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Hired a financial advisor who has claimed to be fee-only for a plan as we are 2-5 years away from retirement. Wanted help with projections but especially with two areas: amount and timing of conversion to Roths and 2. real estate as we contemplate a new or second place. Worried I received an annuity salesperson/asset manager in disguise as the first recommendation is to “simplify” our 401ks (almost all in Schwab target ETFs) with the creation of two funds—one actively managed (presumably by them) because they “can do better” and the other to a Prudential Flex Guard account. One criticism of ETFs they have made is:
“Expense Impact:
Funds can add an unnecessary layer of
expense, as opposed to direct ownership of
securities through separately managed
accounts.
In addition to the fees, the clients could run
the risk of embedded cap gains that
precede their ownership. When securities
significantly appreciate, managers will
rebalance portfolio positions and taxable
gains may be realized by the investor.”
I understand there is a relatively low cost to manage these ETFs but had not heard of the cap gains issue.
And as far as the FlexGuard product—are not target date funds managed to hedge as they get closer to the target date?
I also agree with the “Run, don’t walk” comments. Actively managed funds RARELY outperform index funds in a single year, and almost never in a longer time frame. Plus, I suspect they want a 1% feed to get you sub-standard returns. William Bengsten just updated the 4% rule. Check that out. I believe the book about the update will be released later this month.
The two key things to look for in any financial advisor are
(1) they are a Certified Financial Planner (CFP), or Chartered Financial Analyst (CFA), and
(2) they will be acting as a fiduciary, which means the advice they provide must be in your best interest.
If these folks you’re working with aren’t a CFP/CFA and legally acting as a fiduciary, move on before you lose your shirt, an arm, and two legs.
After that, it’s ideal to find an advisor who provides service based on a set fee, but I’d be willing to consider ones who charge a fraction of assets if that fraction is tiny, as it is at Vanguard’s advisory services (starts at 0.3%): https://investor.vanguard.com/advice/personal-financial-advisor
Separately managed accounts are just a fancy name for “rip off” from what I’ve seen: https://humbledollar.com/2021/05/staying-wealthy/.
ETFs are just a wrapper which make it convenient to own that fund at any brokerage, and can be very cheap AND well-managed, as is the case with Vanguard Group’s funds.
If you’re looking beyond Vanguard’s ETFs or mutual funds, you have to be careful as Wall Street has ratcheted up risk in almost any ETF created in the last ~4-5 years. For more, read this piece by Jason Zweig, if you have a WSJ sub:
https://www.wsj.com/finance/investing/how-index-fund-investing-turned-into-an-extreme-sport-d555b5ed?reflink=desktopwebshare_permalink
Forget all you have received from your above advisor and ask around for Trusted Fee Advisor. You might start with a valued advisor from Fidelity or Vanguard, only fee based, for more Ideas before you find another local Trusted Advisor.
Run as fast as you can. He is a salesman. You have tax deferral in a 401k. You do not need an annuity, which offers tax deferral as well. I have Schwab ETFs. are cheap and I have never had to pay capital gains yet, which does happen in a mutual fund when they sell a holding. If you want advice find someone who charges you a fee for advice and does not sell products. Maybe find someone who will give you advice on your Roth conversion and charge you hourly. You don’t need to pay an annual fee for ongoing advice for that. Thats a tax related question. General consensus is convert to a Roth when your income is low.
I agree in principle with the comments here: I would run – not walk – from this guy. Several reasons:
1) Can he do better with his (probably high-cost) actively managed portfolio of individual stocks than a decently designed portfolio comprised of Schwab ETFs that, in general, are index-based, well-constructed, and very low-cost? HIGHLY doubtful.
2) Any advisor recommending a variable annuity is not fee-only – he’s almost assuredly getting paid to sell you something.
3) It’s laughable that he criticises low-cost ETFs based on “expense impact.” Talk about expense impact – what about the fees and commissions he is charging you? And “unnecessary layer of expense” – variable annuities are among the worst!
4) Additionally, ETF managers can offload low-basis stocks without tax impact – that’s one of the key selling points of the format!
Look for a FEE-ONLY advisor like those who belong to NAPFA, not a FEE-BASED advisor. The latter descriptor was developed to confuse the public by advisors who wanted to jump on the fee-only bandwagon without relinquishing their handsome commissions.
Not sure this passes the smell test…You need to find how they get paid (what their model is..) and if they sell products. Selling products may create conflicts. An assets under management model may be OK if you get strong advice but it may also have conflicts and it is costly for those with high asset levels. Also check the number of clients per advisor (<50 is reasonable). I am not sure what fee for service actually is. Our advisor is flat fee only FA (who is small independent) is working on basically a retainer basis with a flat fee billed quarterly. We get holistic planning and advice with investment management mostly in mutual funds and ETFs and a few individual bonds with a specific purpose. Check the credentials also. CFP, RIA are good ones. If there is a retirement planning credential like RICP or RMA all the better. As noted they should be fiduciary but people claim that so much these days it is almost a marketing term. If subscribe to WSJ they currently have a decent article on how to find an advisor. Andy Panko has a nice 3 part series on YouTube on How to Find a Financial Advisor.
Two points:
FIrst, while ETF’s can generate cap gains distributions they tend to be rare and low vs mutual funds. See Understanding capital gains: How ETFs can help minimize taxes | Invesco US.
Second, this should have no bearing on your 401k/Roth assets as distributions are not taxed when they occur.
The fact that this advisor used this as an argument for a retirement account does not reflect well on them.
Add IRAs, whether traditional or Roth, distributions are not taxed when they occur either.
Sometimes you just have to admit that the advisor is just not a good fit and you need to move on from them. This one appears to have you going from simple to high fee. Assuming they will charge a 1% AUM, the question is what are the chances their returns with the additional will be greater than the market return. Doubtful as even the vast majority of active fund managers on Wall Street with more tools in their belt can’t.
Years ago we utilized my brother in law’s CFP on a fee only basis to “run the numbers” to see if I was correct that our assets were sufficient to retire, then again about a year later when we inherited a fair amount. I told him I wanted to claim Social Security early. He didn’t push back. I hesitated as most authors whom I was reading online were recommending delaying at least the highest earner’s benefits until 70. This is what I decided to do, by utilizing the inheritance monies to delay claiming so our own retirement funds would continue to grow (for what looks like six more years).
Then last year we had his son (who I think is going to take over the company) run a Roth conversion plan I was considering. His father was on the Zoom call as well. Atone point his father had to intervene as the son was not getting my question. His father joked to ustgat his son didn’t have the perspective of an elder to get the question. My plan was confirmed as being sound after several more calls.
I have decided that I am comfortable with my knowledge and access to New Retirement’s Monte Carlo simulator that I do not need a financial advisor. Maybe when we both turn 70 in 3 1/2 years, claim SS, and know for for sure their contributions to our cash flow going forward, I may hire someone to build a bond ladder for 15-20 years to cover the balance of our income needs rather than an annuity.
Sorry for the errors y’all. Do others find that, at least on a mobile device, sometimes your post is too long and you can’t get to the edit button to correct, as well as a page refresh where you loose all your typing to date? I’m not sure if it is my device or not.
Flex Guard looked way too complicated for me.
Separately managed accounts tend to have the highest level of expenses.
I hope this plan wasn’t expensive
I’m not in the US but I’ve just done a bit of research online . It seems to me your financial advisor is trying to steer you from your low-cost ETFs towards separately managed accounts (SMAs)They’re using a “Cost of Ownership Analysis” to highlight hidden fees and potential “embedded capital gains” in ETFs. This is sometimes a tactic to justify more expensive offerings. While ETFs do have costs, SMAs come with their own fees, which I think directly benefit your advisor. I think a US contributor would give you a better read on that. FlexGuard seems to be a high-fee variable annuity. In my country these products can have hefty surrender charges, weird internal costs, and limit your control.I would suggest a second opinion from one of your fee-only advisors who isn’t trying to sell you something. Maybe question why a complex, costly product is suddenly “better” than your current, simpler investments…. just an outsiders opinion.
Is this a fee-for-service planner operating as a fiduciary? What exactly are they proposing?
Prudential Flex-Guard appears to be an indexed variable annuity. Personally, I would have nothing to do with an “advisor” pushing such a thing.
They claim/claimed to be fee for service—we paid a flat fee for a plan–not because we needed investment advice but because wanted help with a Roth conversion strategy and some help with future real estate matters (downsizing current—buying two smaller places in different locales) and what we have received so far is a recommendation to “simplify” our different 401k accounts presumably into accounts they would manage because they “can do better” than we have been doing (75% of our stuff is in Schwab timed ETFs and the rest in single equities such as Berksire and Apple). By the way, their projections for our the lifetime of our investments uses a 6.25% market growth average.
I don’t think you need an advisor for those 2 areas. You can do those yourself. Run a projection on software such as TurboTax or comparable alternative, and see what a Roth conversion does to your taxes. If you have high income it probably isn’t worth doing. Most, but not all, have lower income in retirement. That was my situation. Didn’t make sense to pay the higher tax while working. Even with my RMDs my taxes are lower than if I converted.
Did they give you a review of the Roth strategy? Answer the questions you asked them to address?
If not, it’s outright fraud.
Maybe they can ask for the fee back….
If they ignored his request I’d say a refund is appropriate. I’m hoping the sales pitch was in addition to the work requested.