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Calling for Backup

Dennis Friedman

WHEN I RETIRED, I was surprised by how many of my friends and former colleagues had a financial advisor. My thought: Why would folks pay someone else to manage their money when they could easily do it themselves?

But I found out early in retirement that hiring an advisor was a good idea. There’s a big difference between investing while drawing a paycheck and investing without one. When I retired, I realized that the money I was investing was all the money I’d ever have, except for Social Security—and Social Security replaces just 40% of the average worker’s salary. With the stakes so high, I was hesitant to manage my own money.

When I turned age 67, I decided it was time to hire an advisor. I felt someone else could do a better job than me, not because the advisor would select better investments, but because he or she would be a more patient and less emotional investor.

I wasn’t looking to hire a full-service financial planner who would advise me on topics like estate planning and insurance. I’m pretty well set in those areas and I already have professionals helping me. Instead, I wanted an advisor who would create a plan for meeting my financial goals and help me manage my investments. Here are some things that were important to me when looking for a financial advisor:

  • After one advisor failed to turn up for our appointment, I realized how important it was to have someone who was dependable and trustworthy.
  • I wanted someone with reputable credentials, such as the Chartered Financial Analyst or Certified Financial Planner designation. In addition, the advisor couldn’t work on commission because that creates an incentive to push high-cost financial products.
  • I wanted my own dedicated financial advisor, with the ability to schedule an appointment when needed. I wasn’t willing to leave my investment portfolio in the hands of a robo-advisor, with no human interaction.
  • I wanted a portfolio designed specifically for my circumstances, needs and goals.
  • I wanted my portfolio built primarily with low-cost, broad-based index funds.
  • I wanted transparency, with the ability to go online and see up-to-date information on the total management fees incurred, my portfolio’s performance and the likelihood of meeting my financial goals.
  • I wanted excellent customer support not just from my financial advisor, but from the whole organization.
  • I didn’t want to pay for the initial investment plan. If I didn’t like the plan, I wanted to be able to walk away without incurring a fee.
  • Finally, I wasn’t willing to pay someone 1% of assets per year to manage my investments. It would have to be considerably less.

I decided to go with Vanguard Personal Advisor Services. I’ve been a Vanguard Group client for more than 35 years and felt comfortable with the people there managing my money. Since I already had most of my money with the firm, it was easy to swap over to the advisory service.

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After three years, I’m happy with my portfolio’s performance and with the customer service. But in the back of my mind, I keep wondering whether I’d be better off in a Vanguard Target Retirement Fund that meets my desired asset allocation.

These funds offer a diversified, professionally managed portfolio—and the cost is just 0.12% to 0.15% a year. That’s less than half the cost of the advisory service, which is typically 0.3% a year plus the expenses of the underlying funds. Each target fund is made up of low-cost, broad-based index funds, similar to what my advisor-managed portfolio owns. It’s a type of fund you can literally forget about because it makes all the investment decisions. You don’t even have to keep tabs on your asset allocation because it rebalances for you.

How important is access to a financial advisor and having a personalized financial plan? Is it worth the added expense? So far, the answer is, “yes.” But those target retirement funds sure look tempting.

Dennis Friedman retired from Boeing Satellite Systems after a 30-year career in manufacturing. Born in Ohio, Dennis is a California transplant with a bachelor’s degree in history and an MBA. A self-described “humble investor,” he likes reading historical novels and about personal finance. Check out his earlier articles and follow him on Twitter @DMFrie.

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Carl Book
Carl Book
8 months ago

I think most people can use index funds and forget having an advisor.

Sunil Sharma
Sunil Sharma
11 months ago

An article by Allan Roth in June 2021 in the Barron’s magazine titled “Why My Support for Robo-Advisors Is Waning“ mentions that Vanguard Personal Advisor Service did not rebalance some client portfolios during the 2020 stock market decline, thus missing a rare opportunity to add value to a client’s wealth by ‘selling high and buying low’. Did Vanguard’s target-risk and target-date funds (LifeStrategy and Target Retirement funds respectively) rebalance their portfolios to their policy allocations during the 2020 stock market decline?

Jonathan Clements
Admin
Jonathan Clements
11 months ago
Reply to  Sunil Sharma

As I understand it, those funds are effectively rebalanced every trading day, with no judgment made by a strategist, advisor or money manager, so I assume the answer is “yes.”

Sunil Sharma
Sunil Sharma
11 months ago

Thanks for your reply, Jonathan. Sometime in the past, you mentioned that these all-in-one funds rebalance every trading day using fund inflows and outflows. I presume that the intent is to avoid capital gains liabilities by not selling securities in order to rebalance their portfolios.

However, during the sharp 33% decline in the stock market in 2020, fund flows might not be adequate to rebalance portfolios. Do we know whether these funds sold fixed income securities and bought equities during that decline?

Unfortunately, buying equities during a decline might require these funds to sell equities as equities appreciate sharply after the end of a bear market, which would generate capital gains distributions that these funds try to avoid. Does the management charter for these funds allow them to buy and sell securities in order to rebalance their portfolios, even though such trades might generate capital gains distributions? If not, then investors in these funds might miss out on rebalancing opportunities, which would be a negative attribute of these funds.

Jonathan Clements
Admin
Jonathan Clements
11 months ago
Reply to  Sunil Sharma

I doubt there’s any “fund charter” that spells out a policy on taking capital gains — I’ve certainly never seen such a thing. Given that these funds are geared to retirement savers, especially those in employer plans, I imagine that avoiding realized capital gains is a secondary goal. The primary goal is to maintain their target asset allocation. Did that result in realizing capital gains? You can check each fund for 2020 and see if there was a capital gains distribution.

Sunil Sharma
Sunil Sharma
11 months ago

A clarification, Jonathan. I am not looking for capital gains. I am hoping that these all-in-one funds did engage in rebalancing trades during the stock market decline of March 2020 in order to buy cheaply-priced equities, unlike Vanguard’s Personal Adviser Service which did not rebalance some client portfolios per article by Allan Roth in a June 2021 issue of Barron’s magazine. Does the charter of these funds allow them to trade securities in order to rebalance their portfolios or do these funds rebalance solely using fund flows? If they only use fund flows, then they might have missed the opportunity to buy inexpensively-priced equities in March 2020. That is my concern. How can we determine what these funds did or did not do in March 2020?

Jonathan Clements
Admin
Jonathan Clements
11 months ago
Reply to  Sunil Sharma

These funds are continuously rebalanced and it takes places however is necessary. i believe you’re worrying about a problem that simply doesn’t exist. But if you don’t trust me, call Vanguard!

Sunil Sharma
Sunil Sharma
11 months ago

One final question, Jonathan. Since ‘all-in-one’ funds, such as Vanguard’s LifeStrategy and Target Retirement funds, rebalance continuously, is this a significant argument for using these funds instead of using Vanguard’s Personal Advisor Service which may not rebalance a client’s portfolio at an opportune time, as Allan Roth’s article in Barron’s indicates? Thanks.

Jonathan Clements
Admin
Jonathan Clements
11 months ago
Reply to  Sunil Sharma

There are two questions here. First, should rebalancing be continuous? That may have been a good strategy in February and March 2020, when markets fell swiftly and then promptly rebounded, but — from a return perspective — the right strategy since would have been to delay rebalancing, so you had more in stocks during the rebound. Given that markets often display momentum, being slower to rebalance is often a smart strategy. Second, why use Vanguard’s advisor service when you could get a similar mix from one of its target funds? You get an advisor to talk to, plus the advisor will steer you into index funds with somewhat lower pricing, though not enough to compensate for the 0.3% advisor fee. So the real question is, do you need an advisor?

Last edited 11 months ago by Jonathan Clements
Sunil Sharma
Sunil Sharma
11 months ago

Thanks, Jonathan. I appreciate the discussion very much.

Harold Tynes
Harold Tynes
11 months ago

I chose to engage a financial advisor several years ago when I was in my late 50’s. We worked out a below market fee arrangement based on index funds (Dimensional)+my own mix of Vanguard and Fidelity. The assets are in a mix of Roth, IRA, SEP and taxable accounts. I also had substantial muni bonds. We pay substantially less than 1% in fees. I wanted access to the DFA funds but I also wanted to provide a source of support to my wife when I pass. She and I sleep better at night knowing that if I pass away or become incapacitated, she has someone we trust managing our money. I am still actively engaged in investing the portfolio, but involve the advisor with major life decisions and investment activity. We talk 3 or 4 times a year.

booch221
booch221
11 months ago

Vanguard Personal Advisor Services would cost us $7,500 per year. When we retired Vanguard prepared a financial plan for for free. I still follow the plan and simply do the yearly rebalancing myself. The fee expense for all my funds is 0.07 percent.

Another option, in addition to the Vanguard Target funds, are the Life Strategy Funds. There are four of them, Income, Conservative Growth, Moderate Growth, and Growth. They all have fees less than 0.15 percent.

The Conservative Growth Fund fund, for example, is composed of five other Vanguard index funds and holds 60% of its assets in bonds, a portion of which is allocated to international bonds, and 40% in stocks, a portion of which is allocated to international stocks. The fee is 0.12 percent.

If you owned one of these funds you would never have to rebalance. Vanguard does it for you.

https://investor.vanguard.com/mutual-funds/lifestrategy/#/

Last edited 11 months ago by booch221
Catherine
Catherine
1 year ago

Thanks for a thoughtful and thoughtful provoking piece!

I have a portion of my portfolio at Vanguard and while I wouldn’t classify myself as a Boglehead, I have long been intrigued by the simplicity of the three fund portfolio, or variations thereof. And rebalance once a year, I suppose, based on my current preference in asset allocation.

I’ve spoken to the Vanguard personal advisors a couple of times, and have had some of the same thoughts as you. Ultimately though, I come away with the question of cost/benefit.

Right now my investment costs for my Vanguard portfolio is 0.07% and it’s hard to justify upping the cost of investing to include a financial fiduciary advisor, as long as I find some intellectual and emotional satisfaction in keeping an eye on things myself.

Though, reducio ad absurdum, I could switch what I have into a two or three fund portfolio and cut my portfolio expenses in half again, and yet I haven’t done that.

Human nature, perhaps?

Andrew Forsythe
Andrew Forsythe
1 year ago

Dennis, since I don’t believe Vanguard has any branch offices, I’m assuming all your interaction with the advisor has been remote. Has the lack of face-to-face time been an issue for you?

Dennis Friedman
Dennis Friedman
1 year ago

Andrew,
I communicate with my advisor by telephone. There haven’t been any problems because of the lack of face-to-face time. I’m at my computer looking at my financial plan while the meeting is being conducted. I have access to all the information I need.

Andrew Forsythe
Andrew Forsythe
1 year ago

Thanks, Dennis.

Purple Rain
Purple Rain
1 year ago

I prefer the following one-stop funds to target-date funds:

Vanguard Balanced Fund (60% stocks, 40% Bonds) – VBIAX
Vanguard Wellesley Income Fund (1/3 stocks, 2/3 bonds) – VWIAX
Vanguard Wellington Fund (2/3 stocks and 1/3 bonds) – VWENX.

I especially like the Wellington Fund (the oldest mutual fund) because they manage it to ensure that it is represents by all sectors. Though actively managed, the fees for both the Wellesley and Wellington Admiral shares are very low (0.16%)

Charlie Warner Jr
Charlie Warner Jr
1 year ago

Interesting debate considering that one size does not fit all. I’ve enjoyed having an advisor in retirement. One area they have really helped me is in taxes specifically with tax harvesting. I’m a big picture guy and I like the convenience that comes with a financial advisor. Obviously it’s important to have someone you trust. 

medhat
medhat
1 year ago

Also a Vanguard customer, but I’ve not yet dipped a toe into either their advisory services or target date funds. Intrigued by their advisory services, and that fee is definitely a lot less than comparable firms (not unexpectedly). I do have active management with part of my family’s overall portfolio, mostly as a consequence of inheritances and the like, and like the fact that I don’t manage all the eggs in my family’s financial basket. But I think I’d lean towards what Dennis has done, versus simply getting a retirement date fund, because I think there’s the opportunity for more adjustment based on an individual need or situation.

R Quinn
R Quinn
1 year ago

Never used an advisor, perhaps I made a mistake, but like you I used mostly Vanguard low-cost, broad-based index funds. Given that and the possibility of a target date fund, what is the value added by an advisor as opposed to set it and forget it.

parkslope
parkslope
1 year ago
Reply to  R Quinn

Vanguard’s target-date fund for those in retirement who were born before 1948 (VTINX) has a return since inception of 5.56% and is categorized by Vanguard as low risk (level 2 out of 5).

PAUL ADLER
PAUL ADLER
1 year ago

I have the same question as you do. I talk to my advisor onces a year.
How well did the target retirement funds do compared to your portfolio?

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