Portfolio review - 35 year old trying to take control

[ekphora]

Dear BH community –

Helping a good friend get control of her finances. Would love your collective wisdom and guidance on the following:

Overview
Emergency funds: 8 months
Debt: $62k @ 2.63%
Tax Filing Status: Single
Tax Rate: 28% Federal; ~10% NYC tax
State of Residence: NYC (Manhattan)
Age: 35
Desired Asset allocation: 70% stocks / 30% bonds
Desired International allocation: 35% of stocks
Total portfolio size: $200k
Job – Orthodontist, freelances for a few different offices; works ~11-13 days / month

Current retirement assets

Taxable – total 58%
58% cash (0% interest savings account)

Her SEP-IRA at Pioneer Investments – total 31.6%
2.7% Pioneer Emerging Markets Fund C (PCEFX) (>2%)
1.8% Pioneer Real Estate Shares C (PCREX) (>2%)
3.2% Pioneer Global High Yield Fund C (PGYCX) (>2%)
23.9% Pioneer Ibbotson Moderate Allocation C (PIDCX) (>2%)

Her Roth IRA at Nationwide Financial – total 10.4%
10.4% Nationwide Destination 2040 C (NWMCX) (1.0%)

Contributions

New annual Contributions
~$5.5k Her Roth IRA (may phase out, but then will show up in SEPIRA)
~$20k Her SEP-IRA
$2-5k Taxable

Target allocation
30% US Large
10% US Small Value
18% International Large
7% International Small
5% REIT
15% Total Bond
15% TIPS

Proposed portfolio

Taxable – 58% (move to Vanguard)
30% Vanguard TSM Admiral (VTSAX)
10% Vanguard Small Cap Value Index Fund Admiral (VSIAX)
18% Vanguard All-World Ex-US (VFWAX)


Her SEP-IRA – 31.6% (move to Vanguard)
5% Vanguard REIT Index Admiral (VGSLX)
7% Vanguard Ex-US Small Cap Index (VFSVX)
15% Vanguard Total Bond Market (VBTLX)
4.6% Vanguard TIPS (VIPSX)

Her Roth IRA (move to Vanguard)
10.4% Vanguard TIPS (VIPSX)

Questions:

1. As you can probably figure out, my friend has an accountant that has happily stashed her retirement funds in his choice of actively managed funds. The allocation of retirement monies is actually not bad, but the funds are super-expensive and have been beat soundly by their passive equivalents. Regardless, every time she approaches her accountant, he pushes her around and basically tells her that she “ doesn't know what she’s talking about” and should “just trust him to manage this.” As he is both her accountant and financial adviser, she doesn't quite know how to “force” the change. I've offered to help her, but would love any helpful ideas on how I should do that appropriately – e.g., opening up the accounts at VG and letting them manage the rollover, talking to the accountant vs. playing a backseat role only etc. Her financial knowledge is quite low and while I am quite comfortable advising her on her portfolio, I have never used a financial adviser and therefore don’t quite know how to “deal” with them, nicely or otherwise. Advice appreciated.

2. She has a generally high ability, willingness and need to take risk; won’t need the money for a long time, has the ability to earn pretty easily and has limited desire to work more than she does now, but would work more if she needed to. How does the target allocation resonate with you?

3. I know we could do a 3 fund portfolio, but I've been quite happy with my sliced and diced portfolio and I think giving her exposure to small/value is suitable for her profile. Some specific questions related to asset location and choices – a) does taking the foreign tax credit benefit of VFSVX in taxable outweigh complexity of having to buy one of the domestic indices in taxable and tax advantaged? (it sort of fit nicely there) b) should I consider some lower duration bonds?

Thanks a ton in advance,
ek

[nydad]

Will she be presumably managing these investments going forward? If she doesn't have strong financial literacy and interest in active management of her portfolio, I don't think a tilted portfolio is a good idea. Better to move to a 3-fund solution or even target date portfolios.

Those expense ratios are brutal though. You should calculate those in real dollar terms so she understands what she is paying every year for those funds.

It's her money at the end of the day, so you need to find a way to convince her of the wisdom of passive index investing - then let her deal with the adviser. If you want to help, you can explain to her how an in-kind transfer over to Vanguard would work, then set her up with a Vanguard financial adviser who can complete the rest of the transactions.

[dimdum]

What ever portfolio you choose, you need to get into market slowly to avoid any shock to her.
Market is at high, chances of 3-5% pull back are high but no one knows for sure.

Target fund or 3 fund portfolio should work for her.

While you are hashing out details and waiting to money to move into stock, I would highly recommend opening a Ally or equivalent account.
Ally is paying .90% for saving, its FDIC insured and you can open online in minutes.
0.90% is not much but better than 0%.

[Duckie]

ekphora, if she is self-employed then she can open a Solo 401k plan at Fidelity and move her SEP-IRA there. (Vanguard's plan doesn't allow rollovers from IRAs.) This will allow for ongoing 
Backdoor Roth IRA
 contributions once she hits the income limits.

3. I know we could do a 3 fund portfolio, but I've been quite happy with my sliced and diced portfolio and I think giving her exposure to small/value is suitable for her profile.

She's new at doing it herself. Just because you like to tinker doesn't mean it's suitable for her, at least at first. I also recommend the Three-fund portfolio. An AA of 70% stocks, 30% bonds, and 35% of stocks in international breaks down to 45% US stocks, 25% international stocks, and 30% bonds. Here is a possible retirement portfolio:

Taxable at Vanguard -- 58%
33% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.06%)
25% (VTIAX) Vanguard Total International Stock Index Fund Admiral Shares (0.18%)

Roth IRA at Vanguard -- 10%
5% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.06%)
5% (VGSLX) Vanguard REIT Index Fund Admiral Shares (0.10%)

either SEP-IRA at Vanguard -- 32%
2% (VTSMX) Vanguard Total Stock Market Index Fund Investor Shares (0.18%)
20% (VBTLX) Vanguard Total Bond Market Index Fund Admiral Shares (0.10%)
10% (VIPSX) Vanguard Inflation-Protected Securities Fund Investor Shares (0.20%)

or Self-Employed 401k at Fidelity -- 32%
2% (FSTMX) Spartan Total Market Index Fund Investor Class (0.10%)
20% (FSITX) Spartan U.S. Bond Index Fund Advantage Class (0.10%)
10% (FSIYX) Spartan Inflation-Protected Bond Index Fund Advantage Class (0.10%)

-- This puts all the international in taxable because of the 
Foreign tax credit and at Vanguard because it's better than Fidelity's international funds.
-- This has TIPS but at age 35 she doesn't really need them yet.
-- This has REITs but it's overweighting them and could be skipped.

Something to think about.

[ekphora]

Will she be presumably managing these investments going forward? If she doesn't have strong financial literacy and interest in active management of her portfolio, I don't think a tilted portfolio is a good idea. Better to move to a 3-fund solution or even target date portfolios.

Target fund or 3 fund portfolio should work for her.

Thanks nydad and dimdum. Yes, she will be managing them and she is keenly excited to learn how. However, you're right to challenge my assumption on tilting here. Based on your feedback, I get that simple could be a better starting point for her. If she wants to tilt, she's can always take that decision later. Thank you for the push.

Those expense ratios are brutal though. You should calculate those in real dollar terms so she understands what she is paying every year for those funds.

Great idea! I drafted a spreadsheet that shows her what would have happened if she made the exact same deposits over the last three years with a three fund portfolio, and then broke down the difference into higher ER and active under-performance. I think it's much more clear when it's like - that's $10,000 in cold hard cash that you're missing out on!

It's her money at the end of the day, so you need to find a way to convince her of the wisdom of passive index investing - then let her deal with the adviser. If you want to help, you can explain to her how an in-kind transfer over to Vanguard would work, then set her up with a Vanguard financial adviser who can complete the rest of the transactions.

Thanks - this is the kind of advice I'm looking for. Another other thoughts from others here would be helpful

She's new at doing it herself. Just because you like to tinker doesn't mean it's suitable for her, at least at first. I also recommend the Three-fund portfolio. An AA of 70% stocks, 30% bonds, and 35% of stocks in international breaks down to 45% US stocks, 25% international stocks, and 30% bonds. Here is a possible retirement portfolio:

Excellent. Like it Duckie - great, practical suggestion for her AA. Between the two options (moving to a Solo 401k in her case to facilitate a backdoor vs. transfer the SEP to VG), which would you choose?

Thanks again for the helpful feedback.

[nydad]

And not to sound like a broken record, but I really recommend the Bogleheads guide to investing. You could buy it as a present for her, and ask her to read it - that way, she sees that you're not just pitching stuff you read on the internet, but that there are real pros with deep experience and data to back up the reason behind this approach.

[Duckie]

Between the two options (moving to a Solo 401k in her case to facilitate a backdoor vs. transfer the SEP to VG), which would you choose?

I prefer Vanguard to Fidelity, but given the backdoor Roth IRA issue, I would choose Fidelity. (Actually, once the SEP-IRA is rolled over into the Self-Employed 401k plan at Fidelity she could move it to Vanguard if she wanted. But that's not really necessary. Other than international, Fidelity's index funds match Vanguard's.)

I would advise skipping TIPS and REITs for now. Just make it a three-fund portfolio until she has more experience handling it herself.

[Default User BR]

There's no need to "deal" with the current adviser unless he has some sort of contract that would allow blocking a move. Initiate transfers from the receiving institution. When he calls, have your friend tell him, "I have made my decision, please respect it." Refuse further discussion.


Brian

[ekphora]

I prefer Vanguard to Fidelity, but given the backdoor Roth IRA issue, I would choose Fidelity.

Got it - that definitely makes sense.

There's no need to "deal" with the current adviser unless he has some sort of contract that would allow blocking a move. Initiate transfers from the receiving institution. When he calls, have your friend tell him, "I have made my decision, please respect it." Refuse further discussion.

She doesn't have a formal contract. This approach resonates - thanks for the guidance here!

-ek