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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.
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 🙂
I’m one of those people that don’t understand. I read these newsletters and it appears that those who write articles and those who comment find it easy to set up a portfolio. Scratching your head and wondering what is wrong with people who don’t understand how to invest because it comes easy to you. It’s like the person who grew up in the north with snow storms and icy conditions moves to the south and wonders why people don’t know how to drive on the occasion icy roads. “I know how, why don’t you??”
I don’t want to pay someone to manage my funds. I have read articles and there is so much information that I don’t know how to use it. I don’t know what fees are charged and how to find that information. If I look at a fund (i guess that’s the correct term) there is so much information. HOW DO I USE THAT INFORMATION to determine where to put my money?
My 401k is still with my ex-employer. I want to roll it over to an IRA.
I talked to a financial planner on the phone and they suggested looking at Christine Benz bucket approach. So for you people who are do it yourself, you don’t need any guidance. So either I look at this bucket approach, or I do nothing. Someday I will be required to make RMDs. So it will have to be moved to an IRA to do that, right?
I will give you guys permission to look at my IRA account after I die so you can shake your heads (poor lady, she didn’t know what she was doing). 😄
L…
In your lifetime, assuming you worked outside theme, you had certain skills. I am certain that when using those skills, you were much better at doing whatever that was than I would be.
In my lifetime, I spent 57 years in various aspects of finance. Banking, Lending, Insurance Planning, Financial Planning, Retirement Planning, Insurance & Financial Services agency ownership and for the 15 years before I retired this January, teaching all these various aspects of financial services to future and current Financial Advisors at the collegiate level.
As you might surmise, I have no problems advising folks and helping them set up portfolios, etc. The problem many advisors have however, is that some clients or potential clients don’t know what their actual goals are and have no idea of how to determine what they are. There is an art, and a science in being a great financial advisor. The numbers are the easy part. Human relations is where the art comes in to play.
Speaking in very broad and general terms, here is a plan that anyone can use to successfully set up an investment portfolio.
If you are in your 20’s-40’s…you need to invest in equities…like Vanguard’s Total US Stock Index and Vanguard’s Total International Stock Index. (Fidelity & Charles Schwab will have something similar, if you prefer them.) When you are approaching your 50’s, begin adding bonds or fixed income, like Vanguard’s Total US Bond Index and Vanguard’s Total International Bond Index. The exact percentages will be based on your risk characteristics, but after age 60 or so, many people like a 60-40% allocation to stocks to bonds.
Once you retire, you can alter the 60/40 allocation to 50/50, if you are more risk averse, or you can use annuities as fixed income (after all, that is what Social Security is, an annuity with COLA) and invest the rest of your portfolio in 100% equities. (That is where I am.)
There is also the category of Cash. Throughout your lifetime, 6-12 months off cash holdings would serve nicely as your emergency fund. In retirement the closer to 36 months of cash you can amass, the better you will be able to avoid the risks faced in down markets, early in retirement. Presently, I have 3 years of cash in a Reverse Mortgage Line of Credit, averaging 7.12% interest earnings annually.
As you take all of this into account…and if you feel all of this is too much for you to handle…NOW you can better understand WHY some advisors are worth their fees and others may not be. Any educated, licensed CFP or ChFC professional will have the same knowledge I have outlined in this note, mentioned and then some. If you are retiring soon, you might even search out an Advisor with an additional professional designation, the RICP (Retirement Income Certified Professional.)
Before retiring in January 2024, I spent the past 15 years as a college professor, teaching financial advisors the skills of the professional programs I mentioned earlier, and a number of additional programs as well. My ability to teach courses in those programs was based on my holding those designations my self, and having been in financial services as a practitioner for 42 years.
In closing, let me offer this advice…interview a number of FAs. Make sure they have the minimum educational requirements, which would include a CFP or ChFC designation. Make sure they are fiduciaries, and have that in writing. Do not consider any fee above 1% annually. If possible, try to find an FA who offers a flat fee service, and one who embraces low cost, indexed fund investing. Insist that they educate you so you will be able to become a co-manager of your portfolio, and not only a delegator.
If you do these things you will increase your probability of establishing a successful financial services relationship and being satisfied with the service you receive.
And after 1-2 years, you will be situated to become a DIYer, although I wouldn’t recommend that route. Even I am smart enough to know that there is value in having an advisor and I have one through the Vanguard PAS program. (Even though I an older, have more education, and many, many more rofessional designations, I considerate essential.) Annual cost is 30 basis points (1/3 of 1%).
What do I get for my money? Rebalancing, tax loss harvesting, and a sounding board to bounce ideas off of. In my opinion, well worth the cost. Also, my advisor is 30 years younger than me, so I am pretty sure he will be around to help my wife if I predecease her (I am 4 years older) or to be there for me, should I fall victim to dementia later in life.
I wish you the best in your planning adventures.
Can I suggest reading through HumbleDollar’s portfolio builder? It won’t take you very long and I suspect it’ll help you build a sensible investment mix.
https://humbledollar.com/money-guide/portfolio-builder/
When I interview my potential financial professionals to tend my portfolio, the question I often ask, in addition to question related to their financial expertise, is how active are they in any mainstream organized religion. This will give an indicator of their ethical manner when it comes to managing other people’s money.
Unfortunately, some scam artists have joined religious congregations to pray on its members. It’s natural for congregants to assume that all members are ethical when it comes to financial affairs.
It can be hard to look at a congregation and distinguish between those members with strong ethical values from those with merely an ethical veneer.
A friend lost her 62 year old husband suddenly and had never been involved in their investments. I offered to help her understand and simplify. As an example, her Roth account had about $50K in it and was invested in 19 different and expensive mutual funds. She was paying about $35K in fees, between the AUM fee and mutual fund expense ratios. By consolidating and simplifying the John Bogle way, her fees are under $1K and she knows where to get money.
Ya it’s a shame, I have 3 elderly neighbor lady’s in the same situation, 1 told me “I told my advisor to treat me like they would treat there family member.” I wish those who that want a hands off approach, would just go to a robo-advisor, or just get a VSCGX Vanguard LifeStrategy Conservative Growth Fund. There is so much fear with personal finance, I heard of a stat recently that 70% of parents would rather talk to there kids about sex then money.
Thank you for helping people who clearly need it! A couple of my new neighbors at my CCRC mentioned that they have financial planners. They love them. One of them didn’t know what a QCD was. At least the other claims that her fees are very low.
Thanks Kathy. I’m sure you will be exposed to lots of interesting investment stories.
Richard, after teaching Financial Planning and Retirement Planning for the last 15 years, I can assure you, it is really not complicated, but it is purposely made to be complicated. Why? To justify fees.
The average American can invest on their own through Vanguard (or Fidelity or Charles Schwab.) The solution is simple, and only varies by age.
That’s it. That is the entire universe of investments a normal person should consider when investing.
In your 20’s to early 40’s, 80-95% Total Us Stock Market with 10-15% International Stock Market. In your late 40’s-early 50’s, introduce Bonds into your portfolio. By age 60-65, a 70%-30% or 60%-40% Stocks/Bonds Portfolio will last you the rest of your life.
If you can read at the 10th grade level, you can do it yourself. Read a few books by John Bogle. Every dollar paid to someone else to do for yourself what you should be doing for yourself, is lost forever, as is the earnings it would have made you.
NO ONE cares more about your money than you do. Spend some time learning about money, how it grows, and how to keep it in your portfolio, not in an advisor’s pocket.
Kevin, thanks for reading and sharing. I agree with your investment philosophy and follow it. I’m not sure what prevents some folks from ganging the knowledge and experience, but it’s a real issue for many people. It’s almost as if they view an investment advisor the way they view a Dr, as someone with specialized knowledge that they could never hope to understand.
I was once utilizing a large, well known financial advisor firm in the up and coming years of my career. I soon learned that I could do far better if I ignored their “advice”. During one discussion. I expressed my frustration with their picks for my portfolio and lack of follow up. He explained that, at my asset level, I was a customer ($) and not a client ($$$$$). I said good bye!
GW, thanks for sharing your story. I’ve heard similar stories from others on the relative unimportance at lower AUM levels. Glad you got out early.
25 years ago, we sold a company, anticipating a career change, I got a CFP (qualified for the experience with some financial background) After getting the CFP, and after reviewing the options in the financial industry, I could not enter it. I found the approach among almost all of the firms I discussed positions (mostly big firms) was so unethical, I just could not look in the mirror and do it. Today, I sense things are better but it sounds like there are still pockets of just doing wrong to people (as your article presented) in that industry. Fortunately, the growth of index funds has forced some ethics where it might not have been.
After I left clinical work as a Physical Therapist I considered becoming a CFP. I thought was I would design my clients’ portfolios like mine following the principles of John Bogle. I decided against going forward as I felt clients would not buy into such simplicity. Now however I have been reading that more and more that good, ethical financial advisors are turning more to this concept, and focusing more on the clients’ total financial picture.
JG, thanks for reading and sharing. I also got my CFP, mainly for my own knowledge. I know there are good CFPs out there, but you need to look.
Rick Thanks for the post. Almost every week we receive free dinner offers from financial planners that are promptly disposed of. It has taken some time at the library digging through financials to become a DIYI with p!enty of time for research during the cold winter months. At least our taxes provide up to date library books.
Ah yes, the financial planner free dinner may be the most expensive dinner you ever had. Robert Cialdini’s book, Influence, is well understood by these guys. The engendered need to repay the favor can be difficult for many to resist.
Thanks AK for reading and sharing. It has never been easier to acquire knowledge – it’s almost all on the internet – HumbleDollar’s posts and guides alone cover just about everything most people need to know.
Rick, thanks for your AARP volunteer work and thanks for writing on such an important topic.
The complexity of finance and investing so often makes people’s heads swim, and they are happy to roll along with an advisor who overcharges them and does them little good—just so they don’t have to think about it.
It’s hard to change such widespread behavior but, as many have commented in the past, maybe it starts with required basic finance taught in high school—with a chapter on simple DIY index investing!
Andrew, thanks for reading and commenting. I agree that many people I encounter are finance – phobic, and investment – phobic (I wonder if it correlates with math – phobia). For many folks, a good, honest advisor is with the fees if they would not have created or followed a sound financial plan. The key is finding an honest, caring, holistic FA.
This is such a difficult topic. Looking back on my time as the executor of my parents’ estates, I observed many of the things that folks have commented on here. There were weird and questionable stock & fund purchases. Their FA charged 1-1/4% for doing routine stuff. Luckily, these represented a small portion of their estate. The majority of their assets were concentrated in a few stocks that my father kept forever and would not allow that FA to sell.
Jeff, thanks for reading and commenting. Your experience is why I think it is important to be transparent with our children as we age. They may not only inherit, they may be burdened with caring for us, taking over our finances, and settling an estate. I’ve seen the need arise quite quickly. Inertia is an enormous force in getting us to change.
Rick – My parents were transparent with their plans and wishes, but not transparent with the complicated state of their finances. Look for a future article in HD. It’s on the schedule.
Rich, thank you for this observation. I too am an AARP TaxAide volunteer and I’ve noticed the same thing. For 2023 I estimate 80% of my clients with brokerage statements showed an overall loss. It seemed there was often an abundance of short-term capital losses from individual stocks. Do I dare say these portfolios were being churned? In reply to LH, AARP volunteers are not allowed to give financial advice. But that did not prevent me from wondering why a retiree was paying a “professional’ for the privilege of losing money on their portfolio in 2023 while the S&P 500 was up over 20%.
Robert, thanks for volunteering, and reading and commenting. The article I wrote last year was about a couple in the 80s whose brokerage statement had 3 dozen STCG, 40 LTCG, and 10 pages of dividends. It was such and obvious case of churning.
Interesting report from the field, Rick. Your experience lines up with that of my favorite local fee-only financial advisor, Tim Decker. He has a radio program/podcast each week and based on the stories he tells, a large majority of financial “advisors” do a disservice to their clients. I feel bad for people like your widow. Still, there are far worse stories out there.
Ken, thanks for reading and commenting. Every planner I know has similar stories. One of the worst was when a 90 year old man with stage 4 cancer was sold a deferred, variable annuity. The man’s daughter sought help form an independent planner I know, who was able to get him out of it.
First, I’d like to thank you for your volunteering to help those in need. My question is “How much financial advice can you give?”. If it’s limited but would obviously be helpful could AARP possibly offer it as a volunteer service? Tax help, helps for that year. Financial advice helps for a lifetime
LH, thanks for reading and commenting. The quick answer is we are not supposed to provide financial advice. It’s a tax program. AARP is expanding a program to provide help on state property tax programs, and there are programs to help navigate Medicare. I’m aware of various financial planning associations that do pro bono FP. I volunteered for one many years ago, but they never organized any events.
I try to sneak a little simple planning in when I can. I always encourage young clients to make sure they understand their benefits, and participate in their retirement plans. They have a direct impact on taxes, so that is legitimate.
My first investments were with IDS, which morphed into other entities through the following decades. My investments were small and it didn’t take me too long to realize the company’s proprietary mutual funds were 4th quartile bottom feeders. Sadly most people never figure this out. I believe that company was eventually fined for pressuring their advisors to use those funds.
Dan, thanks for reading and commenting. It’s staggering how many funds are out there, and what some charge.
Rich, everything financial especially for people retired or planning to be is too complicated.
Dick, thanks for reading and commenting. It can be discouraging how complicated finances can be, and how confused many folks are. Even smart, successful people are often unaware of how our tax system works, and what their effective tax rate is. Frequent changes to the tax code are another issue; I regularly see clients with scraps of paper listing their few hundred dollars of charitable contributions. They are confused that they are “no longer” deductible, and don’t really get that the standard deduction more than makes up for it .