Time to ditch the financial advisor?

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rarelyright
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Joined: Tue Oct 30, 2018 10:59 am

Time to ditch the financial advisor?

Post by rarelyright » Tue Nov 06, 2018 4:52 pm

New to trying to actually understand my investments and looking for some advice.

Emergency funds: covered
Debt: Primary residence – 14 yrs left on 3.15% loan, roughly 20 yrs left on 2 rentals at 4.25%.
Tax filing: Married jointly
Tax Rates: Fed 39.6% State 11.3%
State: California
Age: 44
Desired asset allocation: 56% Stock / 44% Bonds (based on what I’ve been reading here)
Desired international allocation: I really don’t know! Looking for advice.
I have close to a 7 figure portfolio split between my company 401k and a mutual funds managed by a financial advisor who charges 0.5% annual management fee. I have significant equity in both my personal residence and rental properties which are cash positive.
Current retirement assets
Company 401k with 25% employer match:

Index Funds
Exp Ratio
Vanguard Total Bond Market Index Inst Bond Funds 15.45% 0.04%
Vanguard FTSE Social Index Inv Large Cap Funds 0%
Vanguard Institutional Index Instl Pl Large Cap Stock Funds 26.43% 0.02%
Vanguard Mid Cap Index Ins Mid Cap Stock Funds 7.95% 0.04%
Vanguard Small Cap Index Instl Small Cap Stock Funds 8.16% 0.04%
Vanguard Total Intl Stock Index Instl International Stock Funds 13.35% 0.09%

Mutual Funds

American Funds Europacific Gr R6 Non US Stock Funds 4.42% 0.49%
Nuveen Real Estate Securities R6 US Stock Funds 13.04% 0.87%
American Funds Balanced R6 60/40 Stock/Bonds 6.71%/ 4.48% 0.28%

Total Stocks 80.06% Total Bonds 19.93%

And here’s the taxable account which I find very confusing:
Insured Cash Account 1.13%
"INVESCO HIGH YIELD MUNCL Y" 1.48%
"HARTFORDMID CAPCL I" 9.18%
"HARTFORDGROWTH OPPTYSCL I" 19.48%
"JPMORGANEQUITY INCOMECL I" 18.78%
"INVESTMENT COMPANY OFAMERICA CL F2" 6.57%
"ISHARES CORE S&PSMALL CAP ETF" 4.71%
"LORD ABBETTTOTAL RETURNCL F" 5.25%
"NEW WORLDCL F2" 8.52%
"PGIMHIGH YIELDCL Z" 2.02%
"FEDERATEDMDT SMALL CAP COREINSTL CL" 3.62%
"LATTICEHARTFORD MULTIFACTOR DEVMKTS EX U S ETF" 6.04%
"AMERICAN TAX EXEMPTCALIFORNIACL F2" 4.17%
"TEMPLETONGLOBAL BONDADVISOR CL" 3.49%
"JPMORGANINTL EQUITY CL I" 5.56%

I didn't look up expense ratios on these because I'm planning to move away from this portfolio. Let me know if I should.

I hope to retire by 55 (11 years) and expect to make large contributions for the next 10 years.

Questions:

1. Regarding the company 401k – Can you suggest asset allocation using funds listed? I have more options but they are not Vanguard index funds.
2. Regarding taxable mutual funds – I’m tempted to part ways with my advisor and put everything in Vanguard index funds using the 3 fund lazy portfolio or just a 2 fund method. If I make the move today I basically broke even on investing $400k over the last 3 years. ($4k went to advisor, my current return is about $5k, was much, much better a few months ago) Should I part ways? Is now a good time? Wait a few months? (I have a feeling someone is going to scold me for attempting to time this)
3. Should I be taking advantage of ROTH or traditional in my company 401k?

Thanks in advance for the help......I really appreciate it.

longleaf
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Re: Time to ditch the financial advisor?

Post by longleaf » Tue Nov 06, 2018 4:59 pm

Yes, go ahead and call Vanguard to initiate taxable account be transferred.
Frugality, indexing, time.

rgs92
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Joined: Mon Mar 02, 2009 8:00 pm

Re: Time to ditch the financial advisor?

Post by rgs92 » Tue Nov 06, 2018 5:43 pm

It's always a good time to ditch the financial adviser.
Here's a good 1-step solution: put everything you have in VBIAX (Vang. balanced index Admiral) and leave it there.
It's close enough to your intended asset allocation and will take no further work ever.

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BL
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Re: Time to ditch the financial advisor?

Post by BL » Tue Nov 06, 2018 5:58 pm

Try to find tax cost of selling in taxable account on paper or print from online. Unrealized gains/losses or cost basis and NAV, etc. With list in hand, find out if V accepts it and cost to sell. If high, find out cost to sell where it is and you could convert to cash if cheaper and not too much gains. Then buy directly when money is in your bank. (Don't do this with IRAs.)
Last edited by BL on Tue Nov 06, 2018 6:05 pm, edited 1 time in total.

mhalley
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Re: Time to ditch the financial advisor?

Post by mhalley » Tue Nov 06, 2018 6:03 pm

I wouldn't go with a balanced fund in taxable at that tax bracket. A simple 3 fund portfolio, substituting muni bonds for total bonds if you desire any bonds in taxable.
Try to replicate the total stock market index in the 401k.
https://www.bogleheads.org/wiki/Approxi ... ock_market

International is the toughest decision after stock bond allocation. Anywhere from 20-50% of equities is fine. Stock markets go up and down, but advisor fees are forever. The sooner you leave, the sooner those fees go away.
Last edited by mhalley on Tue Nov 06, 2018 6:06 pm, edited 1 time in total.

bluquark
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Re: Time to ditch the financial advisor?

Post by bluquark » Tue Nov 06, 2018 6:05 pm

Desired international allocation: I really don’t know! Looking for advice.
Opinions vary on this, but one reference point to start with is that the Vanguard Target Retirement and LifeStrategy funds hold 60% domestic and 40% international equity, which can be simulated by splitting between VTSAX and VTIAX.
I didn't look up expense ratios on these because I'm planning to move away from this portfolio. Let me know if I should.
Yes you should move away, although I notice that one virtue of your advisor's overly complex strategy is that it allocates bonds to California munis, which can be a good idea at your tax rate in your taxable account. If you want to preserve this, Vanguard has VCLAX and VCAIX california bond index funds.
Regarding the company 401k – Can you suggest asset allocation using funds listed? I have more options but they are not Vanguard index funds.
Vanguard Total Bond Market, Vanguard Large Cap Stock and Vanguard Total Intl Stock are great picks for a ~3-fund-style strategy.
Regarding taxable mutual funds – I’m tempted to part ways with my advisor and put everything in Vanguard index funds using the 3 fund lazy portfolio or just a 2 fund method. If I make the move today I basically broke even on investing $400k over the last 3 years. ($4k went to advisor, my current return is about $5k, was much, much better a few months ago) Should I part ways? Is now a good time? Wait a few months? (I have a feeling someone is going to scold me for attempting to time this)
The main reason to take it slow on this kind of transition isn't market timing issues but tax concerns. Since you roughly broke even, the tax consequences should be hopefully be mild, although you should double-check your unrealized gains/losses before you pull the trigger.
Should I be taking advantage of ROTH or traditional in my company 401k?
Since your current tax rate is high, I don't think you can go wrong with traditional for your regular contribution. Consider adding in also megabackdoor roth contributions if your savings rate is high enough.
Last edited by bluquark on Tue Nov 06, 2018 7:48 pm, edited 2 times in total.

rarelyright
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Joined: Tue Oct 30, 2018 10:59 am

Re: Time to ditch the financial advisor?

Post by rarelyright » Tue Nov 06, 2018 6:25 pm

Thanks everyone - really appreciate the help and tax considerations. Looks like I have a little more recon to do regarding tax and megabackdoor roth. Please keep the suggestions coming.

delamer
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Re: Time to ditch the financial advisor?

Post by delamer » Tue Nov 06, 2018 6:38 pm

Here’s some suggestion from the Boglehead wiki for index based portfolios:

https://www.bogleheads.org/wiki/Lazy_portfolios

You have great options in your 401(k) to set up one of these. Although you should implement your allocation across your entire portfolio.

I concur with dumping your advisor and your current funds, but making sure that you understand the tax implications of selling. Be sure you get all your tax basis information for your taxable investments before you make any moves. Once you’ve transferred your assets, your advisor has zero incentive to cooperate with you regarding that information. (The cost basis may be recorded on your account statements.)

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patrick013
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Re: Time to ditch the financial advisor?

Post by patrick013 » Tue Nov 06, 2018 6:40 pm

rarelyright wrote:
Tue Nov 06, 2018 4:52 pm
New to trying to actually understand my investments and looking for some advice.
If you think you will be in the same tax bracket in retirement I'd start
putting money in Roth or Backdoor Roth. Check the VG wiki also.

Reallocate using Tax-efficient Fund Placement . I'd put some investment
grade muni's in taxable and use Roth for equities 100%. Going forward
I'd use fewer funds. The 500, a mid cap and a small cap are fine. I have very
little Intl so that is up to you. Here's some other Investment Priorities.
age in bonds, buy-and-hold, 10 year business cycle

rarelyright
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Joined: Tue Oct 30, 2018 10:59 am

Re: Time to ditch the financial advisor?

Post by rarelyright » Tue Nov 06, 2018 6:52 pm

Thanks for the links - hadn't heard of a backdoor roth until today. Regarding the tax implications - is the caution just to be prepared for a bill or will they affect my move? Seems like I'm stuck paying them and a new AA and investing approach is needed regardless.

rgs92
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Joined: Mon Mar 02, 2009 8:00 pm

Re: Time to ditch the financial advisor?

Post by rgs92 » Tue Nov 06, 2018 6:55 pm

I have read here that Vanguard Balanced Index isn't good for taxable accounts.
But is that really true?
1. Is there that much short term trading to generate that many more short term capital gains?
2. Is there really such a big benefit from tax-free bonds vs. vanilla bond funds?
3. And doesn't it depend highly on your total income?

4. Isn't the simplicity of automatic rebalancing worth the higher taxes in the long run to avoid the costs of tax-managed strategies because of the proven higher returns of holding index funds (stock and bond) without excess trading?

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patrick013
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Re: Time to ditch the financial advisor?

Post by patrick013 » Tue Nov 06, 2018 7:02 pm

rarelyright wrote:
Tue Nov 06, 2018 6:52 pm
Thanks for the links - hadn't heard of a backdoor roth until today. Regarding the tax implications - is the caution just to be prepared for a bill or will they affect my move? Seems like I'm stuck paying them and a new AA and investing approach is needed regardless.
You could keep them and just fund fewer funds going forward, the
low fee index funds. Transfer them to any broker or Vanguard. The
total tax gain and total tax expense may be excessive so keeping them
is an option.
age in bonds, buy-and-hold, 10 year business cycle

delamer
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Joined: Tue Feb 08, 2011 6:13 pm

Re: Time to ditch the financial advisor?

Post by delamer » Tue Nov 06, 2018 7:41 pm

rarelyright wrote:
Tue Nov 06, 2018 6:52 pm
Thanks for the links - hadn't heard of a backdoor roth until today. Regarding the tax implications - is the caution just to be prepared for a bill or will they affect my move? Seems like I'm stuck paying them and a new AA and investing approach is needed regardless.
I apologize if this is too simplistic, if I misunderstood your question:

You currently pay taxes each year on any interest/dividends/capital gains income that are generated by your funds in the taxable account.

If you sell shares in one of the funds, you’ll pay taxes on the difference between your cost basis (basically what you paid for your shares) and the price you sell your shares for. That is a one-time tax. You can end up in a higher bracket if that difference is large. Don’t let the taxes stop you, but make sure you understand the implications.

rarelyright
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Joined: Tue Oct 30, 2018 10:59 am

Re: Time to ditch the financial advisor?

Post by rarelyright » Tue Nov 06, 2018 7:52 pm

delamer wrote:
Tue Nov 06, 2018 7:41 pm
rarelyright wrote:
Tue Nov 06, 2018 6:52 pm
Thanks for the links - hadn't heard of a backdoor roth until today. Regarding the tax implications - is the caution just to be prepared for a bill or will they affect my move? Seems like I'm stuck paying them and a new AA and investing approach is needed regardless.
I apologize if this is too simplistic, if I misunderstood your question:

You currently pay taxes each year on any interest/dividends/capital gains income that are generated by your funds in the taxable account.

If you sell shares in one of the funds, you’ll pay taxes on the difference between your cost basis (basically what you paid for your shares) and the price you sell your shares for. That is a one-time tax. You can end up in a higher bracket if that difference is large. Don’t let the taxes stop you, but make sure you understand the implications.
Okay, that's what I thought. In this case I didn't make much on the investment and I'm in high bracket anyway so I don't think it's much of an issue. Thanks again.

Bonehead3
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Location: Bangkok TH

Re: Time to ditch the financial advisor?

Post by Bonehead3 » Tue Nov 06, 2018 11:21 pm

All good advice here! And with this advice and other resources that were not available years ago, this is the main reason to give up paid advice. As a former "investment representative," I have nothing good to say about the industry. Overall, it's about sales (moving your money to their accounts) and not about advice. I tried to get coworkers to manage their own investments and most say it's too complicated. It's not. You have to decide on sales and tax implications of accounts currently with "full-service" reps but if nothing else, tell kids starting out to stick to VG or other no-load families. So many of these seem to be passed on from generation to generation. My kids are well on the way..... in commission free accounts.

Grt2bOutdoors
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Location: New York

Re: Time to ditch the financial advisor?

Post by Grt2bOutdoors » Wed Nov 07, 2018 10:48 pm

Taxable account - make the move.
Total stock market index - 45%
Total international index - 11%
Vanguard California Tax Exempt - 44%
Or if you don’t mind paying some California income tax on non Cali tax exempt bonds, then hold Vanguard Intermediate Tax Exempt Fund.

Rebalance once per year.
The above is a 20 percent allocation to international. Since you don’t have an all-you-prefer, start out at low end of recommended range 20%. If/when you are comfortable, then raise the percentage but only if you want to.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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BolderBoy
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Re: Time to ditch the financial advisor?

Post by BolderBoy » Wed Nov 07, 2018 11:18 pm

rarelyright wrote:
Tue Nov 06, 2018 4:52 pm
I have significant equity in both my personal residence and rental properties which are cash positive.
So you are making money on your rentals? And paying taxes on that money at your marginal tax rates?

How is that different than having a taxable bond fund or taxable REIT fund in your non-retirement accounts? These are both considered to be very tax inefficient.

(I'm asking because I'm not a landlord and know little about owning rentals)
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect

rarelyright
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Re: Time to ditch the financial advisor?

Post by rarelyright » Thu Nov 08, 2018 11:38 am

BolderBoy wrote:
Wed Nov 07, 2018 11:18 pm
rarelyright wrote:
Tue Nov 06, 2018 4:52 pm
I have significant equity in both my personal residence and rental properties which are cash positive.
So you are making money on your rentals? And paying taxes on that money at your marginal tax rates?

How is that different than having a taxable bond fund or taxable REIT fund in your non-retirement accounts? These are both considered to be very tax inefficient.

(I'm asking because I'm not a landlord and know little about owning rentals)
Yes and yes. I agree, they are probably tax inefficient although we write off interest and depreciation. It's funny you brought this up. I've been considering selling. Houses together are worth $600 (I paid $280k) and I owe $200 I need to figure out what the tax implications of selling them would be since I've been depreciating them for 8-10 years. Mortgage payments are around $1,500 month and I'm getting $2,500 month in rent. Open to suggestions on this one also!

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