No. of Recommendations: 0
My wife will be getting a pretty sizable check as part of a merger at work and, semi related, will have to cut back to half time (and half pay). As a result, we thought it would be a good time to seek some financial advice.

After getting some recommendations locally and talking to a couple advisors, we paid a guy a fee to evaluate where we are, what changes we should make, etc. Link to his site: http://www.ameripriseadvisors.com/jon.d.goldstein/

We haven't had the followup meetings yet, but what I'm on the fence about is putting some money into this guys control. He charges 1% on assets under management which could obviously add up to a significant amount of money. OTOH, the guy is sharp as a tack and not just in an "all hat and no cattle" kind of way. He's very statistical and I do believe he can earn market returns or better with less risk even after fees. Apparently, he's banned from a local casino for successfully counting cards.

For obvious reasons, I do not want an advisor that earns commissions from a mutual fund company which was one of the first questions I asked so I'm comfortable there.

I also talked to a couple executives at work you have money with this guy and they are both very pleased.

As many here know, I've been investing pretty successfully for over 20 years, but I tend to think our portfolio has grown to a point where I'm a bit out of my league and this guy could offer some benefits, specifically, investment vehicles that are available at our net worth, yet difficult to get as an individual.

So what are people's opinions of financial advisors? Well, I know the answer to that question for many of you, but what the downside if he can beat my returns after fees?

I could certainly give him a portion of our money and evaluate him over a year or two, but then I'm certain he'd scoff if I gave him something like $50k and I honestly don't think the benefits of a larger portfolio are available at those levels.

Thanks for your input.

-murray
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No. of Recommendations: 3
Ameriprise has some of the highest fees around. I wouldn't touch them with the proverbial ten foot pole.

http://www.ameriprisesuck.com/

intercst
Fee & Commission Elimination Planner
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Ameriprise has some of the highest fees around. I wouldn't touch them with the proverbial ten foot pole.

I asked him about his association with Ameriprise. He uses their analysis tools and brokers through them, but doesn't recommend their funds unless they meet his filtering criteria (which includes fees). He said a typical portfolio has less than a couple percent of assets in Ameriprise funds.

And, of course, I'll have the option to not invest in something I don't like.

Were there other fees you were referring to besides mutual fund fees?

-murray
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No. of Recommendations: 6
I could certainly give him a portion of our money and evaluate him over a year or two, but then I'm certain he'd scoff if I gave him something like $50k and I honestly don't think the benefits of a larger portfolio are available at those levels.

No offense intended, but that comment is one of the craziest things I've ever heard, and I've heard plenty of crazy things over the years. First, the guy is taking 1% of your total assets each year to basically tell you what you can find out for free in literally dozens of places. Second, he takes this money and then consistently underperforms the market. Third, you lose a ton of money over your lifetime to fund his house, car, country club membership, and kid's private education. If he scoffs at any amount of money, it's just a ploy to trick you into giving him all of it. Run, run away as fast as you can.
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I do not understand why, if you have been investing successfully for some time, you have suddenly lost your nerve.

For any advisor, the real question is his performance after fees. Look at the net result, but also the volatility.

Also, you might look at the Mechanical Investing Board.
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No. of Recommendations: 3
Is there any particular reason you want to go with a fee-based financial advisor versus an hourly paid advisor? I consulted both several years ago, and I decided, that if I wish to hire one, I would hire the hourly-fee based advisor.


Donna
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Don't do it. We had an ameriprise adviser years ago and it seems like every time we went in there he was trying to sell us whatever product was being promoted that month. I don't think he did a good job and the only reason I went was because my husband didn't want to listen to me about how much insurance we needed (he called me greedy when I told him the amount) but when "the expert" said the same thing he thought it sounded good.
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No. of Recommendations: 3
Apparently, he's banned from a local casino for successfully counting cards.

So? I could teach anyone of average or better intelligence how to count cards. If you think this skill helps at all with money management, I would be happy to manage your money for a fee of 0.75%.

Acme

PS -- It is far more impressive when you count cards successfully without getting banned...
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First, the guy is taking 1% of your total assets each year to basically tell you what you can find out for free in literally dozens of places.

You may be right, but we'll see what kind of products he has available for a higher net worth portfolio that I can't get through Vanguard.

Second, he takes this money and then consistently underperforms the market.

Actually, his 10 year average return beat the S&P by a full percent...after fees...with less volatility. I'll ask again, if he can beat the market after fees, doesn't it make sense?

-murray
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For any advisor, the real question is his performance after fees. Look at the net result, but also the volatility.

As mentioned, he has beat the market with less volatility after fees.

Also, you might look at the Mechanical Investing Board.

Been there, done that. After 8 years, I wasn't beating the market so I stopped.

-murray
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Is there any particular reason you want to go with a fee-based financial advisor versus an hourly paid advisor? I consulted both several years ago, and I decided, that if I wish to hire one, I would hire the hourly-fee based advisor.

I can pay him for just his advice. My question is should I put some assets under his management and potentially earn higher returns with lower volatility.

What helped you firm up your decision on a per hour advisor?

-murray
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We had an ameriprise adviser years ago and it seems like every time we went in there he was trying to sell us whatever product was being promoted that month.

As mentioned, he doesn't sell Ameriprise products any more than any other product. If he goes back on his word on that, I'd run for the nearest exit.

-murray
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It is far more impressive when you count cards successfully without getting banned...

You're probably right, but suffice it to say that I would not go against him in poker and I'm thinking he could easily outperform me investing, but I could be wrong.

Look, I know the prevailing wisdom here is that advisors are a rip off. I've probably said as much myself. Why does everyone think that all advisors are bad? As mentioned, I spoke with two highly compensated coworkers and they both love the guy. I tend to take the advice of people I know personally over anonymous internet posters, but I want to go into this with my eyes wide open.

-murray
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Murray, who's your broker -- Schwab, Fido? If you have a decent amount of money in your account(s) with them, you can get some decent -- and free -- financial planning advice from them. Are you or your spouse in TIAA-Cref? If yes, same thing there.

A good financial advisor is more than a stock picker. You'll want to put together a long-term financial plan, think about wills and estate plans, and stuff like that. (That's what I'm doing now.)

I know that you said he doesn't hawk Ameriprise products, but Ameriprise has a certain MLM odor about it, nonetheless. I looked at his website. He appears to be a solid Badger-type guy.

You're in Madison, yes? There are a lot of smart people in Madison, and a lot of financial advisors there, what with the university, the state capital, and all. I'd ask around a bit more, before deciding.

Fungi (NOT a financial advisor)
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Murray, who's your broker -- Schwab, Fido? If you have a decent amount of money in your account(s) with them, you can get some useful -- and free -- financial planning advice from them. Are you or your spouse in TIAA-Cref? If yes, same thing there.

A good financial advisor is more than a stock picker. You'll want to put together a long-term financial plan, think about wills and estate plans, and stuff like that. (That's what I'm doing now.)

I know that you said he doesn't hawk Ameriprise products, but Ameriprise has a certain MLM odor about it, nonetheless. I looked at his website. He appears to be a solid Badger-type guy.

You're in Madison, yes? There are a lot of smart people in Madison, and a lot of financial advisors there, what with the university, the state capital, and all. I'd ask around a bit more, before deciding.

Fungi (NOT a financial advisor)
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You'll want to put together a long-term financial plan, think about wills and estate plans, and stuff like that.

Indeed, that is what he is doing for the fee that we paid him.

We use Vanguard and we do qualify for free advice. I should take some time to discuss our plans with them. Thanks for the reminder.

-murray
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No. of Recommendations: 2
Murray,

Adding to Misterfungi's list: Another broker that offers free counseling and planning is USAA. They give you a separate phone number and go directly to their Wealth Management team.

I was burned by Am in the mid 90's. They said there was no connection between their fund choices and the adviser. Long to short: This was one of the few class action law suits I received checks for. The advisers were getting compensation from the funds, even though they were not Am products.

Gene
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No. of Recommendations: 4
...He charges 1% on assets under management...

This is greatly oversimplified but 4% of a portfolio is what is often mentioned as being the safe withdrawal rate for what recently retired person can spend each year.

If you pay him 1% which only leaves you 3% to live on and pay taxes out of. That is 25% of your income that is being paid to him even without taking taxes into account which could easily cost another 1%.

Think about that, for him to be worth that he would have such a super investor that he could boost your safe withdraw from 4% to 5% just for you to break even. That is a huge amount, if her was a mutual fund manager and could do that over the long term then he would be on the cover of investing magazines.


The only real way to do that is to put you a lot riskier investments which is what a lot of advisors do. If they bet your money on something risky and win then they are geniuses. If they lose then they still get paid for a few years before you are either broke of leave them.

....Actually, his 10 year average return beat the S&P by a full percent...after fees.....

He might have beaten that if you trust his numbers but that is a faulty comparison since you would not have been invested in all large cap stocks if you had invested with him ten years ago so just having had a three fund portfolio of these index funds Total (US) Stocks, total International stocks, and total bonds might have beaten both him and the S&P 500.

In the best case he might work for you if you monitor him closely but when you eventually retire and get older things could change so now is a good time to simplify your portfolio and to basically get it on automatic pilot as much as possible. Eventually some combinations of these could happen;
1) He retires or dies and your account is assigned to an advisor who is better at getting money from you.
2) Your mental capacity or interest in investing declines when you are older.
3) The financial advisors focus changes and he starts costing your more.
3) You die an your spouse is vulnerable to financial advisors might take advantage of her financially.
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No. of Recommendations: 10
Murray my feeling is different from the majority of responders - We elected to get a financial advisor and it was one of the smartest decisions we made.

My wife and I have no children or anyone else. I had handled out investments and at this point certainly am capable of doing so, should I choose. (Incidentally, the time to get a financial advisor is when you still are capable of doing the task - otherwise you really don't have a choice.)

We have some experience with family and friends in older age and unless a person has a sudden death, there will be periods of years when they will not be able to handle investments. Maybe some folks are so smart they can set something on auto-pilot for 10 or 20 years and the laws Congress passes next won't disturb the financial plans. I am not that smart.

There is no question 1% higher return is better - the question is do you really have the ability to attain the same returns as your financial planner. Many people assert they can.

When evaluating a financial planner, be certain to check past performance against benchmarks. Think about the benchmarks. Over the last 30 years interest rates have fallen - in some cases over 15%. That has driven great fixed income returns. Last time I checked it was very unlikely the return on a 30 year bond was expected to drop another 10% in the next 10 to 20 years.

For us personally, the greatest benefits from our decision to use a financial planner/advisor have been these two:

#1 I really don't worry about the ups and downs of the markets - we started in early 2008 and nothing since then have been as bad as the first 12 months. We did keep a "Paper Money" portfolio for a couple of years and I still watch carefully. Is everything thing what I would do no.

#2 Over the years I was running things, I made my share of errors -- like recognizing in late 1999 that I had made a ton of money, the market was in a bubble (my description), saying even if I just got savings account returns for 3 years, I would be ahead of my expectations and the fatal action - I'll just watch carefully and bail out in a hurry. We had paid off the mortgage, gotten a couple of new cars and a few other things to harvest cash, but I still keep most of the money in the market and lost too much. I happen to be 11 years older than my wife and while she has the intelligence to invest, I am of the view investing is like riding a bicycle - you have to make certain mistakes before you can travel smoothly down the street. Some mistakes in retirement, like running out of money, has very undesirable consequences.

The one item we do use as a care gauge of where we are is very simple. We track the trailer 12 months spending divided by current portfolio. This smoothes out annual stuff like insurance and property taxes. We keep our spending under 3.0% of our current portfolio - others will have different numbers.

Gordon
Atlanta
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No. of Recommendations: 4
I spoke with two highly compensated coworkers and they both love the guy.

So what? Are you looking for love or to make money? Everybody "loves" whatever product they bought, even if it it's bad.

I tend to take the advice of people I know personally over anonymous internet posters,
Sure. But what is important is what backs up the advice. Is it authoritative or just personal opinion. Do your co-workers *know* (vs. just think or believe) that this guy has outperformed something like Fidelity Contra? Do they *know* what level of risk their accounts have been facing? (The answer to this is No. Almost nobody does.)


My question is should I put some assets under his management and potentially earn higher returns with lower volatility.
First, I would ask him HOW he gets "higher returns with lower volatility". What is his strategy? Does he have a concrete method, or is it seat-of-the-pants. Can he articulate it?

Frankly, it's not all that impressive to have beaten the S&P500 over the last 10 years, since the S&P just went thru a 10-year period that went essentially nowhere. Depends on the exact dates he's quoting. Is it some specific dates 10 years apart, or is it handwaving ten-ish years. More importantly, is he comparing to S&P500 WITH DIVIDENDS, or without? I bet it's without, because all the charts you see are always raw price without dividends.

What I'd do is ask him for [the data which would allow you to chart] a month-by-month chart of an account he managed compared to SPY or FCNTX.

You might want to do something like what I did when I retired. I thought it worthwhile to put a significant chunk of our money with Fisher Investments (Ken Fisher), to protect us in case I wasn't as smart as I thought I was. ;-)

From that aspect, it was successful. They invested my money in a completely different & independent way than I did. But overall, it was no value-added over FCNTX. Or BRK.
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No. of Recommendations: 4
It kinda all depends on what you are looking for in a FA. Most of the ones we talked to wanted to manage our entire portfolio, and they wanted to do the 60/40 or 80/20 stocks/bonds thing. We always said, "Why would I want to pay a 1%-1.5% fee to you to put my money into a bond fund or CDs? I'll let you manage the equities and I'll put the money into a bond fund myself."

Are you considering having him manage a majority or significant percentage of your money? Or just a small piece. If the latter, then....why bother? If you give him 10% of your money, then whether he does good or he does bad, it will not make any real difference in your net worth.

Suppose you had $1,000,000. Would you put $500,000 under his management? (FWIW, that's Fisher's minimum account size.)

Would you put $100,000? Or only $50,000.
What level of personalized service is $50K or $100K going to get? A 1% fee on a $100K account is $1,000/yr. $83/mo. That's not enough for him to live on, so a small account is basically going to get no attention. Or it's going to be lumped together with 100 other accounts that are all handled identically.

To tell the truth, if I wanted to have somebody manage that level of money ($50k-$100k) for me, I'd put it with somebody like http://sweetspotinvestments.com/
I ran across them via the NAAIM Wagner Award http://www.naaim.org/resources/wagner-award/wagnerarchive/wa... and his paper http://www.naaim.org/wp-content/uploads/2012/04/L2011_The_Ab...

Every financial advisor claims that they can beat the market at lower risk. WHen you ask them how ... what it their method/procedure ... they generally say something like "we investigate and then we pick good stuff". Well, DUH!! To me, it's all handwaving. Or, perhaps he really is able to "pick good stuff". But that skill is a skill of that one person, and is not transferrable to somebody else, and it can't be backtested.
They can show you (maybe) how they performed in the last 10 years, but they can't show you how they would have performed in some *other* 10 year period.
And, of course, they performed GREAT in the last 10 years. Survivorship bias. If they had not performed great, they'd not be talking to you, they'd be waiting tables. How do you know if they were truly superior, or if they were just one of the lucky 50% that was above average?

But, suppose this guy *is* truly superior. Great. You invest with him and he does well for you for 5-10 years. And then he gets bored, or gets hit by a bus. Now you find your money is invested in a bunch of stocks & funds that you know nothing about, and you have no idea why you own them, other than Fred decided to buy them for you.
Now what do you do?
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If you pay him 1% which only leaves you 3% to live on and pay taxes out of. That is 25% of your income that is being paid to him even without taking taxes into account which could easily cost another 1%.

I've often heard this, but the 4% rule is based on historic returns of a simple portfolio. If a more complex portfolio can be structured to either increase the average annual return or smooth out the valleys at the same return, both after fees, wouldn't the SWR be higher?

In the best case he might work for you if you monitor him closely

Knowing that I currently analyze my 1 month and 1,2,5 & 10 year returns as well as my allocations WEEKLY, I will certainly monitor him closely.

-murray
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So what? Are you looking for love or to make money? Everybody "loves" whatever product they bought, even if it it's bad.

I talked to the coworkers extensively and was simplifying their response. It was far more than "Do you like him?", "Yeah", "Ok, thanks".

First, I would ask him HOW he gets "higher returns with lower volatility". What is his strategy?

I will most definitely get the details and offer them up for discussion.

Frankly, it's not all that impressive to have beaten the S&P500 over the last 10 years, since the S&P just went thru a 10-year period that went essentially nowhere. Depends on the exact dates he's quoting. Is it some specific dates 10 years apart, or is it handwaving ten-ish years. More importantly, is he comparing to S&P500 WITH DIVIDENDS, or without? I bet it's without, because all the charts you see are always raw price without dividends.

His 10 year return for a portfolio size I'm looking at was 9.79% ending in March with a lower dip in 2009. Again, after fees. By my calculations, that's over a percent better than the S&P with dividends.

Like others here, I'm skeptical. That's why I'm posting. My thought is to give him a chunk of money (after getting more details of course) and have him earn my trust. I worked with a broker 15 years ago who lied to me so I pulled all my money. I should be able to do the same with this guy.

-murray
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But, suppose this guy *is* truly superior. Great. You invest with him and he does well for you for 5-10 years. And then he gets bored, or gets hit by a bus. Now you find your money is invested in a bunch of stocks & funds that you know nothing about, and you have no idea why you own them, other than Fred decided to buy them for you.
Now what do you do?


Simple, pull my money out of those funds and invest in whatever manner I see fit at the time.

I guess I'm having trouble accepting the prevailing wisdom here that ALL FAs are bad.

-murray
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Rayvt writes,

<<I spoke with two highly compensated coworkers and they both love the guy.>>

So what? Are you looking for love or to make money? Everybody "loves" whatever product they bought, even if it it's bad.

</snip>


You know, I thought the same thing. Justin Bieber is somebody's "highly compensated coworker".

intercst
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Murray,

While money-wise, my experience was not good, I did take away a greater understanding of what I needed to do to plan for retirement. (That was the goal for our meetings) It did serve as a jolt to get us going and helped us make a firm plan. The investment side was the problem for us.

If you do go with the adviser, make sure you understand the plan and the reasons for each piece. Then you will be prepared to evaluate the progress and results.

If you do not monitor the progress vs expectations, you may find yourself on the short end of the stick.

Gene
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No. of Recommendations: 2
...His 10 year return for a portfolio size I'm looking at was 9.79% ending in March with a lower dip in 2009. Again, after fees. By my calculations, that's over a percent better than the S&P with dividends..
Most likely he was not just invested stocks that are in the S&P 500. Compare his returns to a combination of a total (US) stock market index fund and a Total International Stock Market index fund. Comparing performance to the incorrect index is a common way to mislead people.
...I've often heard this, but the 4% rule is based on historic returns of a simple portfolio. If a more complex portfolio can be structured to either increase the average annual return or smooth out the valleys at the same return, both after fees, wouldn't the SWR be higher?...
Mutual funds try to beat the simple index funds and especially after fees very few of them succeed over the long term. If this advisor could do this then he would be making a seven or eight figure salary working on Wall Street.

...I guess I'm having trouble accepting the prevailing wisdom here that ALL FAs are bad...

Not at all. It is just that most of the people who call themselves financial advisors are really salesmen that are misleading you.

There are many times when a financial advisor is a good choice but there problem is that they have a huge conflict of interest when there are so many ways for them to get paid for putting you in less than ideal investments. When I get ready to retire I will likely hire one that I pay by the hour to review my situation. A good financial advisor would be willing to ;

1) Provide an understandable written statement of how they are compensated that states that they will not take any compensation other than what you are paying them. Remember "fee based" is not the same as "fee only".

2) Provide a written statement that they have a "fiduciary responsibility" (Google this) to do what is in your best interest.

Financial advisors can do a lot of good things like;
1) Setting up the right asset allocation.
2) Helping to minimize your taxes.
3) Helping you decide on the right amount to save or spend each year.
4) Making sure that you have things like the right wills, estate plans and working with a lawyer when needed.
5) Help figure out when to start social security and which pensions options to take

Unfortunately picking superior performing stocks and mutual funds is not something that you can expect them to do.

Since you want to use one I would highly suggest that you interview several real financial planners that charge by the hour and pick one to draw up a financial plan for you. You can then use them as needed in future years to update the plan each year. This is assuming that you have a fairly large portfolio where cost would be in the same ballpark as paying a 1% fee for a year or two.
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..Simple, pull my money out of those funds and invest in whatever manner I see fit at the time....

If you are older when that happens that may be hard to do. Even if they were doing well think of how capable your relatives were when they 80.
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I've often heard this, but the 4% rule is based on historic returns of a simple portfolio. If a more complex portfolio can be structured to either increase the average annual return or smooth out the valleys at the same return, both after fees, wouldn't the SWR be higher?

In theory yes, but making the portfolio more complex makes the backtest difficult if not impossible.
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I've often heard this, but the 4% rule is based on historic returns of a simple portfolio. If a more complex portfolio can be structured to either increase the average annual return or smooth out the valleys at the same return, both after fees, wouldn't the SWR be higher?

Minimizing what you lose to fees & expenses also improves the SWR.

Stocks and bonds go up and down in value, but the money you lose to fees and commissions is gone forever.

intercst
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His 10 year return for a portfolio size I'm looking at was 9.79% ending in March with a lower dip in 2009. Again, after fees. By my calculations, that's over a percent better than the S&P with dividends.
As it so happens, I have some data and a handy analysis program. Without looking ahead of time, here's what it says about some various investment vehicles for Mar-1-2003 to Mar-31-2013. (Running these as I type, so I'm not peeking ahead of time.)

"rate" is CAGR.

SPX (S&P 500 index w/o dividends)
B&H: $1.0000 grows to $ 1.8931 in 10.07 years. rate: 6.54% stdev: 20.6%

SPY (w/div)
B&H: $1.0000 grows to $ 2.3000 in 10.07 years. rate: 8.62% stdev: 20.6%

SPY (w/o div)
B&H: $1.0000 grows to $ 1.8803 in 10.07 years. rate: 6.47% stdev: 20.5%


So that there's your S&P. Up a total of 8.9% w/o dividends or 13.0% w/dividends. If he's up total of 9.8%, he's indeed doing about 1% better than the S&P -- without dividends. But not WITH dividends.
Total return of 9.8% is a CAGR ("rate") of 7.1%

Some more (all include reinvested dividends):

VIVAX (Vanguard Value ETF (VTV))
B&H: $1.0000 grows to $ 2.4256 in 10.07 years. rate: 9.20% stdev: 21.9%

VIGRX (Vanguard Growth ETF (VUG))
B&H: $1.0000 grows to $ 2.3106 in 10.07 years. rate: 8.67% stdev: 20.1%

IJS - iShares S&P SmallCap 600 Value Index
B&H: $1.0000 grows to $ 3.0617 in 10.07 years. rate: 11.75% stdev: 26.4%

FCNTX - Fidelity Contrafund
B&H: $1.0000 grows to $ 3.0617 in 10.07 years. rate: 11.75% stdev: 26.4%

VTI - Vanguard Total Stock Market ETF
B&H: $1.0000 grows to $ 2.3906 in 10.07 years. rate: 9.04% stdev: 20.6%


Back to some detailed statistics on SPY:

SPY B&H:
CAGR: 8.62% stdev: 20.6% MxDD: -51% Sortino: 0.32 UI: 12.4 UPI: 0.7

SPY with 10-month Simple Moving Average timing:
CAGR: 8.98% stdev: 12.5% MxDD: -23% Sortino: 0.34 UI: 7.0 UPI: 1.3

See that? About the same return (CAGR) but half the risk (stdev and MaxDrawDown)

Summary:
He beat the S&P500 without dividends.
He didn't beat S&P500 including dividends. He didn't beat a whole lot of other ETFs, either.
In terms of volatility and dips, you can cut those in half with a simple mechanical timing rule.
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Minimizing what you lose to fees & expenses also improves the SWR.

Stocks and bonds go up and down in value, but the money you lose to fees and commissions is gone forever.


I don't disagree, but if portfolio A has an average return of 7% with X volatility and portfolio B has a 7.5% return (after fees) with X-1 volatility, which will have a higher SWR?

Maybe this guy is a charlatan and I'll do my due diligence to figure that out up front, but, again, it's hard for me to believe that it's not possible to find an advisor who can't do a better job of investing than me after expenses. I can believe it's hard to find such an advisor, but not impossible.

-murray
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If you pay him 1% which only leaves you 3% to live on and pay taxes out of. That is 25% of your income that is being paid to him even without taking taxes into account which could easily cost another 1%.

I've often heard this, but the 4% rule is based on historic returns of a simple portfolio. If a more complex portfolio can be structured to either increase the average annual return or smooth out the valleys at the same return, both after fees, wouldn't the SWR be higher?


Yeah. But not THAT much higher. 1% fee out of 4% SWR is 25% of your income going to him. 1% fee out of 5% SWR is 20%. That's still a lot.
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Maybe this guy is a charlatan and I'll do my due diligence to figure that out up front, but, again, it's hard for me to believe that it's not possible to find an advisor who can't do a better job of investing than me after expenses. I can believe it's hard to find such an advisor, but not impossible.

Just remember all the years the Wall Street Journal ran the weekly contest that showed monkeys throwing darts at the stock page were better at picking winners than the best that Wall Street had to offer. Next, keep repeating Bernie Madoff
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SPY (w/div)
B&H: $1.0000 grows to $ 2.3000 in 10.07 years. rate: 8.62% stdev: 20.6%


So that there's your S&P. Up a total of 8.9% w/o dividends or 13.0% w/dividends.

What am I missing? How did 8.62% become 13%?

Just to confirm, I pulled up historical prices for VFINX. On 3/31/2003, the adjusted close (including distributions) was $64.45. On 3/28/2013, it was $144.61, 2.24 times the initial investment or an annual return of 8.4%.

Again, where does the 13% come from??

-murray
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but the 4% rule is based on historic returns of a simple portfolio. If a more complex portfolio can be structured to either increase the average annual return or smooth out the valleys at the same return, both after fees, wouldn't the SWR be higher?

Indeed, yes. It's the volatility that forces you to use a lower withdrawal rate than the average Growth Rate.
But don't make the common mistake of assuming "more complex" is ipso facto better.

First of all, simple mechanical timing (like 10-month SMA written about by Faber) dramatically reduces the volatily but is only trivially more complex.

Second of all, there are withdrawal strategies that materially increase the 4% SWR for the *same* investments, just by slighly modifying your annual withdrawal amounts based on a simple set of rules.
Guyton & Klinger wrote a series of papers, the first Guyton paper was in 2004.
By using their "Decision Rules" your SWR can be 5.5% instead of 4% -- that's 38% more, or $55,000/yr instead of $40,000 for a $1M portfolio.

Try asking this FA about a Guyton-Klinger method for withdrawals. I'll give you odds that he won't know what you're talking about -- until he has a chance to google it.
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Yeah. But not THAT much higher. 1% fee out of 4% SWR is 25% of your income going to him. 1% fee out of 5% SWR is 20%. That's still a lot.

Perhaps I'm not phrasing this correctly. Why are you subtracting the 1% from the SWR IF the return after that 1% is removed is higher than the portfolio used to determine the SWR is higher? This makes no sense to me.

I'll confirm the historical performance, but I don't understand how a higher return, lower volatility portfolio after fees would net a lower SWR.

-murray
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"$1.0000 grows to $ 1.8931"
Did I do it wrong?

Yeah, guess so. I *know* better than to do fractions in my head!
I know darned good and well about anchoring bias fallacy,too -- and here I went and fell for it again. To convert gain-factor to percentage you subtract 1 and multiply by 100. I saw the "1.89", subtracted 1 and then imagined I saw 8.9%. Doing the same to "$1.0000 grows to $ 2.3000" results in 13%. Sorry.

But....the other computations are right. That bit of my commentary is wrong. If he got 9.8% CAGR, then he *did* beat the S&P including dividends by about 1%. And he beat a couple of the other ETFs, too. He didn't beat IJS or FCNTX, though.

historical prices for VFINX. ... adjusted close (including distributions)... or an annual return of 8.4%.

My program uses the *actual* closing prices and the *actual* dividends and the *actual* splits, rather than yahoo's "adjusted" prices. You can never be 100% sure that somebody's adjusted prices are entirely correct, because you don't know how they compute it or if they computed it accurately, or if they have errors in their data. My program computes the effect of reinvested dividends itself. That's why using Yahoo adjusted data shows 8.4% and using the actual raw data shows 8.6%.
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Thanks for that, I thought 13% seemed a bit high during most of the "lost decade" :)

I will most definitely confirm his numbers and methodology.

FWIW, my real return over the same period, including all investments (money markets, bonds, etc.) was 9.5%, but that was helped by AAPL & NFLX.

-murray
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Perhaps I'm not phrasing this correctly. Why are you subtracting the 1% from the SWR IF the return after that 1% is removed is higher than the portfolio used to determine the SWR is higher? This makes no sense to me.

The 4% SWR comes from backtests done on actual real-world returns. Of real-world data from 1926-1976 (Bengen) and 1925-1995 (Trinity).

You don't *know* that you can achieve "higher return, lower volatility". You hope you can, this guy says he can, but you don't know.

You can backtest with actual data, but you can't backtest the future.

The key question in any real-world decision you make is "what if I am wrong--what then?" If I am depending on higher return, low volatility and counting on that to allow me to take 5.5%....what if I am wrong? What then? I'll need to learn to love eating Alpo and sleeping in discarded refrigerator boxes.

------------
Back when we were getting ready to retire (early) in 2003-2005 we went to a number of FA dinner presentations. In talking with one of them, he said that he'd had several clients who retired in 2000-2001 in their 40's and 50's, thinking that the gains they made in the dot-com boom were the new normal. It's really, really hard to get a new high-paying job when you are 50-60 if you have to go back to work because the market unexpectedly lost half your money.

------------
The bit about "a 1% fee means your FA takes 25% of your 4% withdrawal" is true but trite.

But even if you can get 1% more return (after fees) at lower volatility, that doesn't mean you can bump your SWR from 4% to 5%.

The thing that kills you is the worst case volatility and drawdown. It's like a plane doing loops at an airshow. His average altitude may be several hundred feet high, but if he ever even so much as TOUCHES an altitude of 0 feet it's all over.

That 1% fee comes out no matter what. If comes out in years when you get 20% return, and it comes out in years when you get 50% loss.
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But even if you can get 1% more return (after fees) at lower volatility, that doesn't mean you can bump your SWR from 4% to 5%.

I never suggested it would, I was merely trying to counter the statement that a 1% fee lowers the SWR without taking into account any other factors as was suggested here.

That 1% fee comes out no matter what. If comes out in years when you get 20% return, and it comes out in years when you get 50% loss.

Ideally, the likelihood of that 50% loss would be less, but you make a good point.

-murray
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Maybe this guy is a charlatan
Most likely, he is not a charlatan. Most likely he's a straight-up guy ---- who is overly confident in his stock picking ability. Wall Street is littered with the bodies of people who thought they were genius investors.

it's hard for me to believe that it's not possible to find an advisor who can't do a better job of investing than me after expenses
Oh, there are probably such advisors out there. But not for the likes of you and me. They are the ones who take new clients only by recommendation of existing clients, and who have minimum account size of $10 million or more.

It's quite EASY for me to believe that I can do a better job of investing my money than any of the FA's I could find.

"Everything you need to know about successful trading and investing is on the web, gratis. There are no secrets. The rules of the game are known for each of the major market approaches – momentum, value and statistical arbitrage. The main edge you need is called discipline. There are multiple market approaches that have been proven to work (momentum and valuation driven) and yet most people don't have the discipline to stick to them." -- Ivan Hoff

My primary concern is what my wife will face if I die first. And for that I have standing instructions: "Scott Burns Couch Potato portfolio
50% Vanguard Inflation-Protected Securities (VIPSX), 50% Vanguard Total Stock Market Index (VTSMX), rebalance once a year."
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What helped you firm up your decision on a per hour advisor?

I'm not Donna405, but what drove me to seek a FEE-ONLY Financial Advisor is their pledge of a fiduciary responsibility to their clients. They get no commission, fee, kickback, etc., from anyone for their advice, only the fee they charge you. It relieves them of any conflict of interests.

Regarding his card counting ban, using a technique that is banned to improve his performance/gains speaks volumes to me about what he could/might do with any funds under his control. If he cheats at a casino, where else might he cheat (with your money) & lose. Think (Bernie Madoff, Tom Petters, Samuel Israel, Richard Whitney and countless others absconding with their clients money in some scam (Ponzi) or another.

Surprised these haven't been mentioned yet: There are two good sources for locating a Fee-ONLY Financial Advisor:

http://garrettplanningnetwork.com/

http://garrettplanningnetwork.com/find-by-state/?state=WI (ask if they offer a Motley Fool Discount, some used to).

http://www.fiscalfitnessmadison.com/forms.html There are some forms here that may help you in your choices and risk profile. I encourage you to look through them whether you use fee-only or not. The Advisor Questionnaire has good questions to ask ANY financial planner.

http://www.napfa.org/

http://findanadvisor.napfa.org/Home.aspx/Search (type in your location/zipcode)

A Newsweek article on investment scandals quote: "The financial system is not based on trust," NYU's Wright says. "Banks don't trust you—that's why they take collateral. You don't trust the bank—that's why we have the FDIC."

Disclosure, I have no associations with Garrett or NAPFA aside from using a Garrett planner in Q1 2009 in another (west coast) state.
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Rayvt:

A minor point is that if you buy the Admiral shares of the Vanguard Total Stock Market Index (VTSAX) the expense ratio drops from .17 to .05 basis points. The minimum investment is only 10K.


Also, why wouldn't you just buy (VT), Vanguard Total World Stock ETF? Do you think it is better to limit yourself to just U.S. stocks or do you get enough world diversification because a lot of U.S. companies conduct business abroad. I know this is an argument Bogel makes, although Vanguard slightly disagrees with him. Thanks for any response.


Sandywater
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Regarding his card counting ban, using a technique that is banned to improve his performance/gains speaks volumes to me about what he could/might do with any funds under his control. If he cheats at a casino, where else might he cheat (with your money) & lose. Think (Bernie Madoff, Tom Petters, Samuel Israel, Richard Whitney and countless others absconding with their clients money in some scam (Ponzi) or another.

I'm not in favor of financial advisors as a rule, but I'm on this guy's side when it comes to the card counting. In most card games, you pay attention to what cards have been played; bridge, poker, hearts, etc. Part of the game is paying attention and remembering what has been played. But in the case of blackjack it is considered cheating? That's absurd.
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A minor point is that if you buy the Admiral shares of the Vanguard Total Stock Market Index (VTSAX) the expense ratio drops from .17 to .05 basis points. ...
Also, why wouldn't you just buy (VT), Vanguard Total World Stock ETF?


This is just a backtest program I wrote to help me do some investigations & tunings. For that purpose, the funds are better than the equivalent ETF because the funds have an earlier inception date, so there is more data.

In the case of VT, the Inception Date is Jun 25, 2008, so it's totally useless to backtest it, it just hasn't been around long enough.

Don't misunderstand me, or confuse backtest statistics I report with a stock recommendation or a list of what I have in my portfolio. There was a similar confusion with the data I posted on the IUL thread.

The data I post is in the category of "here's the backtest statistics for a readily available alternative to what is being proposed". When somebody is throwing around ballpark return data like Murray was, it's useful to look at a number of other ETFs & funds and compare the stats.

In this case, the backtest stats are in the same ballpark as the claimed returns of the cherry-picked portfolio that the FA showed Murray. (What, you think he would have shown a portfolio that UNDERperformed the S&P?)
So in this case, to me it's no contest--I'd buy&hold a set of those ETFs in a heartbeat in preference to going with the FA.
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I stand corrected... I thought it was illegal, hence, my cheat comment.

http://en.wikipedia.org/wiki/Card_counting

From the Wiki:

As of September 2012, card counting is legal under federal, state, and local laws in the United States as long as no external card counting device or person assists the player in counting cards. It is however frowned upon by casinos.[19] Casinos continue to offer blackjack only because the vast majority of unskilled casual blackjack players more than make up for the small number of advantage players capable of reducing the casinos' edge. In their pursuit to catch card counters, casinos can sometimes misidentify and ban unskilled casual players whose betting style (or lack of) unknowingly mimics betting patterns of card counters.[20]

Atlantic City casinos in the State of New Jersey are forbidden from barring card counters as a result of a New Jersey Supreme Court decision. In 1979 Ken Uston, a Blackjack Hall of Fame inductee, filed a lawsuit against an Atlantic City casino, claiming that casinos did not have the right to bar skilled players. The New Jersey Supreme Court agreed,[21] ruling that "the state's control of Atlantic City's casinos is so complete that only the New Jersey Casino Control Commission has the power to make rules to exclude skillful players." As of 2011, New Jersey Casino Control Commission has not promulgated a regulation to the contrary....


I suppose it could be considered akin to Technical Analysis strategies using certain parameters to determine buy & sell points.
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Oh, there are probably such advisors out there. But not for the likes of you and me. They are the ones who take new clients only by recommendation of existing clients, and who have minimum account size of $10 million or more.

Interesting that you should say that since the guy who recommended us to him is a tax advisor who recently had his home listed as one of the most expensive in the area ($3 mil). As I mentioned, a couple of his clients are executives at my company. I get the feeling that he doesn't deal with too many clients with only a few hundred grand.

Not that we have $10 mil, but we aren't just starting out either.

-murray
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Hi, again, Murray. I chose the hourly-based advisor due to the fact that I do have a little common sense and chose to make my own decisions, using his advice along with my own research. My decision turned out to be the right one for me.

Still today, at times, I will call him and pick his brain (for a fee of course).

Donna
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I guess I'm having trouble accepting the prevailing wisdom here that ALL FAs are bad.

I don't think all FA's are bad, but I'm not impressed with Ameriprise
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<<I guess I'm having trouble accepting the prevailing wisdom here that ALL FAs are bad.>>

I don't think all FA's are bad, but I'm not impressed with Ameriprise

</snip>


If you have any questions about the statement in bold, just google "Ameriprise Litigation". Hard to image that any upstanding financial professional would want to be associated with the firm.

intercst
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If you have any questions about the statement in bold, just google "Ameriprise Litigation". Hard to image that any upstanding financial professional would want to be associated with the firm.

You can lead a horse to water, but.... Some folks just believe what they want to believe. So be it.
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Hard to image that any upstanding financial professional would want to be associated with the firm.

You've definitely given me some more questions to ask in the next meeting.

Thanks for the responses.

-murray
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You can lead a horse to water, but.... Some folks just believe what they want to believe. So be it.

I assume this is directed at me. Trust me, I'm reading every comment here, but I also talk to people face to face, evaluate real information and listen to people I know and trust.

Sorry if I don't simply take a bunch of anonymous internet comments as gospel.

-murray
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Thought about it some more, from the viewpoint of someone who just wanted to make a one-time action and didn't want to continually monitor the account.

VBINX - Vanguard Balanced Index Inv (60/40 index fund)
B&H: $1.0000 grows to $ 2.1608 in 10.07 years. rate: 7.95% stdev: 12.2%

-----------
VBINX B&H:
CAGR: 7.95% stdev: 12.2% MxDD: -34% Sortino: 0.48 UI: 7.4 UPI: 1.1

SPY B&H:
CAGR: 8.62% stdev: 20.6% MxDD: -51% Sortino: 0.32 UI: 12.4 UPI: 0.7

SPY with 10-month Simple Moving Average timing:
CAGR: 8.98% stdev: 12.5% MxDD: -23% Sortino: 0.34 UI: 7.0 UPI: 1.3

Interesting .....
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I'm curious, how many here who are highly critical of financial advisors have actually used a financial advisor? If not, where did you form your negative opinion?

As mentioned, I'm most definitely not ignoring the opinions here, but then talking to a director of our company who has had a real money portfolio with this particular advisor through the 2009 crash carries a lot of weight.

I spoke with our director again and asked him straight out and he does not have any investments in Ameriprise products which seems to be one of the larger issues stated here.

I appreciate the comments and I'm better armed with questions in our next meeting.

-murray
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I'm curious, how many here who are highly critical of financial advisors have actually used a financial advisor? If not, where did you form your negative opinion?

I haven't used one, but if I do, it will be one who charges by the hour, not a salesman affiliated with a financial services company with a built-in conflict of interest that makes the company and the salesman weigh their interests ahead of my own when giving investment advice.

Further, fees are certain. Returns are not. Also, past performance is no guarantee of future performance.

If you base selection of a financial advisor on talking with people who appear (outwardly) wealthy, and whose stated impressions and opinions of the salesman cannot be examined by you for accuracy (because you're not in a position to sit down with their records and see if they are correct about their impressions regarding the fees they pay or the returns they're getting compared to, say, simply holding index funds), you're arguably basing a decision on impressions and salesmanship.
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If he cheats at a casino

It is not cheating -- at least not in a legal sense. The courts have ruled as such many times over. Casinos are allowed to ban people for nearly any reason and they choose not to let people that count cards play.

Acme
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how many here who are highly critical of financial advisors have actually used a financial advisor? If not, where did you form your negative opinion?

I have used a few FAs, have interviewed several more that I decided to not use, but I'm not in the camp of "highly critical" of them. Just somewhat negative on them.

Some wanted to manage my entire portfolio. Some wanted to know every detail of my financial picture (including wills, emergency fund, bank accounts, insurance policies, etc.) before they'd even consider taking my account.

The best ones took the financial information that I chose to give them, and accepted it when I said, "This is the amount I will invest with you, it's only part of our total money, but it's what I want you to manage, don't worry about my bond allocation, e-fund, etc. because I've already got that taken care of."
Some of them wanted to put me in loaded funds and non-traded REITS. Those were the easy ones to ditch. Neagtive opinion? Yeah, in spades.

We finally pulled our money away from all the ones we hired. Not that they didn't do good -- they did just what I expected of them, including not panicking and selling out at the crashes. I *did* get phone calls from them when the market tanked, I think they were trying to keep their clients calm.

No, the reason was that I got tired of paying 1%-1.5% of assets for them to do basically the same thing that I could do myself with a properly chosen set of funds/ETFs. Not all index funds, either - NTTAWTH. Some of what I currently own are actively managed funds/ETFs, as well as index funds.

Paying someone $6,000 a year finally got to be too much for me. As far as I was concerned, the main job they did was to keep me from panicing and to keep me from taking on too much risk. But that hasn't been a problem for me, so I was paying them for something I didn't need.

The free dinners and Xmas & birthday cards weren't worth it.

When I closed tha last one last December, when I told my wife she said, "Finally!! I was wondering how long you were going to keep paying them money." Then she said, "That's %6000 we can use to take another cruise per year."

a director of our company who has had a real money portfolio with this particular advisor through the 2009 crash carries a lot of weight.
Really? Why?
You post & read here, you track your portfolios weekly/monthly/obsessively, you know how to do all kinds of investment things. Does he? It could well be that he has no idea about investing, or how well his account is doing compared to other alternatives such as a well-diversified set of low-cost index funds. It could be the he *needs* a decent FA because otherwise he wouldn't know how to invest in anything except CDs and penny-stocks.

This thread is getting quite long. Maybe you're playing a little bit of devil's advocate? I think a number of people here have given you some pretty good advice and reasons to NOT hire an FA. If you haven't made up your mind by now, then nothing that anyone can say further will be of any use.
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I haven't used one, but if I do, it will be one who charges by the hour, not a salesman affiliated with a financial services company with a built-in conflict of interest that makes the company and the salesman weigh their interests ahead of my own when giving investment advice.

I completely agree which is why I'm confirming no conflict of interest.

-murray
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Maybe you're playing a little bit of devil's advocate?

Absolutely! I knew the prevailing opinion here before I started the thread so simply saying "You're right" would have been a waste of all our time which is why I'm challenging you to support your statements.

I havn't made up my mind yet, but, like you, if I do give him or another FA money, I can always pull the money out with minimal cost and consider it a lesson learned.

-murray
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As mentioned, I'm most definitely not ignoring the opinions here, but then talking to a director of our company who has had a real money portfolio with this particular advisor through the 2009 crash carries a lot of weight.

I think you underestimate how many people here also have "real money" and don't use a paid advisor. It's simple math, which apparently isn't meaningful to you. As I said before, you don't have to drink the water if you don't want to.
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I'm curious, how many here who are highly critical of financial advisors have actually used a financial advisor? If not, where did you form your negative opinion?

My mother-in-law's financial advisor has done a poor job managing her money. She has an annuity (as discussed previously, aren't good for most people) and some expensive and under performing Franklin Funds. She's retired, but has no clear idea how much she can safely withdraw. She got hooked up with her FA years and years ago, and loved him until she retired and started needing money. Now she's sort of realizing there isn't really a plan, and she's a bit confused as to what to do and a bit embarrassed that she doesn't know. Isn't getting from point A to point B what you pay an FA for? I'm wondering what this guy was doing all these years beside cashing his commission checks.

That said, she's undoubtedly better off having had an FA. She and her husband never had good paying jobs, they were thrifty and saved hard. But I'm certain they never would have gone off and bought mutual funds and invested on their own. They needed someone to do that for them. So having mutual funds for a couple decades, even bad funds, translated to more money than they ever thought they would have. That result was good.

But as RayVT showed pretty conclusively, something as small as an extra 1% drag on your portfolio absolutely murders your returns over time. It is shocking how much money it winds up costing. The FA has to give you stellar advice to over come that.
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Oh, heck, how about giving this stellar FA 80% of your money to run at 1%(?) fee and put the other 20% in a simple private active fund managed by yourself.

His: Grew at 9.8% (pa, after fees) over the 10 years Mar-03 thru Mar-13. If I understand it right, $1000 investment grew to $2,550. Ths S&P w/div grew at 8.9%, so $1000 would grow to $2,245.

Yours: Grew at 23.0% pa over the same period. $1000 investment grew to $7,980. Took a 50% hit in 2009. Dropped from $7,128 to $4,590.

This miraculous strategy? Extraordinarily complicated. Requires Einstein-level mathmatical ability. Must be able to multiply two numbers and determine if one number is greater than another. Oh, wait --that's 3rd grade math -- sorry.

Once every 3 months, for every stock in the Russell 3000, compute the score of (Return on Assets * yield) and discard all stocks but the top 100 by this score.
Then rank these 100 by the 52-week price gain.
Then buy the top 5, the ones with the highest 52-week percentage gain. Sell anything that you held from last quarter that isn't in the new top 5. On average, you'll sell 3 stocks and buy 3 stocks, each 3 months.

Is 5 stocks too few for you, think that's too risky? Okay, use the top 10 stocks. 20.4% return. $1,000 grows to $6,390.

If you don't have access to a stock screener that has the ROA and yield information or can't find one on the internets, I'll do it for you and only charge 0.25% fee. ;-)

Link to discussion: http://boards.fool.com/cashcowroe-screen-30690804.aspx
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"Everything you need to know about successful trading and investing is on the web, gratis. There are no secrets."

That's true, but most of what you read about trading and investing on the web is BS. It takes an enormous amount of time and focus to figure out what you need to do. Look at the amount of trauma caused by the IUL discussion. And that's just one product. If you are starting off at zero, which is where most people start off, the subject of personal investing is almost too big to break down into digestible chunks. A lot of the problem is that you don't know how much you don't know. Then you start to realize how much you don't know, and you don't know a lot!
And unfortunately, when you don't know something about finances you can't turn to a professional like you would in the law or medical fields. Because by the time you know enough to determine if your advisor is competent or not, you know enough to do it yourself.
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That said, she's undoubtedly better off having had an FA.


Why?
They could have put it into the Vanguard Index 500 fund and done better, I bet.

AM
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I'm curious, how many here who are highly critical of financial advisors have actually used a financial advisor? If not, where did you form your negative opinion?

I wouldn’t say I’m highly critical of FA’s, but I have used one and no longer do.

I used Fisher Investments from 2003 to 2008. Until the crash of 2008 my returns, net of expenses, pretty much matched the MSCI World Index. So nothing spectacular but nothing horrible either.

But I looked at Fisher’s take on returns, which seemed pretty reasonable and not out of line with what others would say, and I started questioning the rationale.

What he says is that your rate of return on investments is about 70% based on asset allocation (stocks, bonds, etc.). 20% depends on sub-allocations (foreign vs. domestic, sectors, etc.). Stock picking, seemingly the toughest thing for individual investors, only accounts for 10% of your returns.

So look at those numbers individually. If stock picking only accounts for 10% of your return, why even bother with it? Once you’ve picked a sector why not just buy the whole sector? Sure, you might get lucky and pick a real winner, or maybe you’re really good at it. Still, you run the risk of getting burned with a few bad calls. Furthermore, if you’re looking to earn, say 10% a year, what sense would it make to pay someone 1% of your portfolio to earn 1%?

You can look at sectors the same way. It’s pretty easy to purchase a diversified portfolio using generic, off the shelf, low fee ETF’s.

So the real question comes down to asset allocation, which determines the lion’s share of your returns.

The problem, of course, is that you can find a financial advisor who believes just about anything. Some tell you to be 100% in stocks. Some tell you to have nothing in stocks. Some tell you pretty much anything in between.

So it seems that by picking a financial advisor you’ve bought into his investing strategy and have already made the most important decision.

The question, of course, is what exactly are you paying for?
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Murray, a simple question:

What can anyone say or do to convince you NOT to use this FA?

1) If the answer is "nothing you can say or do will convince me," then this is not a productive use of anyone's time.

2) If the answer is yes, then please be specific:

I want to see a, b, c, . . . and then I will BE convinced.

It will give the board something actionable to work towards.

Thanks,

Yodaorange
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Why?
They could have put it into the Vanguard Index 500 fund and done better, I bet.


You'd win the bet. They undoubtedly would have been much better off. However, they wouldn't have known to do that. They needed someone to tell them to buy mutual funds. From their point of view their thinking was if you have a medical question, you consult a doctor. If you have a financial question you consult a financial advisor. They didn't know his advice wasn't great. But it was better than no advice.

FWIW, *I* didn't know about Vanguard index funds when I started investing. I started in 92-ish, and I bought two funds: Fidelity Magellan and Fidelity Contrafund, which I believe had front loads in those days. Why? Because that's what the sales lady at the bank suggested I buy. She was attractive and dressed well so I followed her advice. Why did I buy from the bank? I had a lot cash I had been saving and a bank clerk suggested I talk to the mutual fund lady. Given my own initial level of due diligence, I'm not going to pass judgement on anyone else's. :)
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FWIW, *I* didn't know about Vanguard index funds when I started investing. I started in 92-ish, and I bought two funds: Fidelity Magellan and Fidelity Contrafund, which I believe had front loads in those days. Why? Because that's what the sales lady at the bank suggested I buy. She was attractive and dressed well so I followed her advice. Why did I buy from the bank? I had a lot cash I had been saving and a bank clerk suggested I talk to the mutual fund lady. Given my own initial level of due diligence, I'm not going to pass judgement on anyone else's. :)

----------------------


Don't feel bad.
I started with $1000 and went to Dean Witter.
The slick sob there sold me THREE stocks for that $1000 which included about $50 commission for EACH stock for himself. I actually saw the guy in another room with glass walls laughing at me afterwards.

Lesson learned.

Cheap at $1000 though.

Next looked into mutual funds.
I also invested in Fidelity Magellan and Fidelity Freedom Fund for the IRA. Then I discovered Twentieth Century (now called American Century) and bought into a couple of their funds.

Finally, I discovered Vanguard.
My money is with Vanguard today. This includes mutual funds and two brokerage accounts for buying and selling stocks. So far this year I've bought and sold stocks about 15 times and it hasn't cost me one single penny in commissions. If I keep this up... I will run out of free transactions and have to begin paying.....<GASP!>....$2 whole dollars in commission for each purchase or sale. :)

I get really angry when I hear stories from people like a couple I know who do business with Edward James (which doesn't advertise its commission schedule - and you will play hell trying to find out what it is). ONE SINGLE stock buy cost them about $250 in commission. WHY? Why would anyone do that?

Beats me.
I can't for the life of me understand how these shysters stay in business. There's no way in hell I would do business with a full-service (eye-roll) broker.

AM
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I'm not pitching in so much because I use fidelity advice at no charge but do appreciate all of the information that I have seen available on this thread! A treasure chest of good ideas!
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I don't have much else to add to this thread but I would suggest that you interview several financial advisors before you select one if you choose to use one.

I would also be real curious as to how your meeting goes so please let us know what he has to say.
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AngelMay writes,

My money is with Vanguard today. This includes mutual funds and two brokerage accounts for buying and selling stocks. So far this year I've bought and sold stocks about 15 times and it hasn't cost me one single penny in commissions. If I keep this up... I will run out of free transactions and have to begin paying.....<GASP!>....$2 whole dollars in commission for each purchase or sale. :)

I get really angry when I hear stories from people like a couple I know who do business with Edward James (which doesn't advertise its commission schedule - and you will play hell trying to find out what it is). ONE SINGLE stock buy cost them about $250 in commission. WHY? Why would anyone do that?

</snip>


I found this Edward Jones Financial Advisor Compensation Fact Sheet on the web (i.e., info for new Edward Jones employees.)

http://careers.edwardjones.com/groups/jop_content/documents/...

I particularly liked their travel program.

At Edward Jones, you will have the distinct opportunity to participate in business diversification trips (like the one to London UK). This popular program recognizes and rewards those who build a strong book of business. It promotes knowledge sharing in an atmosphere where Financial Advisors can relax and recharge.

Generally, approximately half of our Financial Advisors qualify for our diversification trip.

</snip>


There are no happy endings for customers underwriting this largess.

intercst
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There are no happy endings for customers underwriting this largess.

intercst

----------------


Exactly.

AM
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I think you underestimate how many people here also have "real money" and don't use a paid advisor. It's simple math, which apparently isn't meaningful to you. As I said before, you don't have to drink the water if you don't want to.

Perhaps you fail to realize that I've had "real money" invested for 25 years and done quite well.

Your borderline insults because I don't completely accept your position without question are pointless.

-murray
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What can anyone say or do to convince you NOT to use this FA?

1) If the answer is "nothing you can say or do will convince me," then this is not a productive use of anyone's time.

2) If the answer is yes, then please be specific:


I would say that nothing YOU tell me on your own would convince me either way, HE will have to convince me to give him money to manage.

Knowing what pitfalls you and others have faced using FAs gives me a better chance of making an informed decision. Make sense?

-murray
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I would also be real curious as to how your meeting goes so please let us know what he has to say.

I most definitely will discuss some of his recommendations since the discussion seems to be mostly civil unlike others we've had recently...

-murray
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Murray said: I would say that nothing YOU tell me on your own would convince me either way, HE will have to convince me to give him money to manage.

Murray, that is helpful. Let me ask the follow on question:

What can he, the FA, say or show you that will convince you to use his services? Once again, specific points a,b,c,d would help everyone understand the process.

Thanks,

Yodaorange
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Perhaps you fail to realize that I've had "real money" invested for 25 years and done quite well.

Then why all the questions and virtual demands for talking points with your proposed FA? I said simple math. Since you obviously can do it, then do it. Paying 1% or more to a financial advisor who then will put you in funds that charge another up to 1% or more in expense ratios doesn't make sense unless you have money to burn. Since you indicate that you have money to burn, then have at it.
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ResN wrote I said simple math. Since you obviously can do it, then do it. Paying 1% or more to a financial advisor who then will put you in funds that charge another up to 1% or more in expense ratios doesn't make sense unless you have money to burn. Since you indicate that you have money to burn, then have at it.

This strikes me as arrogant at best. You are correct the math is simple. Maybe other folks have different needs or values than you. Are you taking the position anyone whose views differ from your is an idiot or fool?

Speaking of simple questions - If you experienced some mentally disabling event (say a stroke) tomorrow and lived for another 20 years, do you think your returns would continue at the same rate of return relative to the S&P?

If your answer is yes, please post your method for that kind of auto pilot. That would be valuable, informative and maybe useful.

Gordon
Atlanta
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What can he, the FA, say or show you that will convince you to use his services?

If he can demonstrate greater than market returns with lower volatility, that would go a long ways. I'm not sure why many here seem offended at the suggestion this is possible. IF he can give me higher returns after fees, it's simple math, no?

Also, he'll need to demonstrate a far deeper knowledge of investing than I have. I'll agree with others that he isn't worth it if he's merely screening mutual funds for me.

On the flip side, if I catch him lying or he tries to sell me high load funds or whole life type products, I'm done.

-murray
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I've been reading this thread with interest, and thought I would chime in as I seem to have a different opinion from most of the replies that I have seen.

I have been doing our investing for about 30 years now, and have been generally happy with the results. That said, DH has absolutely zero interest in anything financial other than the spending side, so my worries have been around having someone who could replace me to do our financial management in case I die before DH. So my number one reason for getting a financial advisor has been to make sure that we found someone with whom I was comfortable in terms of performance and with whom DH could work if he had to go it alone. I find that a perfectly good reason to have a financial advisor because it would be to have that expertise available for someone who does not have nor cares to acquire that sort of expertise.

I happen to think that is a great reason to have a FA.

A 2nd reason that we have an advisor is that the numbers have gotten pretty large, and I'm concerned that if I make an error at this point, it could be pretty expensive, and so having someone to be more objective and not making emotional decisions is a big plus for me.

A 3rd reason is that I am finding that although I love to play with money, particularly ours, and make it grow, I'm starting to prefer to be doing other things, and so I want someone that I can hand this work off to.

I hear the arguments about needing more performance to be able to sustain that 1% fee for the advisor, and I'm OK with that, particularly if he can get a better return after his fees than I can. I'm even OK with it if he can get the same return as I can after his fees are taken out, and I have actually included that commission in my retirement budget to make sure that it is covered. I have no problem paying for the expertise provided that I am getting at least as good performance as I can on my own, and over the past 3 or 4 years that we've been working with this guy, he has been able to at least do as well as me and typically better, so I am a happy camper.

Someone mentioned not wanting to pay a percentage fee on assets that are in bonds with the FA, and so I wanted to point out that my FA actually has us in bonds because we were 100% stock, and as we move towards retirement, needed something in bonds for diversification. He advised that I put my 401k contributions into a bond fund to get some of that diversification, and he has purchased individual bonds for us in our portfolio, but he does not charge any commission on those bonds because he doesn't feel like he is really doing anything to manage that.

My FA has looked at our entire portfolio and given advice on it, but we have only given him a portion to manage, and he only gets a percentage on the dollars under his control. He knows this is a test drive for us, and that's fine with him. We have spoken to other FA's who actually wanted to charge a percentage on the total portfolio (one guy actually included the value of our HOUSE in that!) even if they were not managing it, and that was a total non-starter for me.

The FA I use also has his own home-grown model that he uses to be able to run simulations and tell us what we need to save to reach our particular goals and when we have met them. I really like that someone else is checking this for me.

We interviewed quite a number of FA's over the years trying to find one that would work for us. The guy I am now using actually came in 2nd when we did our first test drive, and the guy we chose then only lasted about 2 years because I was not happy. I have, however, been very happy with the current FA in terms of service, performance, and accessibility. We have followed him from his original brokerage to the new brokerage (there was an acquisition, hence the change), and I do plan to keep him.

I realize others have different opinions, but we are not all looking for the same things from a Financial Advisor, and given the right one, I think they can provide a real service.

As with everything, YMMV.
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I've had "real money" invested for 25 years and done quite well.

To me "real money" means a solid 6-figure portfolio(s), perhaps even 7-figures.

So I'm wondering why someone who has a lot of experience and has achieved a sizeable portfolio by investing on their own would suddenly want to use a FA.


Ah-ha! Upon re-reading the OP: getting a pretty sizable check as part of a merger ... will have to cut back to half pay ...
and then
I've been investing pretty successfully for over 20 years, but I tend to think our portfolio has grown to a point where I'm a bit out of my league ... we paid a guy a fee to evaluate where we are, what changes we should make, etc.
What did he say?
FWIW, when I was actively interviewing FA many years ago in reviewing our existing portfolio, one guy said, "Oh, United Airlines. Well, everybody has to learn their lesson about airlines. I guess you haven't learned yours yet. No worry, you'll find out before long."

The other one that stands out in my memory, after reviewing everything, the guy looked at us and said, "What do you need me for?"

and this guy could offer some benefits, specifically, investment vehicles that are available at our net worth, yet difficult to get as an individual.
From everything I have read recently, these "alternative investments" are in the process of crash-and-burn. I think that low-HNW people are attracted to them partly due to the "little people can't join this club" exclusivity aspect.

Let me ponder about what "a bit out of my league" brings to my mind.
* Net worth above $1M but less than $5M.
* Standard stock position size near $20K. (If you invest primarily in individual stocks.)
My reasoning: $1M is a magic number. It's always been the cutoff between "have it made" and "still working on it." It's not likely that somebody well under $1M would think they are out of their league. And most "alternative investments" are open only to "accredited investors", which means $1M liquid NW.
OTOH, by the time you've accumulated $5M you'd be confident that you have a solid base of knowledge and experience, and confident that you've got a good handle on things.

As far as account size for an FA .... yes, he'd probably scoff at $50K. As he should. As *you* should. $50K of a $1M portfolio is not going to make any difference in the overall portfolio performance.
Anyway, most FA's of consequence have a minimum account size of $100K or $500K.

Frankly, if someone came to me and said, I've been investing pretty successfully on my own for 20 years and my portfolio of stocks/bonds/funds is $1M-$3M and I'm considering hiring a FA to manage a significant chunk of my money ..... the first thing I would ask is "Why??"
Have you lost confidence in your ability?
Do you want to segregate a portion off, so that if you make a bone-headed mistake you won't lose everything?

Almost all the scenarios of answers & rationales that I can think of all end up a the same place, at the same answer. To wit: Put that money into a basic set of index funds. Not with an FA, with Fidelity or Vanguard.

So I would turn your question around and pose it as "Given my reasons (whatever your reasons are) for wanting to have someone else manage this significant chunk of my money --- why should I place it with a FA instead of into index funds?"
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I have been doing our investing for about 30 years now, and have been generally happy with the results. That said, DH has absolutely zero interest in anything financial other than the spending side, so my worries have been around having someone who could replace me to do our financial management in case I die before DH.

2gifts, This is the same thinking I went through. Although in our case it's the DW who has zero interest. In fact, here words were, "You handle everything, just tell me when/if I need to stop spending money." LOL
Although she did participate in the interviews & sessions with the FAs.

I reached the opposite conclusion than you.
If the backup plan is for somebody to take over if I die -- well what if *they* die? For that reason alone we discarded the idea of using a single person or even a small company.
We chose Fisher Investments--they will still be around even after Ken Fisher dies.

The other reason was, as you said, protection against making an error and losing it all. Two different managers (me and them) are unlikely to make the same bone-head error at the same time.

Eventually I decided that these could both be accomplished much cheaper than 1.25% annual fee. I closed the Fisher account and moved the 'fraidy-cat money into a combination of OAKBX, FCNTX, PRWBX, and BRK.

As for the other money that I actively manage, I wrote a set of instructions called "taking over the money" for DW that says to sell all the stocks & everything and put all that money into a specific list of 2 index funds.
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2gifts - you sound to me like you feet are just where there need be -- on the ground. I would only add one other thing which your approach is protecting against. That is an investor panic. More than a few folks threw in the towel and sold all (or at least well over 50%) of their equities in the first quarter of 2009. If the data I read is correct a lot (maybe half) of those folks are still out of equities. They will never recover from that one Sell Low and Buy High event.

A Sell Low Buy High deal is not the end of the world for somebody with a billion or two. But for folks whose annual spending is in the 3% of portfolio range, two such events will be a disaster.

No investor in my experience search for lower returns or higher fees. That said, on some levels you get what you pay for i.e. there is no free lunch.

Gordon
Atlanta
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Also, he'll need to demonstrate a far deeper knowledge of investing than I have. I'll agree with others that he isn't worth it if he's merely screening mutual funds for me.

--------

But, seriously, how will you know if he has deeper knowledge than you have? If your own knowledge is scant, he could just be double-talking you and you would never know it.

If you just HAVE to have a financial advisor, at least get one that is fee-based and doesn't take a percentage (which encourages churning).

The smartest thing to do, IMO, is to put the money in some good no-load mutual funds......and....if you just have to play in the market, keep a little aside at a discount broker fr that purpose.

JMO, of course.

AM
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So I would turn your question around and pose it as "Given my reasons (whatever your reasons are) for wanting to have someone else manage this significant chunk of my money --- why should I place it with a FA instead of into index funds?"

Your observations and deductions are pretty good!

My wife REALLY wanted to talk to someone else about cutting back on her hours and the effect on our future. That and the windfall drove the search. He was very helpful in putting us at ease about our future by providing us with a detailed analysis in 24 hours.

Upon talking to him, it became clear that we are poorly set up to transfer our sizable estate to our 12 yo daughter should we die. He can use some help there in setting up a trust, but that doesn't require funds under management.

I guess what's pushing me towards giving him money to manage is wondering what I don't know. If I do give him money, worst case, I see it as a learning experience that costs me a few thousand dollars. Best case, I get into investments I wouldn't have considered and net a few hundred thousand $. Maybe I underestimate the downside, but I'm just giving my thoughts here.

You'll have to trust me when I say my wife was annoyed at my disdain for FAs going into this. Im going into this with my eyes wide open so we'll see what happens at the next meeting.

-murray
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You'll have to trust me when I say my wife was annoyed at my disdain for FAs going into this. Im going into this with my eyes wide open so we'll see what happens at the next meeting.

Hope everything works out for you and your wife. I mean it.
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But, seriously, how will you know if he has deeper knowledge than you have? If your own knowledge is scant, he could just be double-talking you and you would never know it.

I'd hope my posting here over the years tells you I have an above average knowledge of investing. Even IF he could double talk me up front, I'm more than capable of reviewing his recommendations and analyzing his results.

If you just HAVE to have a financial advisor, at least get one that is fee-based and doesn't take a percentage (which encourages churning).

That may be the extent we use this guy. Stay tuned.

-murray
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Hope everything works out for you and your wife. I mean it.

Thanks for that. We're in great shape overall and either way we go won't change that.

Consider this a learning experience for the board on my dime :)

-murray
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Just to give you another data point, I used to manage my SIL's investments. By manage, I mean I sold off all the front loaded funds with high expense ratios her broker purchased and the I picked the indexed ETFs for her. I also went over their expenses, got them to refinance their mortgage and told them they'd have enough income in the foreseeable future. Asset allocation-wise, I couldn't bring myself to invest in bond funds, so I purchased dividend paying funds in their place, figuring to get into bonds in 2-3 years after rates start going up.

In any case, they thought they were imposing on me, thought they needed to be adults and decided to go with an advisor. When we last visited with them, I found out the advisor told them essentially what I had told them, they'd have enough income and would be able to leave an inheritance if they wanted. I didn't ask about their investments, but I'd bet they are in a bond fund now.

For me, it confirmed that I'm not far off on my planning. I'm certain our plan will survive retirement. Especially since I know expenses can be cut if needed (I pointed out to my SIL where they could cut). Of course, I won't be going with an advisor, but I have no problem with anyone who wants outside confirmation in order to have some comfort with their plan.
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I think a FA is a good idea. I have some, and I also happen to be one. That said, a few caveats:

1. Any kind of illiquid investments: DO NOT BUY. period. A family financial adviser is getting fired soon because of this. I got convinced by him, put some money in and guess what.....the seller is a crook, grabbed the cash and took off. Mutual funds, stocks, bonds, cash, all are fine.....but don't get sucked into some off the wall limited partnership.

2. Give him time to work. If you think he is good, don't worry about month to month performance. Let a full market cycle run its course, then see how he has done.

3. Yeah, Ameriprise fees are high. Ergo, don't trade every time he suggests. It does take a bite out of returns.

4. If he doesn't beat his benchmark after a full market cycle, fire him and buy some mutual funds according to your risk tolerance, expected needs versus rates or expected returns, and properly diversified (value, growth, international, some bonds some cash).

5. In either scenario, just relax and enjoy your time off!

Just my two cents worth =/< what ya paid for it.
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1. Any kind of illiquid investments: DO NOT BUY. period. A family financial adviser is getting fired soon because of this. I got convinced by him, put some money in and guess what.....the seller is a crook, grabbed the cash and took off. Mutual funds, stocks, bonds, cash, all are fine.....but don't get sucked into some off the wall limited partnership.



This means Thomas Kinkade "paintings" are not an investment. The house you are living in is not an investment. Diamonds are not an investment.



3. Yeah, Ameriprise fees are high. Ergo, don't trade every time he suggests. It does take a bite out of returns.



This means... make it clear to him that he does not have the authority to buy and sell FOR you without your knowledge and consent.



4. If he doesn't beat his benchmark after a full market cycle, fire him and buy some mutual funds according to your risk tolerance, expected needs versus rates or expected returns, and properly diversified (value, growth, international, some bonds some cash).


And now we are back where I suggested you go in the first place. Except for the bonds. For some reason I've just never liked bonds. Well... except for that one year a loooooooooonnnnngggggg time ago when my bond fund(s) made over 20%. :)

AM
....disclosure: have no bond fund(s) today....
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MurrayS,

We use a fee-only planner for several reasons:

1) We started to use one when our parents became unable to manage their money. Both my father and his died before my Mother and his. In addition, MIL had Alzheimer's. I took one look at all the bonds they owned and quickly decided I was out of my depth.

2) MDH and I don't always see eye-to-eye on investing. A financial planner can be a good mediator. A couple of examples:

a) We're both retired. I want to preserve capital/earn
dividends & interest. MDH is still wants to invest for growth
and beat the market.

b) As soon as the market drops even 5 percent, MDH wants to sell
everything. We've spent years getting the allocation we have.
The thought of having to duplicate that - IF we manage to buy
back in at a lower price - is the typical "Buy High, Sell Low"
setup.


3) The financial planner can buy load-waived funds and has a bond broker that gives her access to bonds before they become available on major sites, like Fidelity.

4) She made us aware of the special rules for the trusts our two sons inherited from MDH's parents. We could have gotten into a real mess with the IRS if we'd been audited before we straightened that out.

Just offering some points to consider...

PM
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Related to trusts, I believe I mentioned that he suggested setting up a trust to help pass our estate on to our 12 yo daughter.

Any comments on this? Good advice or not?

-murray
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Related to trusts, I believe I mentioned that he suggested setting up a trust to help pass our estate on to our 12 yo daughter.

I'm no expert on trusts, but here are some thoughts. Whether you could benefit from a trust for your daughter depends on a lot of factors, so you should consult an estate attorney, not a financial advisor. One important factor is the amount of money involved in your estate. Under current law, on the federal level, you and your wife would get a combined estate tax exemption of a little more than $10M, which could pass directly to your daughter tax free after both parents are gone. The exemption is indexed for inflation, at least under current law. If your estate is more than this amount (or close), then you might benefit from gifting to a trust set up for your daughter. You and your wife can gift a combined $28K ($14K each) tax free each year to the trust, also indexed for inflation. This won't count against the $10M exemption level, nor will you have to even file a gift tax return. This would drain money out of your estate at a relatively slow pace, but a steady pace. Whether it could get you under the $10M level depends again on your total estate value. You can also make additional annual gifts tax free and not counted against the exemption for things like education expenses, which would include private school (depending on age). There are many such things, all of which an estate attorney can tell you about. Also, if you fear both parents dying while you child is too young to handle money (for some, this can go far into adulthood), a trust would name a trustee and whatever conditions or limitations you might want to impose (such as the age of final distribution). I'm not a big fan of trusts for children, but our estate won't exceed $10M, at least I doubt it ever will. My son also is 31 and married to an accountant, so the time for needing one has passed for us. Institutional trustees can be expensive, and many won't handle trusts under a certain amount, so that's also a consideration. I seriously caution against letting a financial advisor handle this, due to the many inherent conflicts of interest that can arise. Also, this can get into complex legal issues, so a true estate attorney is your best bet. Good luck.
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Not an expert on Trusts either (although I have one for my son), but yes, an estate attorney is the only way to go. The money will be well spent and probably cost less than what it could cost you or your heirs in mistakes, probate, etc.

They are not DIY instruments, despite Suze Orman's (or others) Will & Trust CD or "kits".

Good Luck.
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so you should consult an estate attorney, not a financial advisor

That's exactly what the FA said and he's helping us in that regard...score one for the FA ;)

Also, if you fear both parents dying while you child is too young to handle money (for some, this can go far into adulthood), a trust would name a trustee and whatever conditions or limitations you might want to impose (such as the age of final distribution)

I think this is the primary reason we would want a trust. I think I would have been ill equipped to handle 6 or 7 figures when I was in my 20s and I know I'm better than most.

-murray
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Hi Murray
you asked for 'experiences' with FAs

My experience is the common experience that many here tell you to RUN from.

In the 1980's, I was financially illiterate, and put a traditional IRA and rolled-over 403b's into the hands of an FA.

Meanwhile, knowing that I was illiterate... I found the TMF in the mid 1990's ... and Intercst's Retire Early Homepage, and over time, became much more financially literate.

after learning a LOT... and investing some of my own monies in a cash account, and AFTER the run up of the late 1998 to 2000... and then the dot.com crash, I pulled the monies from the FA.

The monies that were being handled by the FA increase 3 fold... and crashed back to the original sums during the dot.com crash. I moved the monies to self managed IRA's. I didn't actually lose any 'wealth', but I didn't gain any either.

Under my direction, without paying any fees to FAs, I've managed to grow my accounts.

YMMV. I do believe that every investor has to be happy with his/her choices... therefore, I can agree with the posters who've outlined THEIR reasons for choosing to work with an FA.
:-)
ralph
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MurrayS writes,

Also, if you fear both parents dying while you child is too young to handle money (for some, this can go far into adulthood), a trust would name a trustee and whatever conditions or limitations you might want to impose (such as the age of final distribution)

I think this is the primary reason we would want a trust. I think I would have been ill equipped to handle 6 or 7 figures when I was in my 20s and I know I'm better than most.

</snip>


By far the most valuable course I took as an undergrad in engineering school was a 3-day mini-course on financial planning and investments taught by the Army Captain that ran the ROTC program. The Captain brought in several financial planners and stock brokers and had them make their pitch. Then he dissected what they were trying to sell us and how much we'd be screwed. Very entertaining and quite an eye opener -- even for an 18-year-old Freshman.

Seven or eight years later when I had some money to invest, at least I knew enough not to get screwed on fees & commissions.

intercst
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he suggested setting up a trust to help pass our estate on to our 12 yo daughter.

Any comments on this? Good advice or not?


Yes.

I first became aware of this advice when reading Dacey "How to Avoid Probate" in the mid 70's. Published in 1965. Standard advice. Obviously, you should use a lawyer set it up. Lawyers were scandalised when Dacey wrote this, but now it has become quite common. In our little community weekly newpaper, a number of "estate lawyers" run little 3"x3" ads for this service.
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The Captain brought in several financial planners and stock brokers and had them make their pitch. Then he dissected what they were trying to sell us and how much we'd be screwed. Very entertaining and quite an eye opener -- even for an 18-year-old Freshman.

Just so I understand, you were presented with a handful of planners not recommended to or selected by you and a biased teacher pointed out flaws in their products. Based on this, you've determined all planners are crocks that offer no value to an investor.

Got it. Thanks for your opinion.

What are your thoughts on trusts?

-murray
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Also, if you fear both parents dying while you child is too young to handle money (for some, this can go far into adulthood), a trust would name a trustee and whatever conditions or limitations you might want to impose (such as the age of final distribution)

I think this is the primary reason we would want a trust. I think I would have been ill equipped to handle 6 or 7 figures when I was in my 20s and I know I'm better than most.


Actually, no, the primary reason is not that your daughter would be too young to handle the money. The primary reason for the trust (and it could be set up via the will or set up now) is that you want to protect both your wife's lifetime exemption as well as yours when passing the entire estate to your daughter. Assuming you will have a large enough estate to worry about estate taxes, when the first spouse dies, the entire estate will pass to the surviving spouse, but the lifetime exemption is then lost because there is no limit on the size of the estate that can be passed to a spouse without triggering estate taxes. However, when that spouse dies and everything goes to the daughter, only the lifetime exemption of that last spouse is used before estate taxes are due, so you have lost the first exemption.

So if you have a $10million estate, and you die, your wife inherits your half of it without estate taxes, but your $5 million exemption is not used. When she dies, your daughter then inherits that $10 million estate, but there is a $5 million exemption from your wife, and so your daughter owes taxes on the additional $5 million. If, however, you had left your half to a trust when you died, your #5 million exemption is used up. When your wife dies, her $5 million exemption is then used, and daughter has now inherited that $10 million without having to pay estate taxes because both exemptions were used.

There are other reasons to use a trust including that your affairs remain private where the terms of a will are public, it is very difficult to contest a trust since the terms are not public, and you don't have to go through probate.

We have had a trust since the kids were 3 years old mostly to keep our affairs private and to avoid probate.

There are multiple ways to handle this, and an estate planning attorney is your best bet.
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So if you have a $10million estate, and you die, your wife inherits your half of it without estate taxes, but your $5 million exemption is not used. When she dies, your daughter then inherits that $10 million estate, but there is a $5 million exemption from your wife, and so your daughter owes taxes on the additional $5 million. If, however, you had left your half to a trust when you died, your #5 million exemption is used up. When your wife dies, her $5 million exemption is then used, and daughter has now inherited that $10 million without having to pay estate taxes because both exemptions were used.

I could easily be wrong, but I think the current federal estate tax exemption for one spouse carries forward to the surviving spouse, assuming everything is left to the surviving spouse. This means that the surviving spouse can leave a total of $10M to the daughter (or anyone else) free of federal estate taxes. Under the old law, a person needed a trust to accomplish this, but under current law, a trust is no longer needed...at least I think that's the way it is now.
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http://wills.about.com/od/understandingestatetaxes/qt/What-I...

Here's a discussion of the new estate tax and portability of the exemption as between spouses, without the need for an AB Trust.
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2gifts, in re-reading your response, I see that you actually were talking about what would happen if the husband left $5M in trust for the daughter prior to his death, which would reduce the estate tax exemption for the surviving spouse from potentially $10M to $5M (since the husband would have already used up his $5M). I think you're right about that. This is why I suggested gifting to the trust during the parents' lifetimes up to the annual max for each parent per person, which would be around $28K combined per year at current levels, and this amount would not then be subtracted from either parents $5M exemption, thus saving a total of $10M for the surviving spouse to pass to the daughter free of estate taxes.
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MurrayS writes,

<<The Captain brought in several financial planners and stock brokers and had them make their pitch. Then he dissected what they were trying to sell us and how much we'd be screwed. Very entertaining and quite an eye opener -- even for an 18-year-old Freshman.>>

Just so I understand, you were presented with a handful of planners not recommended to or selected by you and a biased teacher pointed out flaws in their products. Based on this, you've determined all planners are crocks that offer no value to an investor.

</snip>


I don't think it matters who recommended or selected them, you just need to dispassionately look at the cost of what's being presented and see if it makes sense. The more the advisor is skimming off in fees and costs, the less it makes sense.

As several others have suggested, if you need an advisor, pay him by the hour. You shouldn't be paying an hourly rate any higher than an accountant or attorney. A 1% advisory fee on a $1 million account is $10,000/year. If you'd pay an attorney in your area $250/hour that's 40 hours of "work". It takes a fraction of that (maybe 2 or 3 hours/year, on average) to allocate $1 million across 8 to 10 mutual funds and do occasional tax loss harvesting and rebalancing. You could be paying the guy $3,000/hour.


What are your thoughts on trusts?


Trusts are fine. (I have one myself) But again the question is what does it cost to prepare one? I'm not going to pay an attorney thousands of dollars to spool-off a standard form from his word processor.

intercst
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Here's a discussion of the new estate tax and portability of the exemption as between spouses, without the need for an AB Trust.

Thanks. I was not aware of this change, and it looks very good to me.

We created our existing trusts back in 1994, and the laws have changed several times since then. We have made several changes along the way due to changes in our own circumstances as well as changes in the law, and are about ready to do another change.

We review our trusts at least every 5 years to see if something needs to be changed, which is also something that should be done. You can't just put your estate plan in place and leave it as things do change in life (kids get married, grandchildren arrive, kids finish college, a spouse dies, tax laws change....)

And I think this also points out yet again why an estate plan should be done with an estate planning attorney to ensure that you are doing what you want, and that both state and federal laws have been taken into consideration.
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I'm not going to pay an attorney thousands of dollars to spool-off a standard form from his word processor.

Interesting take on attorney fees vs. the value they provide. This helps me to put your FA fee comments into perspective.

-murray
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That is how it works. Another benefit of inter vivos trusts is that they allow you to avoid the delays, hassles and expense of probate, or - God forbid - intestacy.

Ms C
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Interesting take on attorney fees vs. the value they provide. This helps me to put your FA fee comments into perspective.

Yeah. The attorney I refer my clients to (or used to, as she just retired), charged less than $2000 for a fairly basic trust. Yes, the bulk of it was boilerplate.

But the value was in the customizations to that boilerplate and in the advice and suggestions on dealing with the specific situation. (Including my own - she prepared a trust for my wife and me, although for various reasons that she approved, we eventually never implemented it.)

Having said all that, there is a big difference between using an attorney for drawing up a trust and using a typical percent-of-assets financial advisor. With the attorney, you're basically looking at a one time project. Prepare the trust, pay the fee, and you're done. At least for a few years - as you really should get a "check up" on your trust every few years to make sure it's still doing what you need and to account for any changes in the law. With a FA who charges a percentage every year, that fee never ends. And their performance is much harder to measure.

If you overpay for poor advice from the lawyer, it's a one time fee. And it's not terribly hard to fix - just get a better lawyer and start over. If you overpay for poor advice from a FA, you may never know because their performance can be hard to measure. The fee never ends. The amount lost can be orders of magnitude higher than the amount paid to a lawyer for a trust. If you can measure the losses at all, because it's not just the losses to the fee, it's the underperformance of the investments as well.

I'm not completely against using a FA. There have been a couple of persuasive arguments here for using one in certain situations. I would say it's better to learn to manage your own investments, even if it's just sticking the money in an index fund or two and leaving it alone. But there are times when even that simplicity is not possible.

So I think it's better to find a good FA before you need one than to just take the best salesman to come along when your capacity to make important decisions may be limited.

--Peter
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Having said all that, there is a big difference between using an attorney for drawing up a trust and using a typical percent-of-assets financial advisor.

I agree. I was merely pointing out some people apparently see all professional fees as a waste and it provides some perspective on their opinions. It doesn't make them right or wrong, it just helps understand where they're coming from.

-murray
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I've always wondered why people don't just do this:

If you have a financial advisor - great! Give them 1/10 of your money and let them charge their fees. Duplicate what they're doing with the other 90 percent - fee free.

Voila! Professional management at 1/10 the price.
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I think one reason may be the loss of leveraging investments not available to a smaller portfolio. For example, it would be hard to ladder individual bonds without several 10s of thousands of dollars from what I've read. If that were to be 10-20% of your portfolio, you'd need a lot of money for that to work.

-murray
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Yes, but why would you pay advisor fees to buy bonds? And I believe that it would realistically take 100's of thousands of dollars, not 10's, in order to be adequately diversified.

Everything I've read says that the bond market is unfriendly to small traders---typical minimum lot sizes 10+ bonds, and spreads are very wide. For bonds, I think funds or ETFs is the best way for a small investor.

And you don't need a FA to put you in bonds funds, so you don't need to pay a fee on that.
When I opened my Fisher account, we had a discussion about just that. My guy said that a lot of their private clients had them manage purely equities and no bonds for that very reason. They just wanted to make sure that I had other (non-Fisher) accounts that I had my fixed-income allocation in.

I could have done what the prev poster said, duplicated the Fisher trades in another account. The trade confirmations got emailed to me from UBS everytime they made a trade. That's the first thing I thought of, and I'm sure just about everybody thinks of it. Commissions would have cheaper, too. UBS was $25-$35, but etrade is $5 for me.
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Everything I've read says that the bond market is unfriendly to small traders---typical minimum lot sizes 10+ bonds, and spreads are very wide. For bonds, I think funds or ETFs is the best way for a small investor.

Exactly. By giving an FA only 10% of your portfolio, you're eliminating the option of buying individual bonds.

That's just an example of why giving an FA 10% of your portfolio may not be in your best interest.

-murray
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Yes, but why would you pay advisor fees to buy bonds?

As I think I noted in my previous post, my FA has purchased individual bonds for us, and he does not charge any fee for anything to do with the bond accounts. He takes his fees from the accounts that are invested in equities. I find this acceptable, and I think it addresses your objection, with which I do agree BTW.
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If you overpay for poor advice from the lawyer, it's a one time fee. And it's not terribly hard to fix

Unfortunately, this is not true for estate lawyers. I have a relative whose parent had a well-recommended estate lawyer write their trust and will. After the parent died they discovered things had been done very poorly and the results were counter to their parent's wishes. But it was too late to do anything about it.
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Estate planning isn't once and done for the most part. It's actually not a bad idea to have a revisit/review done by a different attorney. The estate taxation has changed so often, I am surprised by people not having reviews(trust or not) every few years.

Also, a key point is that probate, wills and taxes are handled differently in different states so a move should trigger a review if nothing else and owning property in multiple states can complicate things. I spent 18 months fighting with a bank because what they wanted was something not necessary in my state and eventually it took the state's attorney general to make that clear.
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murray,

We have revocable trusts set up for our two sons. The trusts also provide for any grandchildren that may come on the scene.

We learned to do this because MDH's parents gave 25% of their estate to each of our two boys. This nicely paid college tuition, including grad school, for them, as well as giving them enough to buy a starter home when they feel the urge.

The trusts have a provision that said neither boy could spend any of the money until they reached 25. Until then, MDH serves as trustee and paid college costs and living expenses while they were in college. (Actually, it was a little more complicated than that. Each boy gains access to 1/3 of the trust assets at 25, another 1/3 of the assets at 30 and the rest of the assets at 35. MDH, as trustee, will override those provisions as he sees fit - probably long before they turn 30.)

We became a believer in trusts after settling my sister's estate in California. She died intestate and probate was a real bear from long distance.

PM
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2gifts: "Actually, no, the primary reason is not that your daughter would be too young to handle the money. The primary reason for the trust (and it could be set up via the will or set up now) is that you want to protect both your wife's lifetime exemption as well as yours when passing the entire estate to your daughter. Assuming you will have a large enough estate to worry about estate taxes, when the first spouse dies, the entire estate will pass to the surviving spouse, but the lifetime exemption is then lost because there is no limit on the size of the estate that can be passed to a spouse without triggering estate taxes. However, when that spouse dies and everything goes to the daughter, only the lifetime exemption of that last spouse is used before estate taxes are due, so you have lost the first exemption.

So if you have a $10million estate, and you die, your wife inherits your half of it without estate taxes, but your $5 million exemption is not used. When she dies, your daughter then inherits that $10 million estate, but there is a $5 million exemption from your wife, and so your daughter owes taxes on the additional $5 million. If, however, you had left your half to a trust when you died, your #5 million exemption is used up. When your wife dies, her $5 million exemption is then used, and daughter has now inherited that $10 million without having to pay estate taxes because both exemptions were used."

Not a trust lawyer, but I do not think that this is necessarily the law anymore. I believe that the last tax law changed this issue (at least in part).

Regards, JAFO
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PolymerMom: "Each boy gains access to 1/3 of the trust assets at 25, another 1/3 of the assets at 30 and the rest of the assets at 35. MDH, as trustee, will override those provisions as he sees fit - probably long before they turn 30.)"

Those are unually percentages. It is typically 1/3 at x age (often 25), 1/2 of the remaining balance at y age (often 30) because 1/2 of 2/3 is 1/3, and the rest at z age (often 35).

Regards, JAFO
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JAFO,

What you said is closer! I may have oversimplified, since the portfolio could well have increased in value over time.

PM
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I appreciate all the feedback here. I've decided to invest with the advisor we talked to after much soul searching. I'm confident that this guy will provide value that exceeds the cost.

Of course, I'll keep a close eye on the returns and report back here. Part of my decision is that this is a good time in life to "experiment" with a FA since our 401ks are off limits and we have time to recover should he fail miserably.

-murray
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