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Author: mountra Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76420  
Subject: Professionally Managed versus Self Directed Date: 12/13/2011 7:48 PM
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I am looking for advice on some particular investment options and questions to ask a financial advisor who is recommending them. In particular the pros and more importantly the cons of annuities and of managed investments versus a self managed approach.

“Stop playing poker and believe you have enough to live on”, is what Mr. Advisor said. Followed quickly by, give me all of your money and I’ll give you income for life – actually two lives, my wife’s and mine. She is 50 and I own up to being 62.

This financial advisor’s goal is to preserve assets and ‘beat zero’. He follows a conservative approach built around Fixed Index Annuities and Managed Equity Funds.

The annuities are from Aviva (7% bonus, fees 0.75%) and Security Benefit Life (7% bonus, fees 0.95%).

The managed funds would be run by Fidelity Institutional (Global Financial Private Capital -Moderate Growth with Income: fees 1.65%) and Trust Company of America (Capital Management Group’s Core Equity All Asset Strategy: fees 2.5%).

The approximate proportions are 30% in the annuities, 60% equity funds and the remaining 10% in cash and equivalents.

The promised or at least projected returns net of fees are 4% for equities and for the annuities. According to the prospectuses the historical returns do seem impressive, with many of the strategies returning positive numbers for 2008. The annual income at 4% would provide far more than I predict to need. The safe or guaranteed part in the annuities would provide about 16% and cover some of our basic needs.

Having written all of this it would seem that I should just follow my instincts.
Maintaining a 60% balance of Bond funds and equivalents and 40% mixed equities should allow for a 4% withdrawal and provide a similar annual income. Perhaps adding some sort of fixed annuity to provide some basic guaranteed income as a safety net.

I am willing to accept moderate risks, but as retirement looms in a year or so, I am beginning to feel a little more risk averse. It comes down to confidence in myself to do the right thing against giving control to others.

I’ll be happy to hear what questions I should pose at my next meeting but any other advice and reassurances would also be welcomed.

Thanks,
mountra

www.gf-pc.com
www.cmgfunds.net
www.securitybenefit.com
www.avivausa.com
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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69843 of 76420
Subject: Re: Professionally Managed versus Self Directed Date: 12/13/2011 9:39 PM
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He follows a conservative approach built around Fixed Index Annuities and Managed Equity Funds.

No, he follows an approach more accurately called "load up my clients with crapppy things that will pay me a big commission".

Having written all of this it would seem that I should just follow my instincts.
Maintaining a 60% balance of Bond funds and equivalents and 40% mixed equities.


Your instincts are fine as far as the "run away from this bozo" part.

But backwards for the balance part. It should rather be 60% equities and 40% bonds. Unless you think that inflation will stay near zero for the next 30 years.

Here's a couple of links to start your learning curve.
FundAdvice.com: "The ultimate buy-and-hold strategy"
http://www.fundadvice.com/articles/buy-hold/the-ultimate-buy...
http://www.merriman.com/bestofmerriman/ultimatebuyandholdstr...

Guyton/Klinger Decision Rules.
http://schulmerichandassoc.homestead.com/Using_Decision_Rule...

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Author: CABob Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69844 of 76420
Subject: Re: Professionally Managed versus Self Directed Date: 12/13/2011 11:21 PM
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This financial advisor’s goal is to preserve assets and ‘beat zero’. He follows a conservative approach built around Fixed Index Annuities and Managed Equity Funds.

I think the advisor's goal is to earn a big commission and continuing fees for a number of years.
I like your own instincts. The specifics of your asset allocation might be subject to debate, but, I think you could be well served to develop an investment plan with an appropriate asset allocation between stocks and bonds, domestic and international, and maybe some alternate asset classes invested in no-load low cost funds and rebalance periodically to maintain your asset allocation.

Bob

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Author: ziggy29 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69845 of 76420
Subject: Re: Professionally Managed versus Self Directed Date: 12/14/2011 8:34 AM
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>> Unless you think that inflation will stay near zero for the next 30 years. <<

And that assumes you believe inflation *is* near zero to begin with. The CPI says so, but the cost of a modest lifestyle based on the necessities -- food, energy, health care, college, et cetera -- is nowhere *near* flat even in this "low inflation" environment today. And that will likely only be worse once "reported" inflation plcks up.

#29

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Author: Hawkwin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69846 of 76420
Subject: Re: Professionally Managed versus Self Directed Date: 12/14/2011 11:46 AM
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For perhaps a more balanced answer than the traditional, "we all hate advisors and you should never pay fees, yada yada" (when we all know that we pay other people to perform all sorts of services we could do ourselves if we want to invest the time and energy...

I will start with the managed account options first. I personally think the fees are way too high. I assume one is a discretionary mutual fund option (the 1.65) and the other is a SMA (the 2.5%).

SMAs can be expense but they can also work extremely well. That being said, I don't see the benefit of paying any extra 1% for the ability to own the individual stocks and have them traded in that manner vs owning the fund - at least within (what I assume is) a tax deferred account. One of the best features of a SMA is the ability to tax harvest but again, that is not something you would do in a tax deferred account.

In both cases, the fees are high. The good news for you is that you can often negotiate the fee. I can discount my managed fee by 10% and my SMA fee by as much as 25%. If the advisor is unwilling to negotiate the fee, I would walk away.

Not knowing more about your investment history, risk tolerance, or the structure of the program, I could not advise you further.

What I can say is that I am generally very against equity indexed annuities, which is what at least one of those annuities is. I have yet to see one that I would recommend to anyone over either owning the funds outright or doing a tradtional variable annuity instead with an income rider. The annuity in question has surrender charges in excess of 10% in a few years and it has a 10 year surrender charge schedule. The only thing it guarantees is that you will not lose money when the market goes down - something a fixed annuity would do for you or a variable annuity would do with a rider. I could not find the cap information but usually, an EIA has a cap where if the market is up 10, you might be capped at 7. If the market is up 40%, you still only get the cap of 7 - the insurance company keeps the rest.

Bottom line, I think I would shop around. Annuities have their purpose but select individuals but they are expensive, restrictive, and are generally for people that have either invested poorly, have poor decision-making skills, and that generally invest emotionally. You realy have to think of them as insurance against both bad market performance and bad investor performance.

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Author: Watty56 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69847 of 76420
Subject: Re: Professionally Managed versus Self Directed Date: 12/14/2011 4:41 PM
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In additions to the problems with annuities often being way to expensive and often underperforming add the following to your list;


1) Generally speaking now is a wonderful time to get a home mortgage because interest rates and inflation are both low. For the various types of annuities the current interest rates are usually a major factor in how much they pay. Just like getting a mortgage looks good right now; the flip side is that it is a rough time to buy an annuity. Depending on the details of the annuity you could be clobbered if (when) interest rates and inflation go up.

2) Annuities are sometimes sold as being a simple retirement solution. In reality these are some of the most complex financial products that most people will ever see. These should never be bought without getting professional advice from a financial advisor who will not a get a commission from the sale of an annuity.

3) If by some chance annuities are right for you, then for diversification you should buy several annuities from several different options from several different companies at several different ages so that the impact of something going wrong will not affect your whole nest egg.

4) Past performance numbers do not mean much. The problem is that ten years ago they could have had 20 different products and they are now only showing you the two or three that outperformed by random chance. Companies have even been known to create two essentially identical but opposite products. One of them will do great the other will quietly disappear.

5) Cost are critical. Often the stated cost does not include many legally hidden fees and costs. At the age of 65 the "safe withdrawal rate" (SWR) that you can start withdrawing from your portfolio and have a good chance of not outliving your money is around 4% (there are various assumptions and opinions about this. ) The problem is that if you are paying 1.5% in known fees and another 0.5% in hidden fees then that is 2% a year or half of you spendable money each year. It is worse for you because you are younger so your SWR is probably closer to 3% so they would be taking two thirds of you money each year with 2% in fees.

6) Often if you to lock in future income the best way to do it is by delaying when you start receiving social security so one option would be to live on your savings(instead of buying an annuity) until you are 70 and then state getting social security then to get a larger SS check each month. This really depends on the details of your situation.


7) 7) 1% of your portfolio could be a significant amount each year. Even at $200 an hour you can likely buy a lot a lot of one on one time with a fee only financial advisor who can help you without being biased to put you in high commission products.

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Author: mountra Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69850 of 76420
Subject: Re: Professionally Managed versus Self Directed Date: 12/15/2011 7:53 PM
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Thanks to all for your replies, comments and advice.

I agree with Rayvt that commissions are a key factor when a FA recommends anything. Yes- I did get the 60/40 backwards and do expect inflation to soar in the future as ziggy29 sees. I am slowly going through the Merriman links and reading the Decision Rules paper.

I understand that diversification is paramount to preserving assets through retirement as CABob points out. I think it is this I am struggling with mostly. I diversify in big buckets (large, small cap, bond funds, international, REIT), but still see too (?) much positive correlation. I accept Watty56’s point that for a relatively small fee I can check in with a fee only planner to help with this aspect.

I have been a long-term buy and hold investor, but am struggling to learn when to sell or take profits and the tools to do so. I learned a hard lesson with the Netflix plummet!

I did have a relationship that did not go well with a ML advisor that I ended about 6 years ago (they were happy, but I lost money over a 10 year period) that has soured my feelings for all commission-based advisors. I do accept though that because we are asked to pay fees and commissions that this is not necessarily bad as Hawkwin points out. Being aware of the surrender charges, caps etc. is vital and information not always made obvious.

I was recently invited to a client appreciation dinner and event that was attended by some 400 (happy) clients. Those that I talked to were all nearly or in retirement, not broke, were happy with their income and accounts managed by this FA. It was a little like a ‘love fest’ and I kept thinking about Lewis’ “Elmer Gantry”! I’m still trying to decide if this had a positive or negative impact on me—the chicken was very good!

Points #4, 6 and 7 by Watty56 hit home (as they all did). Past performance maybe manipulated (?), or at least based on factors not offered to me going forward.
And, I certainly do plan to delay SOSEC until 70 unless the world ends sooner…….

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Author: BruceCM Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69851 of 76420
Subject: Re: Professionally Managed versus Self Directed Date: 12/15/2011 11:13 PM
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If this 'FA'is an 'advisor', then the over-friendly guy at the local Ford auto dealership is my 'transportation consultant'. This person you refer to is, by any other name, a salesman. If you don't see or understand this, then you are destined to transfer much (or even most) of your future investment earnings to him.

BruceM

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Author: Hawkwin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69852 of 76420
Subject: Re: Professionally Managed versus Self Directed Date: 12/16/2011 9:20 AM
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1) Generally speaking now is a wonderful time to get a home mortgage because interest rates and inflation are both low. For the various types of annuities the current interest rates are usually a major factor in how much they pay. Just like getting a mortgage looks good right now; the flip side is that it is a rough time to buy an annuity. Depending on the details of the annuity you could be clobbered if (when) interest rates and inflation go up.

Why is this relevant for a variable annuity? I can see how it would be for a fixed but not a variable.

5) Cost are critical. Often the stated cost does not include many legally hidden fees and costs. At the age of 65 the "safe withdrawal rate" (SWR) that you can start withdrawing from your portfolio and have a good chance of not outliving your money is around 4% (there are various assumptions and opinions about this. ) The problem is that if you are paying 1.5% in known fees and another 0.5% in hidden fees then that is 2% a year or half of you spendable money each year. It is worse for you because you are younger so your SWR is probably closer to 3% so they would be taking two thirds of you money each year with 2% in fees.

SWR is not as relevant as the only reason to buy a VA with retirement dollars (IMO) would be to put on a rider of guaranteed income. Those guarantess would be higher than the traditional SWR, net of fees.

7) 7) 1% of your portfolio could be a significant amount each year. Even at $200 an hour you can likely buy a lot a lot of one on one time with a fee only financial advisor who can help you without being biased to put you in high commission products.

All that advice isn't going to do you much good if your holdings are taking a beating. Here is a new flash - even fee-only advisors get it wrong (e.g. 2008 & 2009). Paying less fees is in not necessarily coorelated to either getting better advice or getting a better return.

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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69853 of 76420
Subject: Re: Professionally Managed versus Self Directed Date: 12/16/2011 11:51 AM
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All that advice isn't going to do you much good if your holdings are taking a beating. Here is a new flash - even fee-only advisors get it wrong (e.g. 2008 & 2009). Paying less fees is in not necessarily coorelated to either getting better advice or getting a better return.

I think the point is that the market will do whatever it does, regardless of where you get your advice and how much you pay for it.

A secondary point is that VA's are chock-full of expenses and gotchas that are not readily apparent. Many of the guarantees are worthless, as what you think you are getting is not, if fact, what you are actually getting.

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Author: Hawkwin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69854 of 76420
Subject: Re: Professionally Managed versus Self Directed Date: 12/16/2011 3:58 PM
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I don't disagree with you but perhaps let me give you an example. I have a client that needed to guarantee his income because of poor planning and saving on his part. A SWR of 4% would not be enough to replace his employement income in retirement. Heck, I don't even believe in that number any more. I think it might be 3-3.5% now but I digress...

I recommended the invest in a product that would give him 6% guaranteed. It also guaranteed to grow his income base at 6% a year, or market performance with annual step-up whichever is better. It was an expensive option for him. The fees eat up 2+% of the investment return a year but he gets his 6% regardless.

He bought in January of 2007 with a 50/50 mix. His account grew nicely through 2007 so he locked in a healthy gain that year. Next year, the market and his account tanked. Come January of 2009, he locked in a 6% gain. His account came back in 2009 and 2010 but not enough to surpass the 6% locked in gain on future income. Same thing looks to happend in 2011. Due to the high fees on the account and market performance, his account balance is negative (but then so is the market). Even if you look at morningstar's moderate allocation index, it is barely positive over the last four years. By comparison, the client has a bucket of future income that is worth 38% more than his initial investment. Even if his account were to go to zero, he will get the income.

The client sacrificed liquidity and maximum possible return (those high fees) for at least a guarantee of 6%. At least he now knows that when he retires, his income will be much higher than if he had simply left it in his 401k with a moderate allocation.

How happy do you think he is today knowing that?

Would I recommend that solution to everyone? No way - but it does make sense for a few. With so many people these days with no pension and not enough savings, I fear it is an option that more and more will be forced into.

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Author: ResNullius Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69855 of 76420
Subject: Re: Professionally Managed versus Self Directed Date: 12/16/2011 5:14 PM
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Just think if the overall market is flat for another 10 years, all while we have about 30% or more total inflation over the same period of time. We've been flat for the past 11 years or so, and Japan has been flat since the time they thought the world was flat.

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Author: Goofyhoofy Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69856 of 76420
Subject: Re: Professionally Managed versus Self Directed Date: 12/16/2011 9:35 PM
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Just think if the overall market is flat for another 10 years, all while we have about 30% or more total inflation over the same period of time.

Just think if we have deflation instead of inflation. You can make a coherent argument for any scenario coming out of where we are, including a decade of nothing. There is little reason to expect rampant inflation (hasn't happened in Japan, which began zero-bound interest rates in the 90's, and quantitative easing in the 00's, and which still struggles with deflation. Hasn't happened in Europe. Hasn't happened in the US in 2009, 2010, or 2011, in spite of the hard money cries of "Weimar just around the corner!")

I recommended the invest in a product that would give him 6% guaranteed.

And again, this may work out splendidly, or it may not. It's a bit early to tell, isn't it? If inflation does kick up, will he be protected? I would rather remain loose. I don't believe that inflation is going to go from 1% to 24% next month, so I believe (perhaps wrongly) that I can step out of the way and get into something else in time. Of course I note that many others will be doing the same thing, but then that's always the risk. If you're running with the crowd, chances are you're going to get trampled.

Agree with others that this "Financial Consultant" is a salesman by any other name, and judging from the few specs mentioned, one who does not have the best interests of his client at heart.
 


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Author: op456op Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69857 of 76420
Subject: Re: Professionally Managed versus Self Directed Date: 12/16/2011 11:31 PM
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What makes me run away at the mention of annuities is this Vanguard statement or similar ones on all I looked at (and I consider myself a Vanguard advocate overall):

* Product guarantees are subject to the claims-paying ability of the issuing insurance company. The underlying risks, financial obligations, and support functions associated with the products are the responsibility of the issuing insurance company. The issuing insurance company is responsible for its own financial condition and contractual obligations.. If the insurance company goes TU, you're SOL on any guarantee.

Sure there are no guaranties on equities or bonds either but they're not touting a guaranteed return either:

I recommended the invest in a product that would give him 6% guaranteed.

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Author: joelxwil Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69858 of 76420
Subject: Re: Professionally Managed versus Self Directed Date: 12/17/2011 10:31 AM
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Yes, that lack of a real guarantee is a problem. There is an interesting discussion of the issue here:

http://www.anabsolutebroker.com/Annuities.pdf

During the same period customers of 42 life & health carriers received cash from state guarantee funds. Every state guaranty fund covers up to $100,000 of cash value in the event of carrier insolvency, but here’s the real deal. I have been digging though the records of insurance company failures for over eighteen months. Based on my research every annuity holder in a failed company during this period received up to $100,000 of the annuity value. In fact, during this period there was only one failed carrier that did not provide all of the annuity value – even for account balances in excess of $100,000 – for all of their annuity customers; owners of annuities issued by National American Life Insurance Company of PA did receive up to $100,000 but account amounts above $100,000 may never be fully paid.

In any case, if I did want to buy an annuity (but I do not), I would not want to put more than $100,000 into any single annuity, for reasons given above.

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Author: RetiredVermonter Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69860 of 76420
Subject: Re: Professionally Managed versus Self Directed Date: 12/17/2011 6:25 PM
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Hawkwin:

A SWR of 4% would not be enough to replace his employement income in retirement.

I understand a lot of people desire that, but I have to ask: How many people NEED that whole income level after they retire? Maybe some do, but all? Depends on people's needs aand desires, ofcourse.

In our case, we live mostly on Social Security (admittedly a fairly good SS income, combined) but our income for the 10+ years since we retired has stayed at about 35-40 percent of what it was when we both left the work force! We still have a small mortgage, some bills, we pay taxes on our home, etc., and yet we feel fairly comfortable -- knock on wood.

Depends on your own needs and desires, as I said.

Vermonter

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Author: Hawkwin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69878 of 76420
Subject: Re: Professionally Managed versus Self Directed Date: 12/19/2011 10:06 AM
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Vermonter - unfortunately, FAR TOO MANY people have planned poorly. I see more of them every day than those that have enough to meet their needs. I see very few that have the liquid resources to be able to replace even 50% of their income in retirement and maintain their lifestyle. Sure, it is easier if you can do it on 30-40% but as you stated, that will not work for everyone.

The question really does become a one of need as many find out that they can no longer do what they used to - or have to continue working to maintain a similar lifestyle in retirement.

Think of a couple making 100k a year (not a ton of money I think we would all agree). Let's assume they need 70k in retirement to maintain their lifestyle. Even if they both get $2000 a month from SS (a heck of a stretch), they would need about 22k to maintain their lifestyle. At a SWR of 4%, that is 550k. In my experience, it is uncommon for middle class couples to have savings over half a million dollars for retirement.

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Author: RetiredVermonter Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69883 of 76420
Subject: Re: Professionally Managed versus Self Directed Date: 12/19/2011 11:34 AM
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True. At our peak income, we made more than $100k/year combined. Now, we live fine on about $2600/month combined SS income (plus a little from other sources). We had little problem "adjusting", but that's us.

Vermonter

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