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I KEEP SEEING THEM—overly complicated, overly expensive investment portfolios. The most recent belonged to a widow in her 70s, with modest earned income, Social Security benefits and about $5,000 in taxable fund distributions for 2023. She was someone I helped during the recent tax-filing season, when I was volunteering at an AARP TaxAide site in Monmouth County, New Jersey.
Her portfolio held about a dozen mutual funds, most of which I’d never heard of. It included a bond index fund from a large insurance company that charged 0.5% in annual expenses. It tracks the same index as Vanguard Total Bond Market Index Fund (symbol: VBTLX), which charges just 0.05%, or one-tenth the fee. Moreover, the Vanguard fund can also be purchased as an ETF (BND) with a 0.03% annual fee.
In 2023, our widow had two mutual fund sales. They seem to have been chosen so they resulted in no taxable gain—a benefit to the taxpayer. But interestingly, the proceeds provided just enough money to cover the $2,500 annual fee that the financial planner charged. It seems her portfolio is worth around $200,000, so the $2,500 she was charged apparently represents a 1.25% annual fee, which is on top of the fund expenses she incurs.
The financial planner listed on the statement is part of a large financial planning firm, with more than 20,000 financial professionals nationwide and $1 trillion in assets under management. I imagine that, for a busy financial planner, this woman’s account ranked pretty low in importance. When I explained to the client what the statement represented, she quietly admitted she didn’t understand how her money was invested. More important, she said she couldn’t get the planner to return her calls. She asked how to go about finding someone new.
Last year, I also wrote about the overly complicated, overly expensive portfolios I saw during tax season. This is a problem that won’t go away, and it isn’t limited to seniors. I’ve also seen unusual investment statements brought in by clients of every age, from their 20s to their 60s. In most cases, the clients didn’t understand what they were invested in. I try to explain the statements, but it rarely seems to help.
I know a number of financial professionals who provide a great service to their clients. But many financial advisors are less than ethical—and yet clients stick with them. Inertia is a common human trait, which is why I expect to continue seeing expensive and inappropriate portfolios in future tax seasons.
I am currently making some changes in our portfolio by adding the Vanguard Total World ETF and thus more exposure outside of US. While researching I went to a popular forum where folks share (generally or by percentages) their retirement portfolio allocations. WOW was I surprised at the complexity of many of them! I kept thinking back to an old article I recall in which Jonathon shared that he would keep his simple with only about 3 broad index funds/ETF investments and that is more like what I was looking to do. For me anyway, it is confusing, unnecessary, and likely duplicative to have so many different funds/stocks etc.
This article popped up on the site this afternoon. It took the opportunity to review some comments that I missed the first time around. I specifically like Kevin Lynch’s thoughtful and generous response to L. Williams request for help in making sense of confusing investment information.
Years ago I wanted to find out what financial advisers learn. I passed the 3 courses in just 3 months that allowed me to sell insurance + anything about securities. I didn’t practice one day…why?
On the first page of the course they discussed that a good financial adviser should be a FIDUACIARY and must put their clients first.
In just 2 minutes I realized it doesn’t make sense, let me explain.
Most clients portfolio should have limited number of funds (IMO max 5), using mostly very cheap index funds. This portfolio should last for years with minimal changes unless a major event happens. This means very low maintenance + very cheap expense ratio = cheap.
Basically, most investors don’t need someone to hold their hand and charge a % out of their portfolio every year while nothing change.
So, how can a financial adviser put their clients first, be 100% honest and make money? Most will starve.
This is another catch 22. If your investment knowledge is below average, you wouldn’t be able to know if your adviser is good.
If your knowledge is above average, you don’t need one 🙂