Benefits of partially managed portfolio?

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Benefits of partially managed portfolio?

Postby lumos » Mon Jul 15, 2013 7:12 pm

Greetings. I am considering whether to expand my relationship with a seemingly bright and personable financial advisor loosely affiliated with my employer but very familiar with our benefits. Although this may be antithetical to the principles of low-cost passive index investing, I appreciate his knowledge and validation and imagine that he could be quite helpful as I approach (early?) retirement and the tax/social security/medicare/distribution phase. He seems more than willing to provide ad hoc consultation for free whenever I need it whether or not I pay for any of his services. He says that this is his practice and I believe him to be sincere, but he is probably more comfortable with this concept than I am at the moment.

Of course, his preferred method of payment is managing a portion of my 401K at 1%. He uses CLS Investments http://www.clsinvest.com to research and manage a very large and broad swath of index funds (200+) to leverage uber-diversification (my term) and active allocation which he contends will likely match the return of my current passive strategy (net fees) in an up market, and would be better able to mitigate loss if/when things start to head south. CLS and other fees would add another ".5% to 1%". (Total: 1.5 - 2%)

His initial portfolio recommendation is
401K stable asset fund (unmanaged) 25%
401K Total Market index fund (unmanaged) 35%
CLS managed index funds 40%

The managed index funds would include:
Large-Cap Core 19.65%
Large-Cap Value 12.43%

Large-Cap Growth 11.90%
Intermediate/Long-Term Bonds 11.62%
Short-Term Bonds/Cash 9.52%
International 9.39%
Global 4.80%
Emerging Markets 3.96%
High Yield Bonds 3.32%
Small/Mid-Cap Value 2.55%
Small/Mid-Cap Growth 2.53%
Preferred Security 2.45%
Inverse Equity 1.64%
Small/Mid-Cap Core 1.58%
Commodities 1.47%
Other 1.20%

Full CLS proposal here: http://nebula.wsimg.com/c676bc79541354788fadc34411c278b5?AccessKeyId=FC03F69D82FC3BBAFE0F&disposition=0

I'm 56 , have a moderate/aggressive risk profile. I'm fairly happy my current 70/30 index fund allocation and low fees in the 401K but would be open to "sensible optimization" if there is such a thing, and would like to retain him as a resource in some way. Would giving him some (small?) portion of my 401K for a period of time to gauge performance make any sense or should I just stay put and leverage his free advice and/or his "special project" fees of $200 per hour as needed?

Thanks in advance for any thoughts or suggestions!
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Re: Benefits of partially managed portfolio?

Postby zebrafish » Mon Jul 15, 2013 7:29 pm

Of course, his preferred method of payment is managing a portion of my 401K at 1%. He uses CLS Investments http://www.clsinvest.com to research and manage a very large and broad swath of index funds (200+) to leverage uber-diversification (my term) and active allocation which he contends will likely match the return of my current passive strategy (net fees) in an up market, and would be better able to mitigate loss if/when things start to head south. CLS and other fees would add another ".5% to 1%". (Total: 1.5 - 2%)

I've never seen a manager who claims they can't beat an index portfolio. Sounds like you're getting the hard-sell. So, this person claims they can beat an index portfolio in an up and a down market. I call bull. It is funny, because the active managers claim they can beat indexing in a down market.

I doubt over long-term, you can "beat" straight indexing or slice-dice in do-it-yourself category when you need to add an additional 1% management fee.

Gee, let's make it sound really complicated so that you don't understand what is going on. But it is really complicated, and therefore, going to beat the market. All it will cost you is 1%. :twisted:

My impression: this is a wolf in sheep's clothing

Personally, I wouldn't do this.
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Re: Benefits of partially managed portfolio?

Postby Jim180 » Mon Jul 15, 2013 7:43 pm

It sounds like CLS Investments uses a practice called "tactical asset allocation". I would ask the advisor about that. That is a practice where they are constantly changing your allocation based on their analysis of market conditions. "Tactical asset allocation" is just a fancy term for market timing. We know market timing in most cases is a losing strategy over time. I would not use this advisor.
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Re: Benefits of partially managed portfolio?

Postby lumos » Mon Jul 15, 2013 10:05 pm

Thanks very much for your input! The "consensus" is neither unexpected nor inconsistent with my general assessment, but it's helpful to get other opinions before moving forward. Thank you.
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Re: Benefits of partially managed portfolio?

Postby inbox788 » Tue Jul 16, 2013 8:27 pm

Let me understand this correctly.

You hire this adviser and pay him a fee based on your assets, let's say 1%. He slices and dices your funds with 40% going to CLS. His work is done.

CLS slices and dices "managed index funds" and charges you another 1%.

They use AdvisorOne implementation, and AdvisorOne takes their 1% cut.

AdvisorOne N Amerigo slices and dices, including almost 10% Vanguard Dividend Appreciation (VIG?) and Vanguard gets their .1% cut.
SPDR Energy Select Sector 7.62 % (XLE? er 0.18%)
SPDR Financial Select Sector 6.14 % (XLF? er 0.18%)

http://finance.yahoo.com/q/bc?s=CLSAX&t ... %2C%5EGSPC

FYI S&P 500 has 11% Energy and 15% Financial, but without calculating all the other slicing and dicing, it's hard to tell if they're under-weighed or overweight these sectors. When all is said and done, I expect they're pretty much approximate the s&p500 weighing.
http://www.bespokeinvest.com/thinkbig/2 ... tings.html


Long% Short% Net%
Cash 5 -2 3
U.S. Stocks 72 0 72
Foreign Stocks 21 0 21
Bonds 2 0 2
Other 3 0 3
Not Classified 0 0 0
Total 102 -2 100
Portfolio
(% of Stocks) S&P 500
(%)
Cyclical 29.54 31.25
Basic Materials 4.95 3.21
Consumer Cyclical 9.50 11.29
Financial Services 12.60 14.79
Real Estate 2.49 1.95

Sensitive 44.02 42.19
Communication Services 4.13 4.22
Energy 13.20 10.89
Industrials 10.82 10.00
Technology 15.87 17.08

Defensive 26.44 26.56
Consumer Defensive 9.89 10.75
Healthcare 14.27 12.37
Utilities 2.28 3.44

Portfolio
(% of Domestic Stocks) S&P 500
(%)
High Yield 4.09 3.38
Distressed 1.65 0.27
Hard Asset 15.36 12.19
Cyclical 38.02 42.47
Slow Growth 9.75 12.22
Classic Growth 0.68 0.57
Aggressive Growth 21.39 20.86
Speculative Growth 6.51 5.99
Not Classified 2.55 2.05
Value Core Growth
24 25 25 Large
5 6 7 Medium
3 3 4 Small
http://portfolio.morningstar.com/Rtport ... ntrynum=10

Using Morningstar X-ray, the asset allocation is surprisingly like VTI, so I doubt they'll outperform it no matter how much they slice and dice.

FWIW, the complicated managed fund looks to me like AA:
45% large caps
27% bonds
18% International
7% small caps
3% other - really insignificant!

Combined with the rest of your 401k, I get
35% bonds/65% stocks

You might as well put EVERYTHING into Vanguard Wellington and be done with it (half joking as you'd want to adjust AA going forward, which some folks do by combining with Vanguard Wellesley; though not the most efficient method).
http://finance.yahoo.com/q/bc?t=5y&s=VW ... &c=%5EGSPC
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