Change from Full Service Advisor To Passive Management?

[Longshadow]

I am new to this forum and am looking for some general advice. I was not successful managing my own investments in my 401K (emotional investor), was unsure how to create a balanced porfolio with the rest of my investments outside the 401K, was not sure how much money I would have or need in order to retire, and was unsure of other basic financial issues (like insurance). I started using an advisor 5 plus years ago to help with these issues. I would say that I have been helped in all the areas that I mentioned but my concern is the fees (1% advisory fees plus higher than average expense ratio fees in the funds) that are being charged. Even though I expressed concern about fees from the beginning of the relationship with this advisor, I hoped that the higher fees would be worth it. After negecting the issue for a number of years I see from reading all the press and the posts on this site that I have had my head buried in the sand. I have raised my new found awareness to the advisor and she is going to present a portfolio of index funds on my 401K (that this is advisor is not currently managing). I have gotten a handle on my emotional responses to the market and better understand the type of investment style I need. And, I am prepared to become more involved in managing my own investments.

However, I do not feel I have all the expertise I need to do that at this time. Also, I have no idea of the fees by an advisor for an index type portfolio. I guess I feel I am not ready to cut the "strings" with the advisor, at least not completely. I am not even sure about how to disengage (switch) from the non 401K investments that I already have with this advisor/company. Any advice would be greatly appreciated.

[Grt2bOutdoors]

Hello and Welcome to the forum!

Invest some time in reading the wiki and one or two of the fine books on the recommended reading list - The Bogleheads Guide to Investing (Larimore,Lindauer, LeBouf), The Four Pillars of Investing (William Bernstein), The Only Guide to Investing You'll Ever Need (Larry Swedroe) or All About Asset Allocation (Rick Ferri). The most important thing for you is to feel comfortable with your choices. Prior to making any choices, you should understand the how and why. Reading some or all of those books will help you in your journey.

Then come back and ask any question, there are many on this forum who can help.

[tibbitts]

Generally the adviser fee for an index portfolio will be the same as that same firm charges for any other kind of portfolio management. However you may save some on the fund expenses with index vs. active funds - fund expenses are distinct from the adviser fee.

Paul

[larryswedroe]

don't confuse the two issues. There are many "full service advisors" who also implement investment plans using passively managed funds.
FWIW, my new book, Think, Act and Invest Like Warren Buffett,(it's only about a two hour read) asks some key questions to help determine if you can /want to do it yourself and also if you decide you might want to work with an advisor, what to look for, insist on, and what to consider. Several of the Bogleheads have posted reviews on Amazon if you're interested.
Good luck
Larry

[Longshadow]

I really appreciate the quick and informed responses to my questions. I feel lucky to have found this forum.

[retiredjg]

There are several options. We don't know enough at this point to have an idea about which option(s) is best.

1) Stay where you are, continue to pay 1% and what you describe as high expense ratios.

2) Move to another advisor with a lower fee.

3) Move all your money to Vanguard and let them advise you. There may or may not be a fee for this (it partly depends on how much money you have invested there).

4) Half-way take the reins and find an hourly fee advisor who will charge you a fee for a specific service - to make a good plan. You would be responsible for implementing the plan. Maybe a once a year meeting with such an advisor to stay on track. Again, you would pay an hourly fee.

5) See if you can learn to do this yourself. Investing can be very simple. Most people can learn enough to do this. People here can help you figure out a good plan. You could also combine this option with #3 and/or #4 above. In fact, I suggest you learn enough to manage a basic portfolio even if you do decide to use an advisor.

The title indicates that you are considering a change from a full service advisor to passive management. These 2 things are not mutually exclusive. You might do both or do neither. What is your real question? Sometimes getting the question worded right helps you figure out what the answer might be.

[retiredjg]

P.S. Welcome to the forum. This link might help. http://www.bogleheads.org/wiki/Main_Page Click on "getting started".

[ResNullius]

Dump the advisor. Move your money into Vanguard. If you don't know enough yet on what funds to invest in, then read and ask questions. You're paying way too much for your so-called advisor, who almost certainly has been getting a portion of the expense ratios and commissions in addition to his 1% AUM fee. Oh, and by the way, most financial advisors probably know a lot less than you currently know about investing. They get their info from cheat sheets handed out each week from the home office.

[Toons]

When you are comfortable I would certainly consider giving Vanguard a call and asking questions,regarding passive investing ,fees etc.They are there to help and you won't feel any pressure to do anything .
That is how I started out,conversation
Phone number in link



https://investor.vanguard.com/what-we-o ... Link=facet

[Longshadow]

A quick update: I have been educating myself reading the suggested resources by the folks who responded (waiting for some other information to arrive from the library and from Amazon). I had a meeting with the advisor on investing my 401K through her and discussing my general concerns over actively managed investing versus passive index fund investing. She presented two hypothetical portfolios of managed vs Vanguard (mostly index funds)in a 10 year time frame from 2003 to the present.

I have a couple of questions at this point.

The managed portfolio was made up of 4 and 5 star Morningstar funds all with a track record of about 15 years. The expense ratio fees of approx 1% and the advisory fees of 1.3% were included. Both met my goals (with the managed fund slightly outperforming the Vanguard portfolio) for a moderate risk investor that might need some retirement savings in the next 5 years.Both portfolios avoided the extreme drops when the overall market dropped and over a 10 year period were slightly ahead of the S&P 500. The portfolio was set up 55% stocks, 40 % bonds, and 5% cash. I questioned the credibility of a backward looking portfolio but the advisor assured me that these were highly rated funds 10 years ago and would have been likely choices for an actual portfolio. What am I missing? What should I be asking?

I am finding that managing my own investments and finances is doable. But, I am just getting started. In talking to Vanguard, they indicated that an advisor could be cleared to have access to an account. They also indicated that the Vanguard funds could be purchased and held at the advisor's firm. The latter sound like I would lose some of the low cost advantages of the Vanguard funds. My advisor indicated that fee for services on a periodic basis is difficult when investments are at other companies...and her general range for that kind of advising still seemed high. Does anyone have any thought or advice to an interim or hybrid approach that still uses an advisor on a limited basis?

Thanks for any thought on my questions.

[retiredjg]

The managed portfolio was made up of 4 and 5 star Morningstar funds all with a track record of about 15 years. The expense ratio fees of approx 1% and the advisory fees of 1.3% were included. Both met my goals (with the managed fund slightly outperforming the Vanguard portfolio) for a moderate risk investor that might need some retirement savings in the next 5 years.Both portfolios avoided the extreme drops when the overall market dropped and over a 10 year period were slightly ahead of the S&P 500. The portfolio was set up 55% stocks, 40 % bonds, and 5% cash. I questioned the credibility of a backward looking portfolio but the advisor assured me that these were highly rated funds 10 years ago and would have been likely choices for an actual portfolio. What am I missing? What should I be asking?

You may not be missing anything. But without seeing what she had to suggest, it's kind of hard to say.

My advisor indicated that fee for services on a periodic basis is difficult when investments are at other companies...and her general range for that kind of advising still seemed high.

What she seems to be saying is that what you want to do does not fit into her business model. Translated, that means she doesn't make enough money doing it that way, so she has chosen a different way.

Does anyone have any thought or advice to an interim or hybrid approach that still uses an advisor on a limited basis?

See my post above. It covers this pretty well.

I know this has probably been mentioned before, but if you present your situation here, people here can make suggestions and explain them to you. Then you can figure out which approach makes most sense to you. See the link below for how to do that.

[EDN]

A quick update: I have been educating myself reading the suggested resources by the folks who responded (waiting for some other information to arrive from the library and from Amazon). I had a meeting with the advisor on investing my 401K through her and discussing my general concerns over actively managed investing versus passive index fund investing. She presented two hypothetical portfolios of managed vs Vanguard (mostly index funds)in a 10 year time frame from 2003 to the present.

I have a couple of questions at this point.

The managed portfolio was made up of 4 and 5 star Morningstar funds all with a track record of about 15 years. The expense ratio fees of approx 1% and the advisory fees of 1.3% were included. Both met my goals (with the managed fund slightly outperforming the Vanguard portfolio) for a moderate risk investor that might need some retirement savings in the next 5 years.Both portfolios avoided the extreme drops when the overall market dropped and over a 10 year period were slightly ahead of the S&P 500. The portfolio was set up 55% stocks, 40 % bonds, and 5% cash. I questioned the credibility of a backward looking portfolio but the advisor assured me that these were highly rated funds 10 years ago and would have been likely choices for an actual portfolio. What am I missing? What should I be asking?

I am finding that managing my own investments and finances is doable. But, I am just getting started. In talking to Vanguard, they indicated that an advisor could be cleared to have access to an account. They also indicated that the Vanguard funds could be purchased and held at the advisor's firm. The latter sound like I would lose some of the low cost advantages of the Vanguard funds. My advisor indicated that fee for services on a periodic basis is difficult when investments are at other companies...and her general range for that kind of advising still seemed high. Does anyone have any thought or advice to an interim or hybrid approach that still uses an advisor on a limited basis?

Thanks for any thought on my questions.

Longshadow,

Your 401k broker is giving you the same runaround all these active types do: "I can pick winning active funds that make up for my fees". It ain't gonna happen except for simple blind luck. There is almost no persistence in the outperformance of active managers from one period to the next. Standard and Poor's tracks managers over independent 5 year periods and finds completely random outcomes: less than 25% of "top tier" active managers stay in the top quartile. As many fall all the way to the 4th quartile and more than 10% do so badly they disappear.

What your 401k broker does is replace poor performing funds with new strategies that have done better to give the appearance that they always are investing in "4 and 5 star funds". Its the old shell game. It's just a merry-go-round of disappointing results that are swept up under the rug.

As for your active fund portfolio beating the S&P 500, well, US large growth stocks have been the worst asset class in the world going on 13 years now, so any reasonably diversified portfolio that included small cap, international, or even real estate (even with a 2% expense drag) probably did better in the last decade or so. Not to mention bond returns have been exceptional as interest rates have collapses, you have a recipe that is almost guaranteed not to repeat. Also, as for less risk, of course a portfolio only 60% or so in stocks will have less risk than the S&P 500 -- but you don't need high-cost active funds to accomplish that task.

The emotions are the hard part -- gotta keep those in check. But as far as the right portfolio approach, there is no doubt that passive should be the preference.

Eric

[2retire]

She presented two hypothetical portfolios of managed vs Vanguard (mostly index funds)in a 10 year time frame from 2003 to the present.

Did you ask her why she made up a hypothetical portfolio? Why didn't she use her existing portfolio for you? It is easy for her to cherry pick the best actively managed funds when she is trying to make a point (only after you've told her you are paying attention). She should have been showing you how the portfolio she has had you in compared to the Vanguard portfolio. Of course, I'm not even sure I'd trust her to do a fair comparison there. It would be interesting for you to post the funds she used in both portfolios and in what percent.

The managed portfolio was made up of 4 and 5 star Morningstar funds all with a track record of about 15 years. The expense ratio fees of approx 1% and the advisory fees of 1.3% were included. Both met my goals (with the managed fund slightly outperforming the Vanguard portfolio) for a moderate risk investor that might need some retirement savings in the next 5 years.Both portfolios avoided the extreme drops when the overall market dropped and over a 10 year period were slightly ahead of the S&P 500. The portfolio was set up 55% stocks, 40 % bonds, and 5% cash. I questioned the credibility of a backward looking portfolio but the advisor assured me that these were highly rated funds 10 years ago and would have been likely choices for an actual portfolio. What am I missing? What should I be asking?

I thought you said her fees were 1% in the OP. How come they jumped to 1.3 (did you swap the numbers)?

As you'll hear numerous times on here, past performance isn't any guarantee of future performance. Just go to Morningstar and get a quote for LMVTX (Legg Mason Value Trust). It is the classic example of a five star actively managed fund that did a complete reversal and now is a 1 star fund. This fund had a great track record and beat the S&P 500 for 15 years, but lost it all and then some. There is no telling which of those four and five star funds could turn into a LMVTX tomorrow.

[livesoft]

Longshadow wrote: "I started using an advisor 5 plus years ago to help with these issues."

Is this the same advisor you just posted about? Were the funds she put you in 5 years ago the same ones she used in the 10-year historical portfolio?

[FoolStreet]

The managed portfolio was made up of 4 and 5 star Morningstar funds all with a track record of about 15 years. The expense ratio fees of approx 1% and the advisory fees of 1.3% were included. Both met my goals (with the managed fund slightly outperforming the Vanguard portfolio) for a moderate risk investor that might need some retirement savings in the next 5 yyear.

Is she suggesting that - today - you should be using the same funds that she used for the comparative exercise? Why didnt she have you in them back then? Or now?



I think you should take a moment and do your own side by side analysis. Have you figured out what your 3 fund portfolio would look like?