For the millionth time - Should I consider an investment advisor?

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For the millionth time - Should I consider an investment advisor?

Post by EMCZMC1987 » Fri Feb 09, 2018 2:29 pm

Hello Bogleheads!

Long time intermittent lurker, first time poster here.

I know it has been asked a million times, but in my particular situation (outlined below), do I need a financial advisor, or just a financial plan?

I’m male, 30 years old, married, with one child, earning 100% of household income. We gross $92,000 in salary + 4-5k in bonuses per year.

We have no debt, save for our mortgage, which is 4.25% with a remaining balance of $148,000. It was originally $156,000 and we put 20% down on a $196,000 home. My grandfather was the quintessential millionaire next door. He provided $120,000 in a managed portfolio to me at a young age, which put me through college, my wife through college, and paid for the down payment on our home.

I have a 401(k) administered by ADP (gross) but it thankfully does have Vanguard options in it. I was foolish for 1.5 years and invested nothing but have been working contributions up since then. We are sitting on $19k after recent corrections, and I contribute 5% pretax and 2% Roth in the following allocations:

I’m increasing those contribution amounts by a percentage point minimum per year, and I’m already capturing all of my employer’s match, which is 75% up to an annual maximum of $3,000.

We have $3,000 in emergency savings, which we recognize isn’t nearly enough, so we’re growing that as well.
We are well-insured with regards to health, but under-insured with regards to life ($250k on me, none on wife or daughter) and long-term disability.

I recognize that I’m doing better than many my age, but not good enough, and I still have a lot to learn. I’m kicking myself hard, because I was slow to learn about finance, outside of the basics, and now I have a life-changing financial event that I must navigate. The same grandfather who provided for my college education created a QTIP whose market value is now $2,500,000, to be split equally amongst his 5 grandchildren upon the death of his second wife, which just occurred.

The portfolio is 75/25 stocks to bonds. All 30 of the stocks in the portfolio are domestic large cap, and one of the bonds is coming due in April, so it will be sold at a small capital loss and disbursed as cash. All in all, I will receive $388,000 in stock and $122,000 in cash and equivalents. I also inherit the cost basis of the stock from the date of grandpa’s death, which was July 2000.
Obviously, this represents a huge financial windfall which I feel marginally prepared for. We live within our means, save, albeit not enough, and the reality is that my short and long term financial plan is a one liner: “Stack up assets in my 401(k) as fast as possible using the lowest expense ratio index funds available to me.”

I know I need to plan for my daughter’s future (not at the expense of my own), insure our family against catastrophe, stack up emergency cash, plan for short term purchases (cars are old), plan out charitable giving, and determine the best time and method to diversify this (in my opinion) fairly clunky portfolio that’s coming my way.

I have worked with a combination investment advisor and financial planner in the past and am evaluating numerous ones locally right now. The front runner, mainly because they actually called me back, managed my collegiate portfolio.

The initial meeting was excellent, as was my experience with them previously. They offered good advice, (pay down debt, invest in low expense instruments) as well as detailed financial planning for those that pursue it. At 24, when I liquidated the last of my college portfolio, they ensured that we had an exit meeting with me not to try to keep my business, but to ensure that I was doing the right things with my money. I didn’t choose them at the time, as I was in my early teens when the relationship was established.

The problem I have with them knowing what I know now is that they’re expensive. Their fee structure is:
First $500,000 - 1.25% annually
$500,001 to $1,000,000 – 1.00% annually
$1,000,001 to $5,000,000 - 0.75% annually
$5,000,001 to $10,000,000 - 0.50% annually
$10,000,001 to $25,000,000 - 0.25% annually
Over $25,000,000 – negotiable
The AUM fees are withdrawn at the end of each quarter.

They are a Dimensional Funds institutional partner, and they are fiduciaries.

My biggest problem right now is that I don’t know what I don’t know, and I need time to learn as well as a stabilizing hand through this huge upward transition in net worth and on into future accumulation mode. I could see using these guys in the short term, but paying out that kind of money long term means hundreds of thousands, if not millions less.

Am I wrong to believe that even with detailed financial planning and quarterly, in person portfolio and goals review (which they offer at no charge) that these guys don’t have a value proposition high enough to justify their percentage?

Should I go looking for a fee-based financial planner to help me clarify my goals, get a plan in place, and then DIY? I don’t want to hemorrhage money now by diversifying the stocks at the wrong time, but I also don’t want to be bled dry over the course of the next 20-30 years.

What say you, Bogleheads?

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Re: For the millionth time - Should I consider an investment advisor?

Post by RRAAYY3 » Fri Feb 09, 2018 3:17 pm

1. No, they know nothing you can’t find on here
2. Get your emergency fund where it needs to be
3. 3 Fund Portfolio to your liking
4. Yes, it’s this simple.

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Re: For the millionth time - Should I consider an investment advisor?

Post by BolderBoy » Fri Feb 09, 2018 3:27 pm

I agree with RRAAYY3.

And the mere fact you are on here talking about all this in a very cogent way shows clearly that you can do this yourself with great ease.

Insofar as the FA goes, the question to ask is, "Am I getting my moneys worth from the expensive advice and management they are giving?" When I had my last FA I asked that question of myself and fired him immediately. And I knew less about investing than you know now.
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Re: For the millionth time - Should I consider an investment advisor?

Post by livesoft » Fri Feb 09, 2018 3:30 pm

From reading the OP's post, I don't understand why they want an investment advisor.

Also, their family makes more money than my family, so I hope they don't pay any Federal income taxes.
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Re: For the millionth time - Should I consider an investment advisor?

Post by FoolMeOnce » Fri Feb 09, 2018 3:35 pm

As someone who is trying to simplify a portfolio with far too many holdings to manage, I recommend you consider managing your windfall yourself. At least at first. You seem to have a good grasp of what to do already. You'll need to pick your spots to realize capital gains if you want to simplify, but you should be able to manage that.

If in a year you feel overwhelmed, then find an advisor (or, better yet, use Vanguard's low-cost service or something similar). If you use an advisor and the advisor puts in in a messy portfolio and you later decide to self-direct, you will be in a far worse position (like me!) trying to unwind it. Better to try on your own first than to decide to do it later when you have a mess of a portfolio.

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Re: For the millionth time - Should I consider an investment advisor?

Post by sunnywindy » Fri Feb 09, 2018 3:39 pm

No, you don't need an advisor. And no, just because you are inheriting a large amount of money that understandably freaks you out, doesn't mean that you have to do anything esoteric and unusual that would require an advisor. However, even though I just wrote that you don't need an advisor, it wouldn't be wrong to use something like Vanguard Personal Advisor for a year or two (or less?) to navigate the new money into your portfolio (and to have a legitimate plan) if you don't have the time or inclination. They can get you started on the right foot, but reading some of the books on this website would help, too.

Also, no reason to mentally beat yourself up. You are now being proactive and most importantly, you are only 30 and have lots of time for the magic of compounding to occur.

Lastly, while you are going to be fine with the equity mixture in your 401(k), most people on this site would recommend using the blend or value versions of the small and mid-cap indexes because historically, they have produced better results. But, you never know - growth may be the way to go going forward...nobody knows what will happen!
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Re: For the millionth time - Should I consider an investment advisor?

Post by Meg77 » Fri Feb 09, 2018 3:40 pm

You don't need a financial advisor - and I say that as a financial advisor and also as a 34 year old who inherited about $350k in my 20s. If felt much the same way you do now, but it was just jitters and I successfully deployed the windfall. You don't need to pay 1.25% per year INDEFINITELY - just to alleviate your nerves.

This is a lot of money, but the dollars involved aren't what necessitate professional advice or management - which are two different things by the way. If you really want to pay for some advice, just pay a financial planner by the hour or a flat fee for a financial plan that you'll implement yourself. Paying for ongoing investment management is rarely needed, especially in the accumulation stage (some people prefer it during the decumulation or distribution phase of retirement).

1. Beef up your emergency fund to 6-12 times expenses with the cash portion of the inheritance.
2. Max out Roth IRAs for you and your spouse for 2017 and 2018, max out your 401k, and max out an HSA if you have access to one. Do this every year by drawing down from the inherited cash and dividends from the inherited stocks as necessary to supplement your cash flow.
3. Fund a 529 plan for your kid(s) to the extent you are comfortable
4. Let the rest of the money just sit there. You might sell any remaining bonds and pay down your mortgage with them since they aren't likely to be returning any higher than your mortgage rate. And you may want to have dividends distribute to a money market fund (to be used for #2) rather than reinvest. But you probably can't sell any of the stocks without incurring pretty large capital gains given the basis goes back many years. So no advisor is going to be able to implement whatever fancy strategy they come up with anyway, at least not without stretching implementation over several years to minimize the tax hit. Ideally you'd transition everything to index funds and let it ride for the next 5 decades. But it may take you years to do that by selling, say, 1-2 stocks per year so you don't spike into another tax bracket.
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Re: For the millionth time - Should I consider an investment advisor?

Post by Dale_G » Fri Feb 09, 2018 5:09 pm

That is excellent advice from Meg.

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Re: For the millionth time - Should I consider an investment advisor?

Post by WhyAmeriprise » Sat Feb 10, 2018 12:14 am

No, you don't need a fee-based advisor who claims over 1% of your account as an Assets Under Management fee. There are some holdouts that believe they can get away with it, but if you've found your way to Bogleheads, you can move into Index Funds and end up getting better returns than FAs who try to guess what the market will do. FAs get invested in their decisions; my FA kept insisting that his portfolio was good even when I told him I saw the flaws in it. He was too proud, and even though I would've left him anyway, I now don't feel guilty after seeing the investment advisor flounder for the last week. Ironically, he would call himself a financial advisor, but any conversation came back to how much I could invest with his firm for what he recommended, not what would be best for my situation. (e.g. he would never agree that paying off student loans is a good idea, even when the loans were non-deductible, charging 6.5%+, and his proprietary funds rarely topped 10%.)

This week taught us that the computers have taken over, and that means that the days of a stock or mutual fund picker being able to outsmart everyone else are over.
With ME or Schwab able to cheaply trade Vanguard, you get not just Vanguard, but a whole range of great investment choices.

As I read that you want to protect for your child's future, do not fall for the line about universal life insurance where you can invest and insure your life. Get level term and invest the rest, using tax-free options first, then tax-deferred. I nearly choked when I heard that my 16-year old VUL was still below the cost basis after last year's returns.

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Re: For the millionth time - Should I consider an investment advisor?

Post by BL » Sat Feb 10, 2018 1:46 am

I suggest you get about a million more or less in term insurance from an independent insurance agent or check for rates. Maybe half that for spouse because it could cost a lot to replace child care, maybe mortgage or other costs on things that you might need.

Your child and spouse if not working would be eligible for Social Security if you die, with benefits expiring at certain child ages. If your spouse is not covered by SS, there would be no child benefits if she died.

If you pay 1% of your portfolio/year, that means it is removed from your portfolio each year, and as the amount increases, the dollar amount lost keeps increasing. So after 30 years, about 1/4 of your money is lost to advisor. Also, the DFA funds, though considered pretty good, are more expensive than, say, Vanguard or other index funds, so you lose money there as well. One of the few things you can control in investing is costs.

When you get the inheritance, I would use the cash to be sure your 401k and both Roths are funded if you need extra cash to do so. Also would build up emergency fund, consider funding child's college fund, fund car purchases, possibly pay down some of the mortgage.

I would check out the Wiki for Windfall, Three-fund portfolio, and suggested books. I liked Boglehead's Guide to Investing, and If You Can for new investors (also a good review for seasoned investors).

Sorry, many of us don't memorize tickers, so have no idea what you have in 401k. V is a good sign.

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Re: For the millionth time - Should I consider an investment advisor?

Post by Watty » Sat Feb 10, 2018 10:07 am

Vanguard charges 0.3% for their advisory service. You could use them for a few years to get everything in order then stop using them.

One question to ask is if they can provide enough service to make their extra cost worthwhile compared to using Vanguard.

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