you're only matching the index" comment as leverage to reduce or remove the 1% annual overhead she's currently paying for (probably not really) average results.

okits

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What kind of services does your mom get for that 1%?  Financial and estate planning, tax optimization, efforts to educate and inform her, reassurance and hand-holding during life transitions or market downturns?  Or does the advisor just meet her once a year and hand over a report on her returns?

I'm a DIY investor, so I'm not against it, but to successfully go that route I think one has to really know what she's doing*, have good self-awareness on risk tolerance and life circumstances, and be willing to accept responsibility for the outcome.

If you're a newbie, yourself, and your mom isn't knowledgable in this area, perhaps put off any major moves until you learn more and can better advise (from your own knowledge base) what's best for her situation.

* Basic (if you are indexing) investing information and theory, how taxation in your country works, retirement benefits and pension issues.

Metric Mouse

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Maybe it's just me...but shouldn't an advisor have blasted that cash into the market in January or Febuary? 20% cash is a pretty conservative portfolio; having 20% cash, sitting in an investment account LOSING 1% of value every year, after a huge dip in the market... what the hell is this advisor doing to earn any pay?

engineermom21

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Re: Trying to help mother with her portfolio, but I'm still a newbie myself
« Reply #10 on: March 18, 2016, 06:24:49 AM »
Thanks for the advice everyone.  As I said, I'm still a newbie myself, trying to learn as much as I can as fast as I can, but I definitely don't feel comfortable enough yet to manage her portfolio myself.  And to be honest, she is never going to be comfortable enough to do that.  Part of the reason she is keeping the 20% cash is because of how conservative she (my mom) wants to be (even though she has plenty of additional cash in various savings accounts...).

I hadn't thought about the tax implications of switching everything to Vanguard.  How would I know which funds would be taxed?  She has a mix of MF, BND, ST, and ETF funds in her portfolio at the moment.

As far as what she is getting for the 1%, I believe it's just the retirement account management, but I would have to double check with her to see if that includes anything else.

I listened in on a call with her adviser earlier this week, and I did ask why she doesn't have anything in VTSMX or VFINX at the moment (she does have 4 other Vanguard funds in her portfolio, though) and her adviser said she would recommend pulling money out of her T Rowe Price Health Sciences and AMG Yacktman Service funds and putting some of it into another Vanguard fund.  My mom asked me my opinion, and I think I am going to tell her to go ahead and do it, since those two funds were down quite a bit over the last year or so.

From the sounds of it, I think I should tell her to leave everything where it is for now, until I get more educated and can help manage it more myself, because I know she won't want to do any of the research herself. 

teen persuasion

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Re: Trying to help mother with her portfolio, but I'm still a newbie myself
« Reply #11 on: March 18, 2016, 06:39:08 AM »
Thanks for the advice everyone.  As I said, I'm still a newbie myself, trying to learn as much as I can as fast as I can, but I definitely don't feel comfortable enough yet to manage her portfolio myself.  And to be honest, she is never going to be comfortable enough to do that.  Part of the reason she is keeping the 20% cash is because of how conservative she (my mom) wants to be (even though she has plenty of additional cash in various savings accounts...).

I hadn't thought about the tax implications of switching everything to Vanguard.  How would I know which funds would be taxed?  She has a mix of MF, BND, ST, and ETF funds in her portfolio at the moment.

As far as what she is getting for the 1%, I believe it's just the retirement account management, but I would have to double check with her to see if that includes anything else.

I listened in on a call with her adviser earlier this week, and I did ask why she doesn't have anything in VTSMX or VFINX at the moment (she does have 4 other Vanguard funds in her portfolio, though) and her adviser said she would recommend pulling money out of her T Rowe Price Health Sciences and AMG Yacktman Service funds and putting some of it into another Vanguard fund.  My mom asked me my opinion, and I think I am going to tell her to go ahead and do it, since those two funds were down quite a bit over the last year or so.

From the sounds of it, I think I should tell her to leave everything where it is for now, until I get more educated and can help manage it more myself, because I know she won't want to do any of the research herself.

If the investments are in a tax deferred retirement account, not a taxable account, switching investments within the account would not trigger taxes.  You need to find out which type of account you are working with here.

engineermom21

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Re: Trying to help mother with her portfolio, but I'm still a newbie myself
« Reply #12 on: March 18, 2016, 07:45:36 AM »


If the investments are in a tax deferred retirement account, not a taxable account, switching investments within the account would not trigger taxes.  You need to find out which type of account you are working with here.
[/quote]

About $120K of her portfolio is an IRA, which I believe is tax deferred. The remaining $600K is in regular stocks and bonds, which I know aren't tax deferred.  So I think there would definitely be tax hits to take into consideration if she were to move everything. 

Heckler

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Re: Trying to help mother with her portfolio, but I'm still a newbie myself
« Reply #13 on: March 18, 2016, 08:05:48 AM »
$700 large is a big amount to make decisions on.  Too big until you and your mom are both educated on the basics, know and understand the risks and costs.  I left my parents stash as is with their advisor, because they would need to manage it themselves, and they weren't interested in getting engaged.  I checked, and they were also getting benchmark index or slightly higher returns. 

Start your learning here:


https://www.bogleheads.org/wiki/Bogleheads_investment_philosophy
« Last Edit: March 18, 2016, 08:07:43 AM by Heckler »

Heckler

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Re: Trying to help mother with her portfolio, but I'm still a newbie myself
« Reply #14 on: March 18, 2016, 08:10:35 AM »
36 different holdings tells me her advisor is doubling up on fees.  Why so many niches (medical, for example), when he wants to sell them because they're down?

engineermom21

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Re: Trying to help mother with her portfolio, but I'm still a newbie myself
« Reply #15 on: March 18, 2016, 08:19:30 AM »
36 different holdings tells me her advisor is doubling up on fees.  Why so many niches (medical, for example), when he wants to sell them because they're down?

I was wondering that myself, but on the call earlier this week she said she pays a flat 1% fee of the total value of her portfolio, so it didn't sound like more trades/holdings meant more in fees (though again, I'm not 100% sure).  She also suggested selling those few options based on my comment as to why there wasn't anything invested in VTSMX or VFINX.  Rather than use the cash, which my mom did not want to do, she suggested selling off some of the other stock and putting it into other Vanguard funds.

Her (the adviser) reasoning on the Health Sciences stock was that if a democrat gets into office, health care will be affected.  She also said that the Yachtman fund owner was losing trust in her opinion. 

Thanks for the reading link, too.  I know I don't have enough experience to offer my mom better advice at this time, so I am going to tell her to leave as-is for now until I get a better grasp of how everything works. 

mskyle

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Re: Trying to help mother with her portfolio, but I'm still a newbie myself
« Reply #16 on: March 18, 2016, 08:36:08 AM »
Is your mom interested in staying with this advisor? It might be best to switch to a different advisor who goes for a more passive investment approach (and charges less). Someone who could charge a flat fee for services rendered (and coming up with a tax-aware transition plan for you mother's portfolio could be a big and expensive service) rather than a percentage of her portfolio (because, honestly, it's not 10x more work to manage a $1M portfolio compared to a $100K portfolio).

I don't know much about the service or the pricing, but Vanguard does have human advisors you can work with.

Also, if your mother can get her current advisor to help her transition to a simpler, more passive portfolio, she can then say, "thanks, bye!" and hold on to her investments (rebalancing and adjusting her risk tolerance as necessary). If that's the plan, she probably doesn't want to let the advisor know she's planning to dump her (although she might figure it out anyway) because then she doesn't have a whole lot of incentive to maximize her tax savings.

The advisor probably isn't deliberately doing anything evil or bad - I think a lot of financial advisors just want to show their clients that they're DOING SOMETHING (and they want to feel like they're DOING SOMETHING), and 36 holdings looks more like DOING SOMETHING than 5 holdings, even if the two portfolios perform almost identically.

FWIW, my company produces software that portfolio managers use to do tax-sensitive trading (and we're especially good at transition!) but we don't have a direct-to-consumer product and I think most of the advisors/managers who use our product charge the kinds of prices your mother is getting charged.

And finally: if the advisor gets you mother to invest her money rather than leaving it in cash, and can talk your mother out of pulling all her money out when the market takes a turn, that's worth a lot. Maybe not $7500 a year, but seriously, it's not nothing.

MustacheAndaHalf

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Re: Trying to help mother with her portfolio, but I'm still a newbie myself
« Reply #17 on: March 18, 2016, 09:18:32 AM »
How long has your mother's portfolio been 20% cash?

This past year S&P 500 performed at -6%, while for the past 5 years it earned about 10% annually.  See Vanguard's website "performance" tab for the details.  If your advisor happened to switch to 20% cash before the past year, thank them and move on.  If they've been 20% cash for several years, it's time to yell at them and move on.  There's no way they beat or came close to the S&P 500 over five years with 20% cash.

When you look at actively managed funds, you often see 5-10% allocated to cash.  One of the ways indexing beats these funds is by being fully invested.  Also consider what happens when the market rebounds... and your advisor is still in 20% cash, because nobody can predict the market.  They lose out to the index, because they have 20% doing nothing relative to the stock market.  An allocation of 20% cash is too defensive.  In bonds, okay.  But cash is a bit excessive unless it's your mother's explicit instruction / comfort zone to have that much.

You might take a read through "A Random Walk Down Wall Street", which John Bogle mentioned in his latest interview.  John Bogle founded Vanguard, and created the first index fund.  It's been such a good idea that Vanguard has slowly become the biggest investment company.  When you pick funds there, every fund aims for low cost.  So you can't really make the mistake of picking an expensive fund.

Neva6

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Re: Trying to help mother with her portfolio, but I'm still a newbie myself
« Reply #18 on: March 18, 2016, 10:14:43 AM »
While not as cheap as DIY, Vanguard has a personal advisor service that costs .3%. I helped move my mother from high fees and individual stocks to this plan. She has the ability to talk to an advisor and they will recommend specific AA based on her goals. Check it out at
https://investor.vanguard.com/advice/personal-advisor