Advisor Dumped, Now How to Best Simplify

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ElwoodBlues
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Advisor Dumped, Now How to Best Simplify

Post by ElwoodBlues » Wed Aug 15, 2018 10:37 pm

I've recently parted ways with my advisor and converted my institutional account to a retail account. (Hooray for small victories!) Now I'm trying to figure out an orderly process to move out of the various stocks, mutual funds, and ETFs that he had selected, and into a simple 3 or 4 fund portfolio. I've determined my desired asset allocations, and desired index funds to move to, but I'm not sure what to assess next. Reading some older BH posts, I came away with the following concepts that see, like they might apply:
  1. Just dump it all at once, simplify, take the tax hit as a lesson, be done with it and move on.
  2. Dump it gradually, for the sake of clarity in the transactions, and avoid potential errors by moving slowly and methodically.
  3. Assess the capital gains implications and dump things in a particular order and timing to optimize tax impact. But doesn't this somewhat involve market timing which is a no-no?
  4. Hang on to one or two "losers" as a reminder of how to not do it, and/or hoping they may turn around, as long as they are not a sizeable portion of the overall portfolio.
I guess I'm struggling the most with understanding the steps involved in doing #3. From the brokerage web site, I can see that my current positions will yield a mix of long and short term capital gains and losses, but how do I figure out the difference in tax hit for dumping all at once, versus holding until everything is long term?

Making progress :beer , but slightly confused at the moment :confused ....

JoinToday
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Re: Advisor Dumped, Now How to Best Simplify

Post by JoinToday » Wed Aug 15, 2018 10:48 pm

what tax bracket are you in (Fed & state), and what are your holdings, STCG, LTCG?

Hard to give advice without a basic understanding of what you have.
I wish I had learned about index funds 25 years ago

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Raybo
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Re: Advisor Dumped, Now How to Best Simplify

Post by Raybo » Wed Aug 15, 2018 10:53 pm

Some questions I have:

Is there anything you currently have that you want to keep?

Is all this in a taxable account?

How quickly do you want to move everything over?

Do you have more gains than losses? If so, how bad a tax hit will you take given the favorable treatment of capital gains?

When all your investments are added together, what is your current Asset Allocation? What do you want it to be?
No matter how long the hill, if you keep pedaling you'll eventually get up to the top.

inbox788
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Re: Advisor Dumped, Now How to Best Simplify

Post by inbox788 » Thu Aug 16, 2018 2:24 am

How much cash did you invest and how much is it worth now? And when did you start investing? If it's a relatively small amount or gain or you haven't invested that long, the tax costs may be small.

FoolMeOnce
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Re: Advisor Dumped, Now How to Best Simplify

Post by FoolMeOnce » Thu Aug 16, 2018 12:06 pm

I'm going through this too. You mention you have some losses. Sell those and then sell others to realize a corresponding amount a gains. That should have no tax consequences, so is a good starting point.

From there, it depends on your income and willingness to pay taxes to simplify. Can you realize any long term gains at the 0% rate? Do you want to avoid the NIIT? Do you want to avoid the AMT? Would gains affect the availability of tax benefits?

bltn
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Re: Advisor Dumped, Now How to Best Simplify

Post by bltn » Thu Aug 16, 2018 12:18 pm

Not knowing your numbers, but assuming your gains don t cause you to incur the NIIT, I lean toward option one. That way you can arrange your asset allocation in index funds and be done with it. Much simpler, and you may end up with more money in the long run.

ElwoodBlues
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Re: Advisor Dumped, Now How to Best Simplify

Post by ElwoodBlues » Thu Aug 16, 2018 10:23 pm

In response to questions from JoinToday, Raybo, inbox788, and FoolMeOnce:

Tax bracket is 22%. No state income tax. I have not attempted to determine the STCG and LTCG taxes yet, as I am just beginning to understand it.

Holdings are:
Chesapeake Energy Corp (CHK)
Invesco S&P 500 Low Volatility ETF (SPLV)
Invesco S&P Smalcap Low Vol ETF (XSLV)
Invesco S&P Midcap Low Vol ETF (XMLV)
iShares US Energy ETF (IYE)
iShares S&P 500 Value ETF (IVE)
Lord Abbet Inv Tr. Short Duration Income Fund (LLYDX)
PGIM Short Duration High Yield Fund (ISD)
Principal Income Fund Inst Class (PIOIX)

Total value around $43.5K currently. This is a small taxable brokerage account.

There is not anything I want to keep, unless anyone has convincing arguments to hold any of these longer for specific reasons. I am in no particular hurry to move everything, although I would prefer to be resettled and simplified as much as possible before the end of the year.

It appears I have more losses than gains, so I may be making this more complicated than I need to. If I am net negative for the year when I sell, does it really matter how much of it is STCG or LTCG? And to determine that, I would also need to know any gains/losses realized earlier in the year, correct?

Looks like net unrealized G/L is about -$1,500. I could break it out in to all the individual fund gains and losses, short and long, but I'm now thinking 1,500 loss is not that big a deal, versus "getting clean" and on a more BH approach. I already know what asset allocation and new funds I want to go to to make up a basic "4 fund" portfolio, so maybe I'm just being hesitant to pull the trigger and "lock in" the losses.

I believe I am below the levels for NIIT to be a concern. AMT is blank or zero on all my prepared tax documents from 2017, so I am assuming that is not an issue either, but I may look at this some more, if only for my own long-term, gradual tax education.

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BL
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Re: Advisor Dumped, Now How to Best Simplify

Post by BL » Thu Aug 16, 2018 10:35 pm

If these are all in taxable, and there is a net loss, I don't see any problems. You will end up having the loss subtract from your AGI. There is no reason to hang onto them. If some have been sold earlier this year, that should be considered as well. There may be some cost in selling a stock or fund.

ElwoodBlues
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Re: Advisor Dumped, Now How to Best Simplify

Post by ElwoodBlues » Fri Aug 17, 2018 7:40 am

BL wrote:
Thu Aug 16, 2018 10:35 pm
... There may be some cost in selling a stock or fund.
Thanks for mentioning that. I had totally forgotten about that aspect. I suppose those fees will be whatever they are, and they don't really have any impact on any decision making, but it is another cost involved in "righting the ship". (before we can "stay the course" :happy )

stan1
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Re: Advisor Dumped, Now How to Best Simplify

Post by stan1 » Fri Aug 17, 2018 8:05 am

ElwoodBlues wrote:
Thu Aug 16, 2018 10:23 pm

It appears I have more losses than gains, so I may be making this more complicated than I need to. If I am net negative for the year when I sell, does it really matter how much of it is STCG or LTCG? And to determine that, I would also need to know any gains/losses realized earlier in the year, correct?

Looks like net unrealized G/L is about -$1,500. I could break it out in to all the individual fund gains and losses, short and long, but I'm now thinking 1,500 loss is not that big a deal, versus "getting clean" and on a more BH approach. I already know what asset allocation and new funds I want to go to to make up a basic "4 fund" portfolio, so maybe I'm just being hesitant to pull the trigger and "lock in" the losses.
The Boglehead way would be to lock in the losses immediately, claim them on your taxes, and immediately reinvest in your desired asset allocation. I would do that for every holding that has a loss. For the ones with gains I'd evaluate case by case to see whether it is a short or long term gain and how much the gain actually is.

The portfolio your advisor gave you is way too heavy in energy and utility stocks if you look at what the top holdings are in some of the low volatility ETFs so I would bite the bullet and liquidate all of those to get more diversification.

John Laurens
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Re: Advisor Dumped, Now How to Best Simplify

Post by John Laurens » Fri Aug 17, 2018 8:42 am

Sell everything with a loss. Donate all gains to a DAF. Start Fresh.

Regards,
John

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Tamarind
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Re: Advisor Dumped, Now How to Best Simplify

Post by Tamarind » Fri Aug 17, 2018 9:25 am

If the net unrealized amount is a loss, then just sell it all this year. You'll get a little tax relief to sweeten the bitter lesson. (https://turbotax.intuit.com/tax-tips/in ... /L7GF1ouP8)

Now, before you hit sell, consider your custodian! What funds do you want to invest in? Where can you buy those funds for free? If there is more than one place, will any of them offer you a bonus or free trades for moving your money there? If so, it might be best to move the account in-kind and sell once you get there. If not, sell first (too bad about the fees) and move the cash.

There can be trade-offs. Vanguard will not give you anything, and will charge $20 per holding you sell, so you might want to sell first, then move. But if you prefer ETFs, you could move the money to TDAmeritrade, potentially pocket a bonus, sell your old holdings for free, then buy commission-free. However you would be subject to them changing their list of commission-free ETFs (they have done so recently), whereas Vanguard will never charge you to buy their own funds. You can do the math, but don't get analysis paralysis. In a few days you should pick a plan you can live with and just execute it.

Congratulations on your fresh start!

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goingup
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Re: Advisor Dumped, Now How to Best Simplify

Post by goingup » Fri Aug 17, 2018 9:48 am

ElwoodBlues wrote:
Wed Aug 15, 2018 10:37 pm
I've recently parted ways with my advisor and converted my institutional account to a retail account.
I'm hoping you're at Schwab or Fidelity. Hopefully a low-cost broker.

I'd sell everything and book that small loss. Your taxable account should be tax-efficient and complement the holdings in your 401K and IRA. Consider the big picture. Usual candidates are a Total Stock Market fund and a Total International Market fund.

ElwoodBlues
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Re: Advisor Dumped, Now How to Best Simplify

Post by ElwoodBlues » Fri Aug 17, 2018 1:14 pm

stan1 wrote:
Fri Aug 17, 2018 8:05 am

The Boglehead way would be to lock in the losses immediately, claim them on your taxes, and immediately reinvest in your desired asset allocation. I would do that for every holding that has a loss. For the ones with gains I'd evaluate case by case to see whether it is a short or long term gain and how much the gain actually is.

The portfolio your advisor gave you is way too heavy in energy and utility stocks if you look at what the top holdings are in some of the low volatility ETFs so I would bite the bullet and liquidate all of those to get more diversification.
If I recall correctly, I think the low volatility ETFs were purchased recently and have short term gains, whereas the rest of the portfolio was long term gains (some) and losses (mostly).

I never really stopped to assess my existing allocations, once I knew I was going to drop my adviser and simplify to basic indexing.

ElwoodBlues
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Re: Advisor Dumped, Now How to Best Simplify

Post by ElwoodBlues » Fri Aug 17, 2018 1:27 pm

Tamarind wrote:
Fri Aug 17, 2018 9:25 am
Now, before you hit sell, consider your custodian! What funds do you want to invest in? Where can you buy those funds for free? If there is more than one place, will any of them offer you a bonus or free trades for moving your money there? If so, it might be best to move the account in-kind and sell once you get there. If not, sell first (too bad about the fees) and move the cash.
The easiest path for me was to just convert my institutional account to a retail account with the same custodian. My former adviser was independent, and I was happy enough with the website and service, so I felt that was the quickest route for me to start DIY'ing. (Avoiding the paralysis of analysis of where to move to.)

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BL
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Re: Advisor Dumped, Now How to Best Simplify

Post by BL » Fri Aug 17, 2018 1:39 pm

Hopefully you can get low-Expense Ratio (ER) funds wherever you are. V,S,F all have some low ER index funds such as those in the Wiki page for 3-fund portfolio:
https://www.bogleheads.org/wiki/Three-fund_portfolio

ElwoodBlues
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Re: Advisor Dumped, Now How to Best Simplify

Post by ElwoodBlues » Fri Aug 17, 2018 1:49 pm

goingup wrote:
Fri Aug 17, 2018 9:48 am
I'd sell everything and book that small loss. Your taxable account should be tax-efficient and complement the holdings in your 401K and IRA. Consider the big picture. Usual candidates are a Total Stock Market fund and a Total International Market fund.
My initial plan was to just move everything into roughly the same asset allocation as I have done with the 401Ks, but knowing that I need to start reviewing it all together, and consider both asset allocation and asset location. For now, I have only a basic awareness that it there are tax benefits putting certain types of assets in the taxable account and others in the tax deferred, and I need to read up more on this topic. (I believe it's in the BH wiki, at least as a starting point.)

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Tamarind
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Re: Advisor Dumped, Now How to Best Simplify

Post by Tamarind » Fri Aug 17, 2018 4:07 pm

ElwoodBlues wrote:
Fri Aug 17, 2018 1:27 pm
Tamarind wrote:
Fri Aug 17, 2018 9:25 am
Now, before you hit sell, consider your custodian! What funds do you want to invest in? Where can you buy those funds for free? If there is more than one place, will any of them offer you a bonus or free trades for moving your money there? If so, it might be best to move the account in-kind and sell once you get there. If not, sell first (too bad about the fees) and move the cash.
The easiest path for me was to just convert my institutional account to a retail account with the same custodian. My former adviser was independent, and I was happy enough with the website and service, so I felt that was the quickest route for me to start DIY'ing. (Avoiding the paralysis of analysis of where to move to.)
That is fine, provided you can get the funds you want and you aren't paying for trades. Are you able to tell us who your custodian is? Then we could give plenty of advice about which funds you could use to make your 3-fund portfolio.

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dratkinson
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Re: Advisor Dumped, Now How to Best Simplify

Post by dratkinson » Fri Aug 17, 2018 5:33 pm

Where is your current brokerage home?



Idea.

Research the transaction costs to "right your ship":
--With your current brokerage,
--and lower-cost brokerages (Vanguard, Fidelity*, Charles Schwab,...).

(* Fidelity has recently announced some zero-fee index funds... if that interests you.)

Why? You may be able to transfer your account "in-kind" to a new investment home and sell your holdings cheaper there.

If you do avoid your current brokerage's selling fee, you may not be able to avoid an "account closing" fee when you leave. (It's just a cost of doing business.)



IRS netting rules. Since you believe you have a large LTCL (long term capital loss) and a small STCG (short term capital gain), if you don't have an offsetting LTCG (long term capital gain) this year, then up to $3K of your LTCL will offset ordinary income + STCG this year.

See IRS netting rules: viewtopic.php?p=2770994#p2770994
"You can net either way.

1. Net short-term gains and losses.
2. Net long-term gains and losses.
3. Net any remaining short-term gains against long-term losses, or vice versa.

If the result is positive, pay tax at short-term or long-term rates depending on the type of gain.
If the result is negative, can use $3000 to offset current-year income (if both then short-term loss used first).
Any excess loss is carried over and remains short-term or long-term."
Bottom line. You may be able to clean up everything this year for no additional tax cost. I wouldn't keep any unwanted investments as a reminder; instead, put that money to work for you.



ST/LT gain/loss and tax reporting. You should figure this out for yourself before you sell, just so you know. Why? We should know the outcome of our investing actions before we take them. Otherwise, why take the action?

But for tax reporting, if you don't figure your exact tax status before you sell, it will be done for you on the 1099B you receive for selling. Either way, your tax reporting status will be known. (However, if you know your exact tax status before you sell, then your knowledge is a double-check that the 1099B is correct. Mistakes have been made before.)
d.r.a, not dr.a. | I'm a novice investor, you are forewarned.

ElwoodBlues
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Re: Advisor Dumped, Now How to Best Simplify

Post by ElwoodBlues » Tue Aug 21, 2018 11:58 pm

Thanks to all who commented. I think I'm understanding now.

Actual breakdown is this:
Previously Realized LTCG: -1840
Unrealized LTCG: -1924
Unrealized STCG: 710
Total: -3054

Playing with an XLS version of the 2017 IRS 1040, The Sched D gives an end result of -3000, which goes on line 13 of the 1040.

If my fiddling with the spreadsheet is correct, it also means that there is zero benefit (assuming similar future gain/loss numbers) to waiting until the STCG became LTCG. I think this is what some were saying/assuming, but now I can see where the numbers come from and learned a bit about how it works in the tax forms.

Also, a word of advice to others who might take the same route (converting from an institutional account to a retail account with the same broker): You will need online access to both the old and new account and the gain/loss history from both accounts in order to have the full picture for projected capital gains impact. This is probably obvious to others, but it took me while to realize why previously realized gains/losses were not showing in my newer account.

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dratkinson
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Re: Advisor Dumped, Now How to Best Simplify

Post by dratkinson » Wed Aug 22, 2018 2:43 pm

ElwoodBlues wrote:
Tue Aug 21, 2018 11:58 pm
...
Total: -3054

Playing with an XLS version of the 2017 IRS 1040, The Sched D gives an end result of -3000, which goes on line 13 of the 1040.
...
Plus -54 carried over to next tax year as a LT loss. (Believe it's listed on a tax worksheet and becomes an input into next year's tax reporting.)
d.r.a, not dr.a. | I'm a novice investor, you are forewarned.

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