Portfolio help. Heavily invested in American Funds and Annuities

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mhall
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Joined: Thu May 14, 2015 11:36 am

Portfolio help. Heavily invested in American Funds and Annuities

Post by mhall »

My parents have a terrible financial planner (imo) and I’m trying to help. Right now they’re heavily invested in American Funds and Annuities. Any advice you can give would be MUCH appreciated. They’re total portfolio with the planner is about $379,000 but they're looking to add $200,000 this month.

Current Portfolio with the financial planner:
Traditional IRA:
$100K Barclays US Dynamic Balance Index II Annual Point to Point w/cap 6.25% (Allianz Annuity)
$100K Barclays US Dynamic Balance Index II Annual Point to Point Spread 1.50% (Allianz Annuity)

Roth IRAs:
$77K Barclays US Dynamic Balance Index II Annual Point to Point w/cap 6.25% (Allianz Annuity)
$76K Barclays US Dynamic Balance Index II Annual Point to Point Spread 1.50% (Allianz Annuity)

Roth IRAs:
$26K roughly split evenly among following American Funds
AHITX American High-Income Trust
ANCFX American Fundamental Investors Equities
AGTHX The Growth Fund of America
AMECX The Income Fund of America
AIBAX Intermediate Bond Fund
ANEFX New Economy Fund
NEWFX New World Fund
ASBAX Short term Bond Fund

Taxable Account (outside of financial planner)
$72K (VTIAX) Vanguard Total International Stock Fund
$8K (VTSMX) Vanguard US Total Stock Market Fund

Age: 61 and 60
Tax Bracket: 25%
Land and rental properties: $300,000
Desired Asset Allocation: roughly 60% stocks/40% bonds

They have an additional $200K in cash they’d like to invest. I’m trying to convince them to add it to their Vanguard taxable account to create a 3-fund portfolio (without the bonds in taxable).

Questions:
1. Should I push to get out of the American Funds and into Vanguard ones (lower expense ratios)? The planner says the American Funds are not actively managed and he’s pushing for them to put next year’s Roth IRA funds into American Funds.

2. How should I treat annuities? Kind of like the bond portion of a portfolio? Supposedly these annuities can't lose any money.

3. They acquired the annuities in 2015. Is there anything we can do except hold on to them for 10 years? There is a penalty of 10% for withdrawing any money from them now.
sco
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Re: Portfolio help. Heavily invested in American Funds and Annuities

Post by sco »

Do they want the help?
Grt2bOutdoors
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Location: New York

Re: Portfolio help. Heavily invested in American Funds and Annuities

Post by Grt2bOutdoors »

One fund - Balanced Index. No need to hold a hodgepodge of funds that the "planner" stuck them in.
https://personal.vanguard.com/us/funds/ ... IntExt=INT

Desired Allocation - 60/40: check
Simplicity - check
Ditch planner - check
Low fees - check, 8 bps
Automatic rebalancing - check
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Grt2bOutdoors
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Re: Portfolio help. Heavily invested in American Funds and Annuities

Post by Grt2bOutdoors »

mhall wrote:My parents have a terrible financial planner (imo) and I’m trying to help. Right now they’re heavily invested in American Funds and Annuities. Any advice you can give would be MUCH appreciated. They’re total portfolio with the planner is about $379,000 but they're looking to add $200,000 this month.

Current Portfolio with the financial planner:
Traditional IRA:
$100K Barclays US Dynamic Balance Index II Annual Point to Point w/cap 6.25% (Allianz Annuity)
$100K Barclays US Dynamic Balance Index II Annual Point to Point Spread 1.50% (Allianz Annuity)

Roth IRAs:
$77K Barclays US Dynamic Balance Index II Annual Point to Point w/cap 6.25% (Allianz Annuity)
$76K Barclays US Dynamic Balance Index II Annual Point to Point Spread 1.50% (Allianz Annuity)

Roth IRAs:
$26K roughly split evenly among following American Funds
AHITX American High-Income Trust
ANCFX American Fundamental Investors Equities
AGTHX The Growth Fund of America
AMECX The Income Fund of America
AIBAX Intermediate Bond Fund
ANEFX New Economy Fund
NEWFX New World Fund
ASBAX Short term Bond Fund

Taxable Account (outside of financial planner)
$72K (VTIAX) Vanguard Total International Stock Fund
$8K (VTSMX) Vanguard US Total Stock Market Fund

Age: 61 and 60
Tax Bracket: 25%
Land and rental properties: $300,000
Desired Asset Allocation: roughly 60% stocks/40% bonds

They have an additional $200K in cash they’d like to invest. I’m trying to convince them to add it to their Vanguard taxable account to create a 3-fund portfolio (without the bonds in taxable).

Questions:
1. Should I push to get out of the American Funds and into Vanguard ones (lower expense ratios)? The planner says the American Funds are not actively managed and he’s pushing for them to put next year’s Roth IRA funds into American Funds.
Show the planner this publication directly from the Chairman of the Capital Group that manages the American Funds, 4th bullet point, last sentence: "Actively managed investments like the American Funds offer the potential to lose less than index-tracking investments during market declines.

Here's the link published today by Capital Group: https://www.americanfunds.com/individua ... exing.html
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
jimmy
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Re: Portfolio help. Heavily invested in American Funds and Annuities

Post by jimmy »

I'd ditch the advisor just for putting most (or any) of their money in an index annuity.. They'll be lucky if they earn 3% over the 10 years. I'd consider taking the penalty but if you don't it should be used as the fixed income portion if they are 100% principal guaranteed. The devil is in the details of the annuity. I'd find out more information on them before you make a decision.
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BL
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Re: Portfolio help. Heavily invested in American Funds and Annuities

Post by BL »

jimmy wrote:I'd ditch the advisor just for putting most (or any) of their money in an index annuity.. They'll be lucky if they earn 3% over the 10 years. I'd consider taking the penalty but if you don't it should be used as the fixed income portion if they are 100% principal guaranteed. The devil is in the details of the annuity. I'd find out more information on them before you make a decision.
+1

Of course the salesman will promote annuities! He gets ~7% commission right at the beginning as well as something every year for a while. Selling parents on this annuity would be reason enough to dump him. You might want to Google allianz Barclays US Dynamic Balance Index II Annual Point to Point and look for reviews by non-Allianz sources. I expect you lose either way: by selling out and taking the penalty or keeping it and losing that much in extra fees. (Be sure to keep it in an IRA if you sell, as you don't pay until you remove it from an IRA.) It was not a good thing to buy. Selling is painful and your parents will have to decide what they can live with.

Buying a SPIA (single premium immediate annuity) at age 70-75 would probably make lots more sense, but the salesmen don't promote them since they don't make much commission off them as they are straight-forward and can be compared easily.

Try to avoid buying more American funds as that is a 5-6% commission front-end load he gets that you never get invested. He also gets about 0.25% each year as a 12b-1 kickback out of the Expense Ratio. Charging AUM would really be double-dipping so I am glad that isn't happening. (By the way, I read that Fidelity and Schwab, can now sell American funds with no loads. http://beta.morningstar.com/articles/77 ... world.html)
I still would recommend index funds such as parents have in taxable.

They have already chosen good index funds in Vanguard taxable account so they should recognize good low-ER funds. They could do the same with the rest of their accounts and put bonds in the IRAs/Roths. See the 3-fund portfolio in Wiki and a long thread here. Vanguard has a PAS management for 0.3%/yr if they want someone else to manage it, but not steal from them.

You and they might want to read Hurdle #5 about salesmen in this great little booklet for new investors which is a good review for all of us:
https://www.etf.com/docs/IfYouCan.pdf
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Bogle_Feet
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Re: Portfolio help. Heavily invested in American Funds and Annuities

Post by Bogle_Feet »

This is insane! It looks like this "advisor" put 80% of their money into annuities! Index annuities are inferior financial products. As soon as those surrender penalties expire I would get out. Hopefully they haven't started to take income payments on those annuities otherwise they may be stuck for life earning 1 - 3% annualized return on investment. http://investingadvicewatchdog.com/index-annuity.html

I would IMMEDIATELY stop working with this commission-based advisor who is fleecing your parents and may be earning trailing commissions for every year they stay invested in those awful annuities. Take Mr. Advisor's name off the contracts and he will no longer get rewarded year after year.

Get into plain old stock and bond index funds.
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nedsaid
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Re: Portfolio help. Heavily invested in American Funds and Annuities

Post by nedsaid »

My reaction is that this is pretty typical what you get from advisors, load funds and expensive annuities.

I am actually fine with paying the load and buying the American Funds as long as these are regarded as long term holdings. These funds have relatively low expense ratios and Larry Swedroe has said nice things about them. You should only pay the load once and not let the advisor trade you in and out of funds. Of course, Vanguard has managed funds that are just as good with no load and with even lower expense ratios.

I have noticed that American Funds are starting to offer no-load versions of their funds through certain brokerages. If you like American Funds, you may not even need to pay the load! These are often available through workplace savings plans also.

Variable Annuities are another story. These are sold and not bought and are complex instruments that are difficult for even seasoned investors to fully understand. They also tend to be fee traps, your all-in costs could be 3% to 4% a year. What is worse, is that these are sold within IRA's, a tax-sheltered investment within another tax shelter. I am not 100% against Variable Annuities but in most cases are not good investments. Just say no.
A fool and his money are good for business.
Jack FFR1846
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Re: Portfolio help. Heavily invested in American Funds and Annuities

Post by Jack FFR1846 »

I like translating % into $ because it has much more impact.

The simple statement for your parents about investing that $200k into more American Funds loads: Would you prefer to pay $12,000 right up front to buy into these funds or pay $0 and invest in funds that cost less every year that do essentially the same thing? And of course, the American Funds are going to have higher yearly cost (0.25% would be $470 a year) and the Advisor's fee (1%?), which is $1880.

So after the end of one year, they'll pay $14,350 out of that original $200k. So if the fund grows 14%, they'll actually lose money.

A Vanguard target date fund (I looked at one for age 72) has an er of 0.13%, which on $200k invested is $260 a year.
Bogle: Smart Beta is stupid
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David Jay
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Re: Portfolio help. Heavily invested in American Funds and Annuities

Post by David Jay »

Bogle_Feet wrote:This is insane! It looks like this "advisor" put 80% of their money into annuities!
This!
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
Topic Author
mhall
Posts: 36
Joined: Thu May 14, 2015 11:36 am

Re: Portfolio help. Heavily invested in American Funds and Annuities

Post by mhall »

It's amazing how the financial advisors spin words and deceive folks. So yesterday my mom asked the advisor whether the American Funds were actively managed funds. He said they were not. I believe what he was referring to is that HE was not actively managing those funds himself. I've been slowly coaching my mom on what questions to ask and how to interpret his answers.

My parents do want my help but they hate confrontation and so they're not willing to ask difficult questions to the advisor. Fortunately, I have them convinced that any additional money should not go to the advisor.

I'm afraid they are stuck with the annuities for at least 7 years. Right now our plan is to probably get out of them after 7 years when there are no penalties. It does make me sick to my stomach knowing the bulk of their IRAs are tied up in the annuity.
jimmy
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Re: Portfolio help. Heavily invested in American Funds and Annuities

Post by jimmy »

One option with the annuities is to look into how much of a free withdrawal you have each year. You might be able to take out 10-15% a year without penalty. 20k/year withdrawal to another IRA into a more traditional 60/40 allocation could ease the pain of feeling stuck in the contract and you'll be dollar cost averaging into the market over 7 years. Just a thought.. good luck.
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BL
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Re: Portfolio help. Heavily invested in American Funds and Annuities

Post by BL »

mhall wrote:It's amazing how the financial advisors spin words and deceive folks. So yesterday my mom asked the advisor whether the American Funds were actively managed funds. He said they were not. I believe what he was referring to is that HE was not actively managing those funds himself. I've been slowly coaching my mom on what questions to ask and how to interpret his answers.

My parents do want my help but they hate confrontation and so they're not willing to ask difficult questions to the advisor. Fortunately, I have them convinced that any additional money should not go to the advisor.

I'm afraid they are stuck with the annuities for at least 7 years. Right now our plan is to probably get out of them after 7 years when there are no penalties. It does make me sick to my stomach knowing the bulk of their IRAs are tied up in the annuity.
The advisors are trained to answer any questions in a way that suits them, so there is not much point to asking most questions. Study the paperwork and website and see how much money he is collecting directly, look up the American funds on Morningstar and study expenses/fees to see how much he gets from your funds' ERs (then multiply % times value to convert it to dollars), see if/how the loads showed up when they bought American funds (I expect it would be an adjusted cost that covers load and might not show up at all without careful study. Don't think he will tell you more than he legally is required to do.)

+1 on Jimmy's suggestion to withdraw the allowed amount if they should decide to wait to sell these annuities. At least you would be getting some out each year to move to the Roth or traditional IRA.

You can call Vanguard and have them handle moving the funds there. You don't have to interact with salesman at all.

I believe you could then contact the annuity company and remove the broker's name from the policies which might stop him from receiving commissions for the next 7 years. (No experience here.)
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