Fiduciary using funds with a front load?

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GutCheck
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Fiduciary using funds with a front load?

Post by GutCheck » Thu Oct 18, 2018 6:24 pm

Hey All,

I pushed my rertired mother to engage a fiduciary financial advisor has she had some complex and (from my view) bad investments from her previous advisor. The new advisor has been solid from what I have seen, his back office is schwab which I am not crazy about because I love vanguard but she is in a rural part of the country and he was the only fiduciary advisor taking new clients within an hour of her that I could find. I felt it important she be able to visit him in person as she is uncomfortable with computers.

Fast forward to this week, she hasn't signed a mgmt contract yet but his fees seem reasonable (1% on first million, .8 thereafter - she has about 500k with him) he did however start investing her money (as she discussed and agreed to with him before he did this).

That's where my question comes in - two of the funds he put some money into are GATEX and PFOAX, they have front load fees of 5.75% and 3.75% respectively. he has put 5k into each for a front load loss/fee of 475$

Is this something to be concerned about? I want him to keep an eye out for my moms investments so I don't have to.

Is it reasonable to ask that he modify the contract such that his fee is 1% less any front load fees? So based on this if he charges 5,000 for his first years work he would only take 4,525 and the remaining would come from the front load fees.

Also, my understanding is that he/his office is the recipient of the front load fees - is that accurate?

Any help or insight is appreciated!

sport
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Re: Fiduciary using funds with a front load?

Post by sport » Thu Oct 18, 2018 6:30 pm

Are you sure she paid those loads? Perhaps the loads are waived for an advisory account.

MotoTrojan
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Re: Fiduciary using funds with a front load?

Post by MotoTrojan » Thu Oct 18, 2018 6:36 pm

I don't think it makes sense for a retired person to ever use a 1% adviser. It is one thing if you want to use some more advanced strategies and are looking for growth, but when you are withdrawing 3-4% and not earning much more than that, 1% is a huge contribution.

Is this taxable or tax-advantaged? If tax-advantaged I would use a LifeStrategy, Balanced, or Target Retirement type fund. If taxable, you could have her use Vanguard PAS to manage a 3-fund, or perhaps at $500K depending on AA she would be fine spending taxable dividends from one of the previously mentioned self-balancing funds, and then withdrawing additional capital as needed. Even if this is less tax-efficient, it is far less risky and will yield more after-tax than the 1% fee adviser.

GutCheck
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Re: Fiduciary using funds with a front load?

Post by GutCheck » Thu Oct 18, 2018 6:46 pm

RE: paying the fees, Not sure about that she paid these loads, I have a call scheduled with the advisor next week to check about this.

RE: An advisor doesn't make sense for a basic portfolio like this. You are preaching to the choir. She doesn't actually use or withdraw any money from this account, she survives on a pension and SSN entirely. I have tried a few times to walk her through the basics of a 3 fund portfolio or even just a targeted retirement type fund. These are tax advantaged.

She completely withdraws when talking about this with standard excuses like "this is just so confusing <previous advisor> always handled this and I don't need the money now, I don't want to do this" etc etc. After multiple conversations I'm basically forced to concede the point and I just want to make sure she gets in with an advisor who isn't going to rip her off by selling her annuities and life insurance products as her previous advisor - helpfully provided by her previous employer did.

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oldcomputerguy
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Re: Fiduciary using funds with a front load?

Post by oldcomputerguy » Thu Oct 18, 2018 6:49 pm

Some things I notice, in no particular order:
  • The two funds you listed (GATEX and PFOAX) each have a 12b-1 fee of around 0.25%. This is part of the ongoing ER, and is over and above the front-end load. This is money going to to the advisor (darned if I'll call him a "fiduciary" based on what you've shown us) to reward him for putting your mom's money into these funds. It's a built-in conflict-of-interest.
  • From your figures, the "advisor" has put just 1% of your mom's money in each of these funds. It's frequently posited here on Bogleheads that any holding less than 5% of your total has negligible to no effect on your total portfolio performance. Has this "advisor" put the rest of the money likewise into such finely sliced-and-diced holdings? The only reason for him to do so is to make it look like your mom can't deal with something as "complicated" as investing, so he can justify his fee. Also, splitting her money into small lots to invest results in more trading fees, which add to the costs she incurs. How many funds does he have her in at present?
Do you have anything in writing, signed by him, in which he describes himself as a "fiduciary"? To my (admittedly unsophisticated) sense of smell, this stinks like a week-old dead fish. It's my distinct feeling that your mom is making this guy's boat payment.
It’s taken me a lot of years, but I’ve come around to this: If you’re dumb, surround yourself with smart people. And if you’re smart, surround yourself with smart people who disagree with you.

sport
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Re: Fiduciary using funds with a front load?

Post by sport » Thu Oct 18, 2018 8:00 pm

GutCheck wrote:
Thu Oct 18, 2018 6:46 pm
She doesn't actually use or withdraw any money from this account, she survives on a pension and SSN entirely.
If this is a traditional IRA account, and she is at least 70.5 years old this year, be sure she withdraws the RMD (required minimum distribution). There are stiff penalties for failure to make RMDs.

GutCheck
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Re: Fiduciary using funds with a front load?

Post by GutCheck » Thu Oct 18, 2018 11:18 pm

oldcomputerguy wrote:
Thu Oct 18, 2018 6:49 pm
Some things I notice, in no particular order:
  • The two funds you listed (GATEX and PFOAX) each have a 12b-1 fee of around 0.25%. This is part of the ongoing ER, and is over and above the front-end load. This is money going to to the advisor (darned if I'll call him a "fiduciary" based on what you've shown us) to reward him for putting your mom's money into these funds. It's a built-in conflict-of-interest.
  • From your figures, the "advisor" has put just 1% of your mom's money in each of these funds. It's frequently posited here on Bogleheads that any holding less than 5% of your total has negligible to no effect on your total portfolio performance. Has this "advisor" put the rest of the money likewise into such finely sliced-and-diced holdings? The only reason for him to do so is to make it look like your mom can't deal with something as "complicated" as investing, so he can justify his fee. Also, splitting her money into small lots to invest results in more trading fees, which add to the costs she incurs. How many funds does he have her in at present?
Do you have anything in writing, signed by him, in which he describes himself as a "fiduciary"? To my (admittedly unsophisticated) sense of smell, this stinks like a week-old dead fish. It's my distinct feeling that your mom is making this guy's boat payment.
This is a great post. I didn't even know about the 12b-1 fees. He has put 19% of her cash into stocks and 16% into bonds so far, and the rest is in cash . He says he will invest the rest over the next few weeks in order to "take advantages of market fluctuations" and rebalance at the end (which seems odd, right?)

Overall he has suggested 11 types of funds from large cap to hedge to treasuries. ~10% over her cash now remains in a fixed annuity she needs to wait to withdraw the cash from or it has onerous fees. The smallest investment is 4.9% the largest stock fund is a large cap blend at 14.7%, there is a total of 43% in short, intermediate, and foreign treasuries (including 10% in that annuity that will be sold when fee free).

EDIT: I posted the current funds that I know about and the fees for each by type in a comment below.

It does seem like perhaps he is making this overly complicated?

She is not yet at RMD age but will be in the near future and knows she has to withdraw that. She will use that money to pay off her relatively small mortgage on an accelerated rate.

RE: Fiduciary, he reprents himself as one on his website and to me and my mom in person and over the phone. However I did notice that he has this sentence on his website also "Registered representatives of broker dealers are exempt from this law and are not required to be a fiduciary to a client. "

It seems like he is a registered representative of Schwab so maybe he doesnt have to act like a fiduciary? I am going to ask him these questions directly when we speak and have my mom ask that he hold off on investing any more money until we do.

So after further consideration the big thing prevent me from jumping in were the relatively complex annuities she had that I thought were not a good idea but didn't know and my own lack of knowledge. If he is not acting as fiduciary I am going to have my mom fire him and transfer all of her money to Vanguard and Open a Targeted Retirement account (the money is in an IRA and a 403b).

Any thoughts or insight is greatly appreciated.
Last edited by GutCheck on Fri Oct 19, 2018 12:17 am, edited 2 times in total.

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BL
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Re: Fiduciary using funds with a front load?

Post by BL » Fri Oct 19, 2018 12:07 am

Look up each fund on something like Morningstar or even Google and the ERs should show as well as the 12b-1 kickbacks and front or back loads.

GutCheck
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Re: Fiduciary using funds with a front load?

Post by GutCheck » Fri Oct 19, 2018 12:16 am

Yep I googled them:

fund name Front Load 12b fees Expense Ratio
Gatex 5.75% 0.25% 0.94%
JSCVX - - 1.13%
FMIJX - - 0.98%
WEF1Z - - 0.48%
PFOAX 3.75% 0.25% 0.96%
YAFFX - - 1.27%

The expense ratios are not vanguard levels but they are not terrible?

minimalistmarc
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Re: Fiduciary using funds with a front load?

Post by minimalistmarc » Fri Oct 19, 2018 12:33 am

They are terrible

GutCheck
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Re: Fiduciary using funds with a front load?

Post by GutCheck » Fri Oct 19, 2018 12:52 am

yes, looking at the fees now and doing the calculations. Assuming 1/6th of the funds have the same FL and 12b an GATEX and 1/6th of the funds have the same FL and 12b as PFOAX and the same .96% average this ends up cost her:

$18,133.33 the first year if this holds true
$10,216.67 each year assuming VERY basic things like its worth exactly 500k the next year

VS

$650.00 a year considering the .13% ER + IRA administration fee (assuming she will roll this into an IRA if she has not.
The same price assuming the same as above.

A difference of 17k a year. She can afford to fly 6 hours to see me, first class 4 times a year with a ton of room + get to see her grandchildren, and literally just sit next to me while she tells me what to do and I do it.



So I guess that answers my question, huh? I am glad she showed me this paperwork before he invested more. He is a member of NAPFA where he represents himself as both fee only and a fiduciary...but this is not the case right? Even without the FL/12b funds the cost is just way too high for something not likely to be better than a vanguard 2015 retirement account. Right?

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aspirit
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Re: Fiduciary using funds with a front load?

Post by aspirit » Fri Oct 19, 2018 1:23 am

Unless you address it it will continue. How in the world can anyone give their savings to someone*claiming to be a fiduciary without those papers reviewed by an independent 3rd party accountant or atty. ?

If she signed it away I'd suggest you point it out, you might make a stink and get it back,...that has a state timeline. Look it up...or remain sheered. Seems you have paid a..."stupid tax". viewtopic.php?t=63706. Google it here in the upper right hand search box.
minimalistmarc wrote:
Fri Oct 19, 2018 12:33 am
They are terrible.
Yes, quite unsuitable. OP, your lucky oldcomputerguy recognized it.

“A big enough bonus can convince even honest, law-abiding finance workers selling garbage products (as fiduciaries) that they’re doing good for their customers.” – Morgan Housel


This includes all fiduciaries :oops:

Good Luck!
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RickBoglehead
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Re: Fiduciary using funds with a front load?

Post by RickBoglehead » Fri Oct 19, 2018 5:16 am

In hindsight, you should have specified with him that either he review the plan with you, or specified what type of investments were okay or not okay. Seems like you unwittingly gave your mom to the wolves.

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oldcomputerguy
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Re: Fiduciary using funds with a front load?

Post by oldcomputerguy » Fri Oct 19, 2018 5:33 am

Gatex -- domestic large-cap blend stock
JSCVX -- domestic small-cap value stock
FMIJX -- large-cap international
WEF1Z -- short-term domestic bonds
PFOAX -- intermediate-term international bonds
YAFFX -- large-cap value stock fund, half U.S., one-quarter international, the rest in cash.

Seems we're all over the map here, could have been covered more cheaply with a Vanguard target-retirement or lifestyle fund.

The only other things I'd add are that WEF1Z has an awfully high ER (0.48%) for what is supposed to be an Institutional-class fund, and that PFOAX has a turnover rate of 154%, which in effect adds another ~1.5% in hidden expenses to the (already-high) 0.96% ER and the 3.75% front-end load.

Yes, the expenses are horrible, IMHO bordering on criminal for someone who advertises himself as a "fiduciary".
It’s taken me a lot of years, but I’ve come around to this: If you’re dumb, surround yourself with smart people. And if you’re smart, surround yourself with smart people who disagree with you.

onourway
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Re: Fiduciary using funds with a front load?

Post by onourway » Fri Oct 19, 2018 5:50 am

What would be so confusing by holding a single balanced or target date fund at Vanguard, especially if she isn't spending the money?

If she does start to want some of the money, you can help her set up a regular automatic withdrawal to be deposited in her bank account.

It doesn't get any simpler than this.

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Re: Fiduciary using funds with a front load?

Post by sschullo » Fri Oct 19, 2018 6:32 am

Did this "adviser" call himself a fiduciary? If this adviser is listed on Garrett or National Association of Personal Financial Advisers, they must act as fiduciaries and not ever sell commission-based products. If he is listed, report him to Garrett or NAPFA, but make sure your mom was charged a commission.
Public School K-12 Educators: "Ask NOT what your annuity sales person can do for you, ask what you can do to be a Do-It-Yourselfer (DIY)."

GutCheck
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Re: Fiduciary using funds with a front load?

Post by GutCheck » Fri Oct 19, 2018 10:28 am

re: complexity - Prior to engaging with the variety she had a bunch of fixed income annuities with different dates and rules and it was very hard for me to figure out how to divest her from those without paying fees. Like most/all of her money was in these terrible products.

re: NAPFA - yes he is listed there. I will wait until I talk with him to take any rash actions. Regardless even without paying the frontload and 12b-1 fees, the ER of the fees + the trading expenses (need to verify what these are, if any) means she is paying 9,800 in fees and commision a year vs ~675 a year with vanguard. That's still enough of a difference that I think i can convince her to not sign up and move her funds to vanguard.

re: stupid tax - yes, sure - in our defense, I asked him to send me specific funds prior to purchasing them but that was over the phone and it's hard to hold anyone accountable as I don't know what my Mom told him in person. My mother certainly doesn't have the understanding to calculate the true cost of his advice when you take in the ERs and FL,12b-1 (if they apply). I wish that he had acted more transparently and how I expected since he claims to be a fiduciary, but live and learn. If I can get her into vanguard, she will make back the minimal fees paid so far ASAP.

Overall he was helpful in a few ways: untangled the annuities and broke out the timing on how to sell those without incurring fees, convincing her taking a small mortgage to have cash on hand was not a smart decision.

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Re: Fiduciary using funds with a front load?

Post by GutCheck » Fri Oct 19, 2018 10:30 am

oldcomputerguy wrote:
Fri Oct 19, 2018 5:33 am
w
Seems we're all over the map here, could have been covered more cheaply with a Vanguard target-retirement or lifestyle fund.

The only other things I'd add are that WEF1Z has an awfully high ER (0.48%) for what is supposed to be an Institutional-class fund, and that PFOAX has a turnover rate of 154%, which in effect adds another ~1.5% in hidden expenses to the (already-high) 0.96% ER and the 3.75% front-end load.

Yes, the expenses are horrible, IMHO bordering on criminal for someone who advertises himself as a "fiduciary".
Thank you so much for the invaluable advice, and for teaching me something else about the turnover rate.... I was fairly into this stuff a while ago (4-5 years) but then found vanguard funds, put my 401k into a retirement fund and set up a lazy three fund portfolio and haven't looked back. It's amazing how much, and how costly, the information asymmetry is in this field.

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Re: Fiduciary using funds with a front load?

Post by GutCheck » Fri Oct 19, 2018 10:32 am

RickBoglehead wrote:
Fri Oct 19, 2018 5:16 am
In hindsight, you should have specified with him that either he review the plan with you, or specified what type of investments were okay or not okay. Seems like you unwittingly gave your mom to the wolves.
Correct. I did say this over the phone, There were long delays while we waited for annuities to reach maturity so I assumed her cash was either still in those or in a MMA. But assumptions and all that...

I should have put it in writing. luckily I visited her recently and she showed me the trade confirmations before all of her money was invested this way. I know she won't let me make her whole but I will be having a long conversation about what happened and why.

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Re: Fiduciary using funds with a front load?

Post by GutCheck » Sat Oct 20, 2018 9:52 am

the mystery deepens. He is unavailable to talk until next week so I asked him to hold off on further investments until we do and I asked about the 12b-1 funds and he replied "they are temporary holdings for reasons I will explain later" .... seems suspicious...

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Re: Fiduciary using funds with a front load?

Post by aspirit » Sat Oct 20, 2018 9:59 am

Reading above you're being played* by this individual.
He cannot talk for a week till his "commissions" are irreversibly set in stone, and he plays you for $more$.
Become sheered before the slaughter or not, it is your decision.
GutCheck wrote:
Sat Oct 20, 2018 9:52 am
the mystery deepens. He is unavailable to talk until next week so I asked him to hold off on further investments until we do and I asked about the 12b-1 funds and he replied "they are temporary holdings for reasons I will explain later" .... seems suspicious...
You do realize that there is a timeline that "actions" like you mention can be reversed, I forget what it is. I suspect its 30 days, again I forget, look it up! He's putting you off because that timeline is next week. Act fast or loose out.

Selling 1st class crap is how most advisors get paid commissions, thats what they get up in the a.m for, in addition to the
1?%AUM she's going to pay, unless you put a stop to it and her in a appropriate fund or mix of holdings.
Good luck!
Last edited by aspirit on Sat Oct 20, 2018 12:01 pm, edited 1 time in total.
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Re: Fiduciary using funds with a front load?

Post by oldcomputerguy » Sat Oct 20, 2018 11:07 am

GutCheck wrote:
Fri Oct 19, 2018 10:28 am
Overall he was helpful in a few ways: untangled the annuities and broke out the timing on how to sell those without incurring fees, convincing her taking a small mortgage to have cash on hand was not a smart decision.
Wait.... am I reading this correctly? Are you saying that he advised her to take a mortgage on her home simply to have cash on hand?

:shock: :annoyed :!: :!:

Get your mom away from this guy as soon as humanly possible.
It’s taken me a lot of years, but I’ve come around to this: If you’re dumb, surround yourself with smart people. And if you’re smart, surround yourself with smart people who disagree with you.

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CalculatedRisk
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Re: Fiduciary using funds with a front load?

Post by CalculatedRisk » Sat Oct 20, 2018 4:36 pm

oldcomputerguy wrote:
Sat Oct 20, 2018 11:07 am
GutCheck wrote:
Fri Oct 19, 2018 10:28 am
Overall he was helpful in a few ways: untangled the annuities and broke out the timing on how to sell those without incurring fees, convincing her taking a small mortgage to have cash on hand was not a smart decision.
Wait.... am I reading this correctly? Are you saying that he advised her to take a mortgage on her home simply to have cash on hand?

:shock: :annoyed :!: :!:

Get your mom away from this guy as soon as humanly possible.
I read that as the advisor convinced the mother that taking the mortgage was not smart.

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Re: Fiduciary using funds with a front load?

Post by oldcomputerguy » Sat Oct 20, 2018 7:48 pm

CalculatedRisk wrote:
Sat Oct 20, 2018 4:36 pm
oldcomputerguy wrote:
Sat Oct 20, 2018 11:07 am
GutCheck wrote:
Fri Oct 19, 2018 10:28 am
Overall he was helpful in a few ways: untangled the annuities and broke out the timing on how to sell those without incurring fees, convincing her taking a small mortgage to have cash on hand was not a smart decision.
Wait.... am I reading this correctly? Are you saying that he advised her to take a mortgage on her home simply to have cash on hand?

:shock: :annoyed :!: :!:

Get your mom away from this guy as soon as humanly possible.
I read that as the advisor convinced the mother that taking the mortgage was not smart.
Okay, yeah, now that I look again, I believe you’re correct. :happy
It’s taken me a lot of years, but I’ve come around to this: If you’re dumb, surround yourself with smart people. And if you’re smart, surround yourself with smart people who disagree with you.

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Re: Fiduciary using funds with a front load?

Post by AlphaLess » Sat Oct 20, 2018 8:24 pm

MotoTrojan wrote:
Thu Oct 18, 2018 6:36 pm
I don't think it makes sense for a retired person to ever use a 1% adviser. It is one thing if you want to use some more advanced strategies and are looking for growth, but when you are withdrawing 3-4% and not earning much more than that, 1% is a huge contribution.
Upvotex100.

A responsible withdrawal strategy with preservation of capital is something like 3.25% these days.

So a 1% fiduciary fee is akin to a massive tax (on tope of the tax one has to pay on investment returns that are taken out to pay for living expenses).
"You can get more with a kind word and a gun than with just a kind word." George Washington

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Re: Fiduciary using funds with a front load?

Post by GutCheck » Mon Oct 22, 2018 10:14 am

aspirit wrote:
Sat Oct 20, 2018 9:59 am
You do realize that there is a timeline that "actions" like you mention can be reversed, I forget what it is. I suspect its 30 days, again I forget, look it up! He's putting you off because that timeline is next week. Act fast or loose out.

Selling 1st class crap is how most advisors get paid commissions, thats what they get up in the a.m for, in addition to the
1?%AUM she's going to pay, unless you put a stop to it and her in a appropriate fund or mix of holdings.
Good luck!
Thank I did not realize that but will look into it.


Re:the mortgage, yes he helped me convince her it was not a smart idea and gave her a plan to pay it down asap.

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