Fire my financial advisor now or later? (recent windfall help needed)

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investingdeacon
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Fire my financial advisor now or later? (recent windfall help needed)

Post by investingdeacon » Fri Apr 19, 2019 8:45 am

Hello Bogleheads,

This is my first post. I'm new to investing and thankful to live in an age where great ideas can be shared freely on the internet.

My question pertains to how I ought to invest a recent windfall of $150k. Right now that money is sitting in a Merrill Lynch money market brokerage waiting for my action.

I have connections to Merrill Lynch through my family, who have used them as investment advisors for generations. Because of this, my AUM fee is supposedly much lower than a typical client of my current net worth, as I'm only being charged 0.75%. I know that long term my best strategy is to probably go it on my own, but as I'm still learning about investing, I'm not sure I'm completely comfortable doing that yet.

I have begun reading the Bogleheads Guide to Investing, JL Collins stock series blog, listen to ChooseFI, etc. I am slowly absorbing all of these things. Let's get right to my questions. Before, here are some quick stats that may be helpful for you to know.

- 32 years old, married w/ 2 young kids
- Earn high 6 figures
- Only debt is my mortgage, which is high 6 figures but interest is 3.75%
- Already funded my 401k for the year
- Fully funded my HSA and invested it in VTI
- In the past month I invested $60K in VTSAX and $25k in VBTLX on my own in my Vanguard taxable brokerage account (which I realize doing the VBTLX may not have been the smartest to put there, still learning). Financial advisor doesn't know this.

Here is what my financial advisor is proposing:
- open 529 accounts for my kids, put $4k each kid from each spouse to get things going
- invest the remaining $134k in a Merrill Lynch CIO Equity ETF aggressive growth fund
- consider smaller amounts in some Leveraged Index Return Notes to "get alpha" - proposed a 3 year & 5 year LIRN from ScotiaBank.

I have pushed back on her a bit, telling her that from my reading that my overall goal is to maximize my long-term returns and that I continue to read that over a long period of time, almost everything underperforms a total stock market index such as VTSAX even on a gross basis, add on top of that AUM fees that I will be charged every year which will further lower my returns. I told her that at the current moment I am unconvinced that my best course of action is anything other than investing in low cost index funds.

Her response was that she agrees that mutual funds and total stock market index funds are a good way for most people to do lower income investing. She agreed that the bulk of my portfolio should be in indexes, and that the ML CIO Equity ETF isn't really trying to beat the market, rather it is a form of a "managed passive strategy" that monitors the index by subdividing it into sectors which gives us more flexibility for tax loss harvesting over a total stock market index. She said that by over or underweighting certain sectors of the market based on their research they hope to slightly outperform the market enough to justify the fees.

She also pointed out that in a fund such as VTSAX there is internal turnover of ~3% per year for which I may owe substantial capital gains taxes on every year even if I am just holding the fund. Is this true? Even so, wouldn't this be true with the fund she is proposing also?

She said that for someone of my high income, it is important to consider all the various things we can do to minimize my tax burden, and this equity ETF as well as other tax loss harvesting strategies will allow me to do that.

My questions

Q1: Her reasoning about the tax loss harvesting flexibility with the basket of ETFs does make sense to me. However, knowing what I know, I think I'm still risking that this fund will underperform over the long haul, so should that be a dealbreaker?

Q2: Am I being foolish investing some of my money with her at ML while I'm still "learning the ropes?" I know that paying a 0.75% AUM fee over the long haul isn't best, but for right now it's only costing me $1125 and if her advice helps steer me out of trouble or out of big taxable events, perhaps the advice is worth it in the short term?

Q3: If I decide in a year or so, after learning more and becoming more confident, that I want to move away from ML and go on my own, how messy will that be from a tax perspective? Say I want to move all my holdings to Vanguard that I currently had at ML.

Q4: How important is tax loss harvesting when considering your overall returns?

Q5: Once I do decide where/how to invest the money, do you recommend dollar cost averaging it in over the next year or lump sum? My advisor said that because market is at all time highs it may be smarter to DCA.

Q6: Any other advice you have I would greatly appreciate! Thank you!

aristotelian
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Re: Fire my financial advisor now or later? (recent windfall help needed)

Post by aristotelian » Fri Apr 19, 2019 9:00 am

If you feel comfortable with index fund investing on your own, just do it now. If so, keep contact with FA to a minimum.

ML is fine, but if you decide to change, you just do an in-kind transfer and there are no tax implications. Might be cleaner to transfer elsewhere now to get FA out of the picture. If you do it that way, Vanguard handles the transfer and you never have to talk to the FA.

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prudent
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Re: Fire my financial advisor now or later? (recent windfall help needed)

Post by prudent » Fri Apr 19, 2019 9:12 am

Welcome to Bogleheads!

Personally, if I envisioned moving out of ML in a year, I wouldn't put any more money in ML. Until you're ready, you can keep the windfall in a money market fund and earn over 2% with no risk. Do not put money in LIRNs. They are illiquid.

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Re: Fire my financial advisor now or later? (recent windfall help needed)

Post by Strayshot » Fri Apr 19, 2019 9:13 am

“She said that by over or underweighting certain sectors of the market based on their research they hope to slightly outperform the market enough to justify the fees.”

Snake oil from a typical financial advisor. I hear “their research” and think market timing, I hear “hope” and think gambling, I hear “fees” and think FEES.

You are smart enough to come here, read books, and make good money. You are smart enough to manage your own portfolio.

That gnawing concern you have inside that ultimately triggered you coming here to post a small novel is your gut telling you you’re getting ripped off with a high 3/4 percent fee and snake oil products and feeling bad that your family has been ripped off like this over generations.

Tax loss harvesting Is important, but easy to do yourself. For many FA’s, tax loss harvesting is an excuse to rack up some additional trading fees throughout the year.

student
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Re: Fire my financial advisor now or later? (recent windfall help needed)

Post by student » Fri Apr 19, 2019 9:24 am

Just do the 3-fund portfolio and transfer the money to Merrill Edge (different division from ML). I am not sure going from ML to ME will give you a bonus but you can sign up for preferred rewards. viewtopic.php?f=2&t=150033 Vanguard, TDA, Etrade, Fidelity or Schwab will work too.

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09deaconX
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Re: Fire my financial advisor now or later? (recent windfall help needed)

Post by 09deaconX » Fri Apr 19, 2019 9:32 am

investingdeacon wrote:
Fri Apr 19, 2019 8:45 am
Q5: Once I do decide where/how to invest the money, do you recommend dollar cost averaging it in over the next year or lump sum? My advisor said that because market is at all time highs it may be smarter to DCA.
Once you get clarity on your other questions about where to invest this money, the academic answer is to invest it all at once into the market. While you do A) expose yourself to the chance you invest just before a big crash, you also are B) missing out on any gains you see in the market over that period in which you DCA - and since the market generally goes up in the long run, B outweighs A.

Considering your long-term investment horizon, the risk of A is further mitigated in my mind. That said, you might prefer the lower risk, lower return option of DCA over the next year. More information here: https://www.bogleheads.org/wiki/Dollar_cost_averaging

Go Deacs.

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RickBoglehead
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Re: Fire my financial advisor now or later? (recent windfall help needed)

Post by RickBoglehead » Fri Apr 19, 2019 9:38 am

investingdeacon wrote:
Fri Apr 19, 2019 8:45 am

Q1: Her reasoning about the tax loss harvesting flexibility with the basket of ETFs does make sense to me. However, knowing what I know, I think I'm still risking that this fund will underperform over the long haul, so should that be a dealbreaker?

Q2: Am I being foolish investing some of my money with her at ML while I'm still "learning the ropes?" I know that paying a 0.75% AUM fee over the long haul isn't best, but for right now it's only costing me $1125 and if her advice helps steer me out of trouble or out of big taxable events, perhaps the advice is worth it in the short term?

Q3: If I decide in a year or so, after learning more and becoming more confident, that I want to move away from ML and go on my own, how messy will that be from a tax perspective? Say I want to move all my holdings to Vanguard that I currently had at ML.

Q4: How important is tax loss harvesting when considering your overall returns?

Q5: Once I do decide where/how to invest the money, do you recommend dollar cost averaging it in over the next year or lump sum? My advisor said that because market is at all time highs it may be smarter to DCA.

Q6: Any other advice you have I would greatly appreciate! Thank you!
2) Vanguard PAS is 0.30%. You can figure that savings quite easily.

3) Vanguard will transfer anything you own that they let you keep. Contact them now, provide a recent statement, and they can tell you if anything won't transfer.

4) Tax loss harvesting reduces taxes. Impact on returns? Well, you got rid of a loser that was dragging you down (at some point, since it's a loss), and replace it with a winner.

5) No. Time after time after time this is answered. DCA looses to lump sum more than it wins.

I would move the lump sum to Vanguard into a 3 fund portfolio NOW.
Avid user of forums on variety of interests-financial, home brewing, F-150, PHEV, home repair, etc. Enjoy learning & passing on knowledge. It's PRINCIPAL, not PRINCIPLE. I ADVISE you to seek ADVICE.

cherijoh
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Re: Fire my financial advisor now or later? (recent windfall help needed)

Post by cherijoh » Fri Apr 19, 2019 9:45 am

investingdeacon wrote:
Fri Apr 19, 2019 8:45 am
Here is what my financial advisor is proposing:
- open 529 accounts for my kids, put $4k each kid from each spouse to get things going
- invest the remaining $134k in a Merrill Lynch CIO Equity ETF aggressive growth fund
- consider smaller amounts in some Leveraged Index Return Notes to "get alpha" - proposed a 3 year & 5 year LIRN from ScotiaBank.

I have pushed back on her a bit, telling her that from my reading that my overall goal is to maximize my long-term returns and that I continue to read that over a long period of time, almost everything underperforms a total stock market index such as VTSAX even on a gross basis, add on top of that AUM fees that I will be charged every year which will further lower my returns. I told her that at the current moment I am unconvinced that my best course of action is anything other than investing in low cost index funds.

Her response was that she agrees that mutual funds and total stock market index funds are a good way for most people to do lower income investing. She agreed that the bulk of my portfolio should be in indexes, and that the ML CIO Equity ETF isn't really trying to beat the market, rather it is a form of a "managed passive strategy" that monitors the index by subdividing it into sectors which gives us more flexibility for tax loss harvesting over a total stock market index. She said that by over or underweighting certain sectors of the market based on their research they hope to slightly outperform the market enough to justify the fees. <-- Managed passive is an oxymoron IMO. I think advisors get training on how argue against the passive index fund approach and this sounds like one of them.

She also pointed out that in a fund such as VTSAX there is internal turnover of ~3% per year for which I may owe substantial capital gains taxes on every year even if I am just holding the fund. Is this true? Even so, wouldn't this be true with the fund she is proposing also? <--- I have invested in VTSAX in taxable for years. It pays out dividends every year, but I don't remember much if any capital gains. VG does have a rather unique strategy to avoid cap gains so her comment may be true for other index funds. Actively managed funds can have much larger capital gains distributions than index funds, so your intuition is correct.

She said that for someone of my high income, it is important to consider all the various things we can do to minimize my tax burden, and this equity ETF as well as other tax loss harvesting strategies will allow me to do that. <-- Tax loss harvesting allows individuals to take up to $3k of loss and count it against ordinary income each year. (This is after cancelling out any capital gains). Any excess loss is carried forward into the future. The next year, if any capital loss exists after cancelling out capital gains, you can again cancel out $3K of ordinary income. Eventually, when you sell out of the fund, you would pay capital gains based on the lower basis (from the tax loss harvesting). I know lots of people actively engage in tax loss harvesting, but to me it doesn't seem worth the trouble. And if you are high income, I don't see how it would have all that much impact for you except that you are taxed at a higher marginal rate. But is a couple hundred dollars less in taxes that big of a deal for a high income taxpayer?

My questions

Q1: Her reasoning about the tax loss harvesting flexibility with the basket of ETFs does make sense to me. However, knowing what I know, I think I'm still risking that this fund will underperform over the long haul, so should that be a dealbreaker? <-- What is the expense ratio (ER) for this fund? Then you also need to add on the AUM wrapper fee. It doesn't seem likely to me that the fund will perform as described. When was this fund created? Before or after the great recession? I woul be very leery if this fund has only been in existence during the long bull market.

Q2: Am I being foolish investing some of my money with her at ML while I'm still "learning the ropes?" I know that paying a 0.75% AUM fee over the long haul isn't best, but for right now it's only costing me $1125 and if her advice helps steer me out of trouble or out of big taxable events, perhaps the advice is worth it in the short term? <-- Your "adviser's" primary job is to sell you product. Any advice is ancilliary IMO. You also have to consider the higher fees for any products she recommends.

Q3: If I decide in a year or so, after learning more and becoming more confident, that I want to move away from ML and go on my own, how messy will that be from a tax perspective? Say I want to move all my holdings to Vanguard that I currently had at ML. <-- Vanguard is focused on being a low cost provider. Therefore, it doesn't handle everything. I expect you might have to sell the proprietary ML fund and leveraged index return notes. My advice would be to not invest in them in the first place.

Q4: How important is tax loss harvesting when considering your overall returns? <-- I don't know, since I don't do it.

Q5: Once I do decide where/how to invest the money, do you recommend dollar cost averaging it in over the next year or lump sum? My advisor said that because market is at all time highs it may be smarter to DCA. <-- Lump sum investing does better about 2/3 of the time. But in this market environment, I would be prone to DCA.

Q6: Any other advice you have I would greatly appreciate! Thank you! <-- The best time to break up with a financial advisor is before you establish a relationship with her or him. :wink:

chambers136
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Re: Fire my financial advisor now or later? (recent windfall help needed)

Post by chambers136 » Fri Apr 19, 2019 10:02 am

investingdeacon wrote:
Fri Apr 19, 2019 8:45 am
She also pointed out that in a fund such as VTSAX there is internal turnover of ~3% per year for which I may owe substantial capital gains taxes on every year even if I am just holding the fund. Is this true? Even so, wouldn't this be true with the fund she is proposing also?
I find this statement to be very dishonest. As far as I know, VTSAX is one of the most tax efficient fund available anywhere. I have some growth funds that we still hold from a former advisor that pays out more than 10% of the holdings in distributions per year. I’m just waiting until the basis is low enough to sell. Compare the VTSAX distributions to the fund that she proposed. I’ll bet the ML fund is far less tax efficient, and she has to know this. But as the saying goes, it’s amazing what people don’t understand if you pay them enough not to.

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grabiner
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Re: Fire my financial advisor now or later? (recent windfall help needed)

Post by grabiner » Fri Apr 19, 2019 10:13 am

investingdeacon wrote:
Fri Apr 19, 2019 8:45 am
She also pointed out that in a fund such as VTSAX there is internal turnover of ~3% per year for which I may owe substantial capital gains taxes on every year even if I am just holding the fund. Is this true? Even so, wouldn't this be true with the fund she is proposing also?
VTSAX (Vanguard Total Stock Market Index) happens to be an exception; because of the ETF share class, it can avoid capital gains the same way ETFs do. (I suspect that her error is based on incompetence, not malice; since she would never recommend a Vanguard fund, she does not know about the special tax situation of Vanguard funds.)
Q4: How important is tax loss harvesting when considering your overall returns?
It is important, but it is something you can do without her help. When the stock market falls, you can sell whatever funds you hold and buy other funds which are not substantially identical. If you have a large portfolio, this should allow you to deduct $3000 in capital losses every year for years following a bear market.
Q5: Once I do decide where/how to invest the money, do you recommend dollar cost averaging it in over the next year or lump sum? My advisor said that because market is at all time highs it may be smarter to DCA.
Whether you should DCA is a psychological question, not a financial question. If there were a financial reason, then if it were right for you to put 10% of the money into the stock market every month, it would also be right for me to pull 90% of my money out of the stock market now and put it back at 10% per month; we would have the same returns.

So the decision whether to DCA should be based on how the windfall relates to the rest of your portfolio, not on the market. In particular, if the market has fallen when you want to start investing, you should still DCA or not according to the same criteria

A common DCA strategy is to increase your stock allocation by 10% of your portfolio, so that you increase your risk gradually. Thus, if the $150K is half your portfolio, you might put $30K into stock each month until you reach your target stock allocation. If it is much less than half, putting the appropriate amount into stock would not make much difference to your overall risk, so you might as well do it all at once.

One other note, which the advisor would not recommend because it would reduce AUM: A common use of a windfall is to pay down a mortgage. However, since you are itemizing deductions in a high tax bracket and have a low-rate mortgage, I would not recommend that you pay it down. If you are in the 37% tax bracket, you get only a 2.37% return from paying down the 3.75% mortgage.
Wiki David Grabiner

barnaclebob
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Re: Fire my financial advisor now or later? (recent windfall help needed)

Post by barnaclebob » Fri Apr 19, 2019 10:18 am

investingdeacon wrote:
Fri Apr 19, 2019 8:45 am
Her response was that she agrees that mutual funds and total stock market index funds are a good way for most people to do lower income investing. She agreed that the bulk of my portfolio should be in indexes, and that the ML CIO Equity ETF isn't really trying to beat the market, rather it is a form of a "managed passive strategy" that monitors the index by subdividing it into sectors which gives us more flexibility for tax loss harvesting over a total stock market index. She said that by over or underweighting certain sectors of the market based on their research they hope to slightly outperform the market enough to justify the fees.

She also pointed out that in a fund such as VTSAX there is internal turnover of ~3% per year for which I may owe substantial capital gains taxes on every year even if I am just holding the fund. Is this true? Even so, wouldn't this be true with the fund she is proposing also?

She said that for someone of my high income, it is important to consider all the various things we can do to minimize my tax burden, and this equity ETF as well as other tax loss harvesting strategies will allow me to do that.

My questions

Q1: Her reasoning about the tax loss harvesting flexibility with the basket of ETFs does make sense to me. However, knowing what I know, I think I'm still risking that this fund will underperform over the long haul, so should that be a dealbreaker?

Q2: Am I being foolish investing some of my money with her at ML while I'm still "learning the ropes?" I know that paying a 0.75% AUM fee over the long haul isn't best, but for right now it's only costing me $1125 and if her advice helps steer me out of trouble or out of big taxable events, perhaps the advice is worth it in the short term?

Q3: If I decide in a year or so, after learning more and becoming more confident, that I want to move away from ML and go on my own, how messy will that be from a tax perspective? Say I want to move all my holdings to Vanguard that I currently had at ML.

Q4: How important is tax loss harvesting when considering your overall returns?

Q5: Once I do decide where/how to invest the money, do you recommend dollar cost averaging it in over the next year or lump sum? My advisor said that because market is at all time highs it may be smarter to DCA.

Q6: Any other advice you have I would greatly appreciate! Thank you!
Welcome,

They eye rolls start as soon as you say what her response is. Especially this: "managed passive strategy" as its complete non speak meant to passivate and/or confuse you. An internal turnover of 3% is hardly anything and you will be in the top tax bracket pretty much no matter what you do aside from donating everything to charity.

You should definitely consider strategies to minimize your taxes. And for that you want a good tax planner that you pay by the hour, not a used car salesman err I mean a financial planner.

We are hard on financial planners here and paint them as near demons which conflicts with the fact that the vast majority of them are probably good people who think they are doing good and believe in their products. She probably isn't intentionally misleading you or anything and trying to do the best given her line of products and sales requirements from the company. But that doesn't mean there isn't something better.

In reality 150k for someone making high 6 figures is small potatoes in the long run. Even if you meant high five figures its a good boost but not life changing. Don't be afraid of your money, be empowered by it. You are off to a great start DIY. Start making a spreadsheet of how you would allocate your money. Once its on a spreadsheet and you are comfortable with that then you'll be just as fine seeing those same numbers when you login to your account.
Last edited by barnaclebob on Fri Apr 19, 2019 11:10 am, edited 1 time in total.

JoinToday
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Re: Fire my financial advisor now or later? (recent windfall help needed)

Post by JoinToday » Fri Apr 19, 2019 10:30 am

investingdeacon wrote:
Fri Apr 19, 2019 8:45 am
...
My question pertains to how I ought to invest a recent windfall of $150k. ....
....
I have connections to Merrill Lynch through my family, who have used them as investment advisors for generations. Because of this, my AUM fee is supposedly much lower than a typical client of my current net worth, as I'm only being charged 0.75%.
.....

- 32 years old, married w/ 2 young kids
- Earn high 6 figures
- Only debt is my mortgage, which is high 6 figures but interest is 3.75%
- Already funded my 401k for the year
- Fully funded my HSA and invested it in VTI
- In the past month I invested $60K in VTSAX and $25k in VBTLX on my own in my Vanguard taxable brokerage account (which I realize doing the VBTLX may not have been the smartest to put there, still learning). Financial advisor doesn't know this.

Here is what my financial advisor is proposing:
- open 529 accounts for my kids, put $4k each kid from each spouse to get things going
- invest the remaining $134k in a Merrill Lynch CIO Equity ETF aggressive growth fund
- consider smaller amounts in some Leveraged Index Return Notes to "get alpha" - proposed a 3 year & 5 year LIRN from ScotiaBank.

I have pushed back on her a bit, telling her that from my reading that my overall goal is to maximize my long-term returns and that I continue to read that over a long period of time, almost everything underperforms a total stock market index such as VTSAX even on a gross basis, add on top of that AUM fees that I will be charged every year which will further lower my returns. I told her that at the current moment I am unconvinced that my best course of action is anything other than investing in low cost index funds.

Her response was that she agrees that mutual funds and total stock market index funds are a good way for most people to do lower income investing. She agreed that the bulk of my portfolio should be in indexes, and that the ML CIO Equity ETF isn't really trying to beat the market, rather it is a form of a "managed passive strategy" that monitors the index by subdividing it into sectors which gives us more flexibility for tax loss harvesting over a total stock market index. She said that by over or underweighting certain sectors of the market based on their research they hope to slightly outperform the market enough to justify the fees.

She also pointed out that in a fund such as VTSAX there is internal turnover of ~3% per year for which I may owe substantial capital gains taxes on every year even if I am just holding the fund. Is this true? Even so, wouldn't this be true with the fund she is proposing also?

She said that for someone of my high income, it is important to consider all the various things we can do to minimize my tax burden, and this equity ETF as well as other tax loss harvesting strategies will allow me to do that.

My questions

Q1: Her reasoning about the tax loss harvesting flexibility with the basket of ETFs does make sense to me. However, knowing what I know, I think I'm still risking that this fund will underperform over the long haul, so should that be a dealbreaker?

Q2: Am I being foolish investing some of my money with her at ML while I'm still "learning the ropes?" I know that paying a 0.75% AUM fee over the long haul isn't best, but for right now it's only costing me $1125 and if her advice helps steer me out of trouble or out of big taxable events, perhaps the advice is worth it in the short term?

Q3: If I decide in a year or so, after learning more and becoming more confident, that I want to move away from ML and go on my own, how messy will that be from a tax perspective? Say I want to move all my holdings to Vanguard that I currently had at ML.

Q4: How important is tax loss harvesting when considering your overall returns?

Q5: Once I do decide where/how to invest the money, do you recommend dollar cost averaging it in over the next year or lump sum? My advisor said that because market is at all time highs it may be smarter to DCA.

Q6: Any other advice you have I would greatly appreciate! Thank you!
a. What is high 6 figure income? $700K - $999K? or did you mean low 6 figure income, $100K - $300K. If you meant high six figure, I am having trouble why you consider $150K much of a windfall compared to your income

b. read about tax efficient asset location in the wiki.

c. once you start acquiring assets, 0.75% will add up. Why pay someone 0.75% when there are better & cheaper alternatives? DIY or Vanguard PAS

Q2, Q3: The problem with advisors is if they put you in an inappropriate fund (higher fees, higher turnover, not tax efficient, not diversified), it can be costly if you need to do a course correction (move to appropriate index funds) due to taxes on capital gains.

Q4: Tax loss harvesting: saves me a few $K per year in taxes. Free money, but it won't make the difference between beach front property and inner city housing.

Advisor is more concerned about loosing a client that looking out for your welfare. Cut ties, move to vanguard, 3 fund portfolio.
I wish I had learned about index funds 25 years ago

deltaneutral83
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Re: Fire my financial advisor now or later? (recent windfall help needed)

Post by deltaneutral83 » Fri Apr 19, 2019 10:44 am

She said VTI/VTSAX wasn't tax efficient? LOL, ruuuuuuuuuuuunnnnnnn!

chambers136
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Re: Fire my financial advisor now or later? (recent windfall help needed)

Post by chambers136 » Fri Apr 19, 2019 10:46 am

barnaclebob wrote:
Fri Apr 19, 2019 10:18 am
An internal turnover of 3% is hardly anything......
She probably isn't intentionally misleading you or anything and trying to do the best given her line of products and sales requirements from the company.
I know I’m nit picking, but if she knows enough to look up and quote the turnover of a fund, she is either not competent enough to recognize what a reasonable turnover rate is, or is outright lying about it. To me, this would call into question the rest of the advice. Whether specific to VTSAX or not, even index funds that don't have the patented Vanguard class method are far more efficient than most active funds (at least the ones I'm familiar with)

trustquestioner
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Re: Fire my financial advisor now or later? (recent windfall help needed)

Post by trustquestioner » Fri Apr 19, 2019 10:58 am

You don’t owe her responses. She’s a salesperson, period.

$150k is not material for someone making high 6 figures. If you must have an advisor hire PAS, live below your means and you’ll create generational wealth.

Topic Author
investingdeacon
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Re: Fire my financial advisor now or later? (recent windfall help needed)

Post by investingdeacon » Fri Apr 19, 2019 11:12 am

JoinToday wrote:
Fri Apr 19, 2019 10:30 am
investingdeacon wrote:
Fri Apr 19, 2019 8:45 am
...
My question pertains to how I ought to invest a recent windfall of $150k. ....
....
I have connections to Merrill Lynch through my family, who have used them as investment advisors for generations. Because of this, my AUM fee is supposedly much lower than a typical client of my current net worth, as I'm only being charged 0.75%.
.....

- 32 years old, married w/ 2 young kids
- Earn high 6 figures
- Only debt is my mortgage, which is high 6 figures but interest is 3.75%
- Already funded my 401k for the year
- Fully funded my HSA and invested it in VTI
- In the past month I invested $60K in VTSAX and $25k in VBTLX on my own in my Vanguard taxable brokerage account (which I realize doing the VBTLX may not have been the smartest to put there, still learning). Financial advisor doesn't know this.

Here is what my financial advisor is proposing:
- open 529 accounts for my kids, put $4k each kid from each spouse to get things going
- invest the remaining $134k in a Merrill Lynch CIO Equity ETF aggressive growth fund
- consider smaller amounts in some Leveraged Index Return Notes to "get alpha" - proposed a 3 year & 5 year LIRN from ScotiaBank.

I have pushed back on her a bit, telling her that from my reading that my overall goal is to maximize my long-term returns and that I continue to read that over a long period of time, almost everything underperforms a total stock market index such as VTSAX even on a gross basis, add on top of that AUM fees that I will be charged every year which will further lower my returns. I told her that at the current moment I am unconvinced that my best course of action is anything other than investing in low cost index funds.

Her response was that she agrees that mutual funds and total stock market index funds are a good way for most people to do lower income investing. She agreed that the bulk of my portfolio should be in indexes, and that the ML CIO Equity ETF isn't really trying to beat the market, rather it is a form of a "managed passive strategy" that monitors the index by subdividing it into sectors which gives us more flexibility for tax loss harvesting over a total stock market index. She said that by over or underweighting certain sectors of the market based on their research they hope to slightly outperform the market enough to justify the fees.

She also pointed out that in a fund such as VTSAX there is internal turnover of ~3% per year for which I may owe substantial capital gains taxes on every year even if I am just holding the fund. Is this true? Even so, wouldn't this be true with the fund she is proposing also?

She said that for someone of my high income, it is important to consider all the various things we can do to minimize my tax burden, and this equity ETF as well as other tax loss harvesting strategies will allow me to do that.

My questions

Q1: Her reasoning about the tax loss harvesting flexibility with the basket of ETFs does make sense to me. However, knowing what I know, I think I'm still risking that this fund will underperform over the long haul, so should that be a dealbreaker?

Q2: Am I being foolish investing some of my money with her at ML while I'm still "learning the ropes?" I know that paying a 0.75% AUM fee over the long haul isn't best, but for right now it's only costing me $1125 and if her advice helps steer me out of trouble or out of big taxable events, perhaps the advice is worth it in the short term?

Q3: If I decide in a year or so, after learning more and becoming more confident, that I want to move away from ML and go on my own, how messy will that be from a tax perspective? Say I want to move all my holdings to Vanguard that I currently had at ML.

Q4: How important is tax loss harvesting when considering your overall returns?

Q5: Once I do decide where/how to invest the money, do you recommend dollar cost averaging it in over the next year or lump sum? My advisor said that because market is at all time highs it may be smarter to DCA.

Q6: Any other advice you have I would greatly appreciate! Thank you!
a. What is high 6 figure income? $700K - $999K? or did you mean low 6 figure income, $100K - $300K. If you meant high six figure, I am having trouble why you consider $150K much of a windfall compared to your income

b. read about tax efficient asset location in the wiki.

c. once you start acquiring assets, 0.75% will add up. Why pay someone 0.75% when there are better & cheaper alternatives? DIY or Vanguard PAS

Q2, Q3: The problem with advisors is if they put you in an inappropriate fund (higher fees, higher turnover, not tax efficient, not diversified), it can be costly if you need to do a course correction (move to appropriate index funds) due to taxes on capital gains.

Q4: Tax loss harvesting: saves me a few $K per year in taxes. Free money, but it won't make the difference between beach front property and inner city housing.

Advisor is more concerned about loosing a client that looking out for your welfare. Cut ties, move to vanguard, 3 fund portfolio.
a. Yes high six figure, but this just became a reality as of 3 months ago (just became business owner, was previously making low six figure), so right now a $150k windfall is significant to my net worth.

b. thanks

c. I agree. Just need confirmation from people who have been doing this longer than I have. I think my confidence lags behind my knowledge and I am fearing the unknown and making mistakes, but what eats at me is that I know that this is what I probably should/need to do.

Yes, I do think she is more concerned about losing me than my ultimate welfare. Thank you for your help.

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Re: Fire my financial advisor now or later? (recent windfall help needed)

Post by pkcrafter » Fri Apr 19, 2019 11:14 am

Welcome, Investingdeacon,

The first thing to remember is this windfall is your money, not your family's money or ML's money. You have landed on the Bogleheads site and that is very fortunate for you. So, I suggest you do nothing with the windfall money until you realize the decisions you make should be the ones best for you, not the family or the ML advisor.

With that, I suggest you research our website, learn about costs and simple investing before deciding whether you want to help any advisor buy their new retirement home.

Getting Started

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

Three fund portfolio

viewtopic.php?f=10&t=88005

Costs

https://www.sec.gov/investor/alerts/ib_ ... penses.pdf

Yes, you can do it yourself.

You mentioned ML CIO (chief investment office) aggressive portfolio. Here is a look at moderately aggressive. It actually contains Vanguard funds plus a bunch of other funds.

https://www.ml.com/Publish/Content/appl ... thSize.pdf

I would not own a portfolio like this, especially in taxable.


Paul
Last edited by pkcrafter on Fri Apr 19, 2019 11:29 am, edited 1 time in total.
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Re: Fire my financial advisor now or later? (recent windfall help needed)

Post by diy60 » Fri Apr 19, 2019 11:28 am

investingdeacon wrote:
Fri Apr 19, 2019 8:45 am
- invest the remaining $134k in a Merrill Lynch CIO Equity ETF aggressive growth fund
OP, welcome the forum.

Here is a link to her proposed investment vehicle. It doesn't look like something any informed DIY investor would ever consider. Stick to the straight up low cost index funds or related ETFs. You can TLH on your own just using the low cost index funds and ETFs.

https://olui2.fs.ml.com/MLIAP/MLIAPView ... leColorPDF

Good luck.

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Re: Fire my financial advisor now or later? (recent windfall help needed)

Post by neilpilot » Fri Apr 19, 2019 11:29 am

investingdeacon wrote:
Fri Apr 19, 2019 8:45 am
....I have connections to Merrill Lynch through my family, who have used them as investment advisors for generations. Because of this, my AUM fee is supposedly much lower than a typical client of my current net worth, as I'm only being charged 0.75%.
In the end, you should determine the real cost of the FA compared to the expected benefits. I was formerly with ML, at the same AUM rate. I then determined that I was actually paying a bit more than that 0.75% when I looked at the elevated fees of the various investments when compared to the typical 3+ index fund portfolio I would maintain in a self-managed account. I went from 0.75% plus about 0.85% in average ERs to my current average ER of under 0.2%.

In your case, given $150k under management, that would equate to a savings of just in excess of $2k/year. Is the FA worth $2k/yr to you?

BTW, I quit my FA back before the tax laws changed, so at least the AUM fee was a tax deduction. You no longer have that option.

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Re: Fire my financial advisor now or later? (recent windfall help needed)

Post by Katietsu » Fri Apr 19, 2019 11:32 am

Good Advice is worth paying for. Bad advice is a bad deal at any price. I do not think you were told anything useful. Some things she said were just wrong.

Personally, I would probably do nothing for the next 6 months given your new information about your business. Well, I would move it out of ML away from the AUM and into a money market or savings account making over 2%. I would view $150,000 as a needed emergency fund given your career situation. I would then use some of what should be your great cash flow to invest, fund 529’s, etc.

Meet with a good tax planner/small business accountant now.

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Re: Fire my financial advisor now or later? (recent windfall help needed)

Post by Frank Grimes » Fri Apr 19, 2019 1:50 pm

Not much to add, other than another Go Deacs!

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Re: Fire my financial advisor now or later? (recent windfall help needed)

Post by Mr.BB » Fri Apr 19, 2019 2:04 pm

Ask her to supply examples of her funds are doing compared to a total vsic index fund. Demand some examples. How has it done maximizing alpha? How long is this fund been around? How is it doing right now compared to the rest of the market?
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Re: Fire my financial advisor now or later? (recent windfall help needed)

Post by Dottie57 » Fri Apr 19, 2019 2:04 pm

Please don’t let anyone talk you into An AUM (assets under management) arrangement. No front loads or 12b-1.

Advisors don’t have a secret sauce to pour on your investments to ensure better results. You don’t owe anyone an answer. You should learn to say a “No” with finality in your voice. Answer any further questions from the advisor with a “i said No”.
You want liquidity so no investments which cannot be sold and funds received within a day or two.

When you say you want to maximize returns you open up yourself to persuasive sales speak. Noone can maximize with certainty. Bogleheads accept market results (index results). We akbowledge trying to beat the market is not possible for 99.99%.

Using indexes has given me a slightly early retirement.

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Re: Fire my financial advisor now or later? (recent windfall help needed)

Post by TomatoTomahto » Fri Apr 19, 2019 2:21 pm

She also pointed out that in a fund such as VTSAX there is internal turnover of ~3% per year for which I may owe substantial capital gains taxes on every year even if I am just holding the fund. Is this true?
She’s either a liar, incompetent, or maybe she’s hiding behind the word “may.” We have a bunch of VTSAX. Highest tax bracket. Not an issue.
Okay, I get it; I won't be political or controversial. The Earth is flat.

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Re: Fire my financial advisor now or later? (recent windfall help needed)

Post by WoodSpinner » Fri Apr 19, 2019 2:41 pm

Have you looked at the CIO Fund she is suggesting?
https://olui2.fs.ml.com/MLIAP/MLIAPView ... leColorPDF

This is a fund of funds — but I don’t see any mention of the Expense Ratio or expected Dividends or Capital Gain history. Couldn’t find it on Morningstar.

Puzzled how this fund of funds would be helpful for Tax Loss Harvesting? Seems like it would make it MUCH harder.

Also, you haven’t mentioned investment plans into Tax Deferred accounts? Are you making that space out?

WoodSpinner

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Re: Fire my financial advisor now or later? (recent windfall help needed)

Post by 09deaconX » Fri Apr 19, 2019 2:45 pm

Mr.BB wrote:
Fri Apr 19, 2019 2:04 pm
Ask her to supply examples of her funds are doing compared to a total vsic index fund. Demand some examples. How has it done maximizing alpha? How long is this fund been around? How is it doing right now compared to the rest of the market?
Using the fund the OP referenced (https://olui2.fs.ml.com/MLIAP/MLIAPView ... leColorPDF) as the basis, we can estimate that. Feel free to double check my math:

This fund looks like its inception was just 2009 (how convenient for their marketing purposes). Looking at their 10 year annualized gross returns (given in that report at 13.0% from 4/1/09 to 3/31/19), when I pull up VTSAX and do a quick calc I'm seeing 13.6% gross returns (closing price of 19.65 on 4/1/09 and then 70.43 on 3/31/19. So it looks you would have given up an extra 0.6% in gross returns annually compared to VTSAX. And THEN you take into account their higher expenses. :oops: :oops:

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Re: Fire my financial advisor now or later? (recent windfall help needed)

Post by nedsaid » Fri Apr 19, 2019 3:05 pm

investingdeacon wrote:
Fri Apr 19, 2019 8:45 am
Hello Bogleheads,

This is my first post. I'm new to investing and thankful to live in an age where great ideas can be shared freely on the internet.

Nedsaid: Welcome to the forum and thank you for posting. Real life situations posted by people seeking advice are a big part of what makes the forum interesting.

My question pertains to how I ought to invest a recent windfall of $150k. Right now that money is sitting in a Merrill Lynch money market brokerage waiting for my action.

Nedsaid: You don't HAVE to do anything right now. Perhaps you could let it sit and mentally get adjusted to the windfall. Maybe allow 6 months to let emotions cool off. We feel pressure to do something but sometimes inaction is the best policy.

I have connections to Merrill Lynch through my family, who have used them as investment advisors for generations. Because of this, my AUM fee is supposedly much lower than a typical client of my current net worth, as I'm only being charged 0.75%. I know that long term my best strategy is to probably go it on my own, but as I'm still learning about investing, I'm not sure I'm completely comfortable doing that yet.

Nedsaid: That is okay. Advisors can be like training wheels on a bike. Learn what you can from them and later go out on your own. The thing is, you need to be getting value for your money and a 0.75% annual Assets Under Management arrangement is a high hurdle to overcome, that is if you want to match or beat the benchmark indexes.


I have begun reading the Bogleheads Guide to Investing, JL Collins stock series blog, listen to ChooseFI, etc. I am slowly absorbing all of these things. Let's get right to my questions. Before, here are some quick stats that may be helpful for you to know.

- 32 years old, married w/ 2 young kids
- Earn high 6 figures
- Only debt is my mortgage, which is high 6 figures but interest is 3.75%
- Already funded my 401k for the year
- Fully funded my HSA and invested it in VTI
- In the past month I invested $60K in VTSAX and $25k in VBTLX on my own in my Vanguard taxable brokerage account (which I realize doing the VBTLX may not have been the smartest to put there, still learning). Financial advisor doesn't know this.

Here is what my financial advisor is proposing:
- open 529 accounts for my kids, put $4k each kid from each spouse to get things going
- invest the remaining $134k in a Merrill Lynch CIO Equity ETF aggressive growth fund
- consider smaller amounts in some Leveraged Index Return Notes to "get alpha" - proposed a 3 year & 5 year LIRN from ScotiaBank.

Nedsaid: The 529 account idea above is the only one here that I like. Aggressive Growth is the rage right now as we have been in a Large Growth market for just over a decade now. Doesn't seem like the time to make an Aggressive Growth investment. The advisor's recommendations for your other investments smacks of yield chasing, interest rates have been low for a decade now and everyone and their brother knows this. Too much performance chasing going on out there.

I have pushed back on her a bit, telling her that from my reading that my overall goal is to maximize my long-term returns and that I continue to read that over a long period of time, almost everything underperforms a total stock market index such as VTSAX even on a gross basis, add on top of that AUM fees that I will be charged every year which will further lower my returns. I told her that at the current moment I am unconvinced that my best course of action is anything other than investing in low cost index funds.

Nedsaid: If you believe this, then you have outgrown your advisor. The indexes are hard to beat. The main rationale for retaining an advisor is to help keep you from making behavioral mistakes and help in portfolio construction. Pretty much, if I were responsible for someone else's money, I would invest it in both a more conservative and a simpler manner than I do for myself. No reason for overly complex portfolios.

Her response was that she agrees that mutual funds and total stock market index funds are a good way for most people to do lower income investing. She agreed that the bulk of my portfolio should be in indexes, and that the ML CIO Equity ETF isn't really trying to beat the market, rather it is a form of a "managed passive strategy" that monitors the index by subdividing it into sectors which gives us more flexibility for tax loss harvesting over a total stock market index. She said that by over or underweighting certain sectors of the market based on their research they hope to slightly outperform the market enough to justify the fees.

Nedsaid: Advisors are starting to see the light and my suspicion is that their role will have to shift towards investor education and investor behavior rather than trying to beat the market indexes. Tax loss harvesting is a viable tactic but in my view not a good long term strategy as you invest to make money and not lose it. Take advantage of tax loss harvesting when the opportunity presents itself but it should be a means to the end and not the goal itself. Tactical asset allocation looks great in theory but is much harder to carry out in real life. Vanguard closed such a fund for lack of success.

She also pointed out that in a fund such as VTSAX there is internal turnover of ~3% per year for which I may owe substantial capital gains taxes on every year even if I am just holding the fund. Is this true? Even so, wouldn't this be true with the fund she is proposing also?

Nedsaid: This is pretty low turnover and a Total Market Index will be pretty darned tax efficient. Not perfect but vastly better than active funds which can have turnover of over 100%.

She said that for someone of my high income, it is important to consider all the various things we can do to minimize my tax burden, and this equity ETF as well as other tax loss harvesting strategies will allow me to do that.

Nedsaid: Well, maybe. Easier said than done.


My questions

Q1: Her reasoning about the tax loss harvesting flexibility with the basket of ETFs does make sense to me. However, knowing what I know, I think I'm still risking that this fund will underperform over the long haul, so should that be a dealbreaker?

Nedsaid: There might be some benefit from tax loss harvesting. Another thing that you have to take into consideration is the infamous "Nedsaid Effect." Investments that you sell will tend to outperform the investments that you buy to replace them. You will see the ratio of incorrect sell/buy decisions outweigh the correct sell/buy decisions at a 2:1 even a 3:1 ratio. You are making the bet that investment B that you just bought will outperform investment A that you just sold. Not a good bet as markets are pretty darned efficient.

Q2: Am I being foolish investing some of my money with her at ML while I'm still "learning the ropes?" I know that paying a 0.75% AUM fee over the long haul isn't best, but for right now it's only costing me $1125 and if her advice helps steer me out of trouble or out of big taxable events, perhaps the advice is worth it in the short term?

Nedsaid: How is the portfolio actually performing? If your advisor is significantly trailing the benchmarks, even after taking into consideration the 0.75% AUM Fee, you might want to move. Most portfolio managers can't beat the market benchmarks, my guess is that your advisor has less skill than the portfolio managers. Her guesses on how to outperform the markets are as good as yours.

Q3: If I decide in a year or so, after learning more and becoming more confident, that I want to move away from ML and go on my own, how messy will that be from a tax perspective? Say I want to move all my holdings to Vanguard that I currently had at ML.

Nedsaid: Brokerages are required to keep track of your tax basis. Unless you have old holdings that you owned before 2011 or so, Merrill Lynch should have that information. Odds are that they have cost information on holdings purchased before then. You need to know what your potential capital gains are if you need to liquidate some holdings.

Q4: How important is tax loss harvesting when considering your overall returns?

Nedsaid: It is important. But remember this, you invest money to make money, not to generate losses. Tax loss harvesting is an important technique but it is not the goal.

Q5: Once I do decide where/how to invest the money, do you recommend dollar cost averaging it in over the next year or lump sum? My advisor said that because market is at all time highs it may be smarter to DCA.

Nedsaid: The academic literature says to invest the money all at once. There might be good psychological reasons to dollar cost average it in over time. No one likes to see their investment drop in value soon after purchase. I agree with the advisor here, average the money into the markets over time, probably a year. My recommendation is to avoid buyer's remorse.

Q6: Any other advice you have I would greatly appreciate! Thank you!
A fool and his money are good for business.

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Re: Fire my financial advisor now or later? (recent windfall help needed)

Post by CedarWaxWing » Fri Apr 19, 2019 3:17 pm

barnaclebob wrote:
Fri Apr 19, 2019 10:18 am


Welcome,

They eye rolls start as soon as you say what her response is. Especially this: "managed passive strategy" as its complete non speak meant to passivate and/or confuse you. An internal turnover of 3% is hardly anything and you will be in the top tax bracket pretty much no matter what you do aside from donating everything to charity.

You should definitely consider strategies to minimize your taxes. And for that you want a good tax planner that you pay by the hour, not a used car salesman err I mean a financial planner.

We are hard on financial planners here and paint them as near demons which conflicts with the fact that the vast majority of them are probably good people who think they are doing good and believe in their products. She probably isn't intentionally misleading you or anything and trying to do the best given her line of products and sales requirements from the company. But that doesn't mean there isn't something better.

In reality 150k for someone making high 6 figures is small potatoes in the long run. Even if you meant high five figures its a good boost but not life changing. Don't be afraid of your money, be empowered by it. You are off to a great start DIY. Start making a spreadsheet of how you would allocate your money. Once its on a spreadsheet and you are comfortable with that then you'll be just as fine seeing those same numbers when you login to your account.
BarnacleBob: I think you are way too kind in giving the benefit of the doubt to this so called FA, so you must be one heck of a nice guy!

She knows what her job is, and she knows who she is supposed to satisfy... her company comes first.

These companies are looking for people like that to represent their products, and they don't want the smartest folks ... they want the folks who are able to speak in full sentences, and able to parrot exactly what they are told to say without questioning the value of their products. That is what that work environment/culture rewards.

If she does not understand the harm she is doing to people.... she is also either not able to understand how investing works, or is simply less than honest. Either way in the long term allowing her to take over a significant amount of money is not likely to be an optimal decision.

When I was too young to invest I did listen to the news a lot... and it seemed to me the Merill Lynch was in the news a great deal in those days for breaking the law. Why they are still in business is amazing to my perspective that formed not only in those years, but is reinforced every time I hear about them in the news again.

https://duckduckgo.com/?q=merill+lynch+ ... 4-1&ia=web

https://www.consumeraffairs.com/finance/merrill.html
Don't just look at the stars... look as the wording in their complaints. Dishonesty is rampant at Merrill Lynch.



“It is difficult to get a man to understand something, when his salary depends on his not understanding it.” Upton Sinclair.

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Re: Fire my financial advisor now or later? (recent windfall help needed)

Post by barnaclebob » Fri Apr 19, 2019 3:28 pm

CedarWaxWing wrote:
Fri Apr 19, 2019 3:17 pm
BarnacleBob: I think you are way too kind in giving the benefit of the doubt to this so called FA, so you must be one heck of a nice guy!

She knows what her job is, and she knows who she is supposed to satisfy... her company comes first.

These companies are looking for people like that to represent their products, and they don't want the smartest folks ... they want the folks who are able to speak in full sentences, and able to parrot exactly what they are told to say without questioning the value of their products. That is what that work environment/culture rewards.

If she does not understand the harm she is doing to people.... she is also either not able to understand how investing works, or is simply less than honest. Either way in the long term allowing her to take over a significant amount of money is not likely to be an optimal decision.

When I was too young to invest I did listen to the news a lot... and it seemed to me the Merill Lynch was in the news a great deal in those days for breaking the law. Why they are still in business is amazing to my perspective that formed not only in those years, but is reinforced every time I hear about them in the news again.

https://duckduckgo.com/?q=merill+lynch+ ... 4-1&ia=web

https://www.consumeraffairs.com/finance/merrill.html
Don't just look at the stars... look as the wording in their complaints. Dishonesty is rampant the Merrill Lynch.



“It is difficult to get a man to understand something, when his salary depends on his not understanding it.” Upton Sinclair.

Many people benefit from financial advisors. There are a lot of people who wouldn't be as disciplined with saving or pick bad investments. If you can't be disciplined and ignore the fear mongering de jour then DIY is probably not a good choice.

I was in a scout troop where one of the dads was in the first 100 Edward Jones salesmen hired by the company and had ridden his way up to a high level executive position. He was a great guy. Most people who work for questionable companies are decent people and there are ethical concerns in just about any part of a capitalist society.

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Re: Fire my financial advisor now or later? (recent windfall help needed)

Post by DesertDiva » Fri Apr 19, 2019 3:36 pm

Here's a good read for you (if you haven't seen it already): https://www.bogleheads.org/wiki/Managing_a_windfall

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Re: Fire my financial advisor now or later? (recent windfall help needed)

Post by David Jay » Fri Apr 19, 2019 3:57 pm

It appears that the ER on the CIO fund is .54 If this is the product: https://antiochianprodsa.blob.core.wind ... MF&ETF.pdf

Note on page 3, the strategy performance compared to sector is +.24 before fees, -.30 after fees.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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Re: Fire my financial advisor now or later? (recent windfall help needed)

Post by JBTX » Fri Apr 19, 2019 4:26 pm

Take it all right now, open a vanguard brokerage account and put it in a vanguard target date fund or vanguard life strategy fund. Done.

As you learn more you may choose to vary from that, but that gets you 90% of the way there, the rest is fine tuning.

I'd avoid going with the advisor because she is putting you in unconventional stuff and then you will have to wind it down once you leave. You may have to pay an upfront load which will then be money down the drain.

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Re: Fire my financial advisor now or later? (recent windfall help needed)

Post by CedarWaxWing » Fri Apr 19, 2019 4:46 pm

barnaclebob wrote:
Fri Apr 19, 2019 3:28 pm
CedarWaxWing wrote:
Fri Apr 19, 2019 3:17 pm
BarnacleBob: I think you are way too kind in giving the benefit of the doubt to this so called FA, so you must be one heck of a nice guy!

She knows what her job is, and she knows who she is supposed to satisfy... her company comes first.

These companies are looking for people like that to represent their products, and they don't want the smartest folks ... they want the folks who are able to speak in full sentences, and able to parrot exactly what they are told to say without questioning the value of their products. That is what that work environment/culture rewards.

If she does not understand the harm she is doing to people.... she is also either not able to understand how investing works, or is simply less than honest. Either way in the long term allowing her to take over a significant amount of money is not likely to be an optimal decision.

When I was too young to invest I did listen to the news a lot... and it seemed to me the Merill Lynch was in the news a great deal in those days for breaking the law. Why they are still in business is amazing to my perspective that formed not only in those years, but is reinforced every time I hear about them in the news again.

https://duckduckgo.com/?q=merill+lynch+ ... 4-1&ia=web

https://www.consumeraffairs.com/finance/merrill.html
Don't just look at the stars... look as the wording in their complaints. Dishonesty is rampant the Merrill Lynch.



“It is difficult to get a man to understand something, when his salary depends on his not understanding it.” Upton Sinclair.

Many people benefit from financial advisors. There are a lot of people who wouldn't be as disciplined with saving or pick bad investments. If you can't be disciplined and ignore the fear mongering de jour then DIY is probably not a good choice.

I was in a scout troop where one of the dads was in the first 100 Edward Jones salesmen hired by the company and had ridden his way up to a high level executive position. He was a great guy. Most people who work for questionable companies are decent people and there are ethical concerns in just about any part of a capitalist society.
I agree that most people are decent people... and they are also influenced by the corporate culture where they work, and have to sell the product line that is offered to them.

The same is true of people who work for very ethical mutual fund companies who try to put their customers interests first, or at least try to make sure that there are no conflicts of interest. Merrill Lynch does is not one of those companies, and has not been for at least the last 40 years when I first heard of them. The saleswoman of discussion may be a great girl scout leader and a great person outside of work... but the evidence available to us would suggest she is not looking out for the OPs best interests as far as I can tell. Unfortunately the financial industry is a bit over stocked with situations like the one described, so I guess buyer beware applies, as the ethical standards in many companies is that if it is legal it is ok.

I think VG would be a great place for the OP to go to... and a few others are fine also, but VG for me has never demonstrated any conflicts of interest in dealing with me... so I tend to recommend them over most other low cost MF companies. No bait and switch, no AUM unless one uses PAS at 0.3%, among the lowest fees in the country ... but they did it first and for the right reasons based on their over all business model.


I have friends and relatives who are so called "FA"s... all nice outgoing "great persons" outside of work... but I would never hand over my money to them to invest on my behalf, nor would I trust them to even know how to give good advice, let alone put my interests first. None of them had any real financial expertise before starting their jobs, and they do mean well, but what they "know" about finance and investing... is based on them trusting their employers. One of them left that job at one of these FA companies (not ML or EJ) which I will not name but most anyone here would know the name if I released it... because she was felt she did want to do what was best for the customer... and felt she would not be able to advance financially if she put their interests first. She was correct in that perspective based on other folks I know (and talk to) who work there.

Glad your Boy Scout leader was a great guy... so was mine. His motto as a mortician was... "its hard to not smile at a 5k funeral" when I once asked him how he could be so smiley all the time in light of his chosen work.

I suspect that ML gives prizes or bonuses for sales performance, but not for the person who simply achieves the highest risk adjusted after tax returns over a multi year (10-20) period for his/her customers. Nor do they wish for employees to explain that one of the most prominent damper on total returns over a long period of time is high costs of investing. The lasts thing they want is a financially literate confident client who will ask inconvenient questions. Vanguard thrives on people asking the right questions, and this egalitarian list is one of their best (and most critical perhaps) promoters.

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Re: Fire my financial advisor now or later? (recent windfall help needed)

Post by Mr.BB » Fri Apr 19, 2019 6:16 pm

09deaconX wrote:
Fri Apr 19, 2019 2:45 pm
Mr.BB wrote:
Fri Apr 19, 2019 2:04 pm
Ask her to supply examples of her funds are doing compared to a total vsic index fund. Demand some examples. How has it done maximizing alpha? How long is this fund been around? How is it doing right now compared to the rest of the market?
Using the fund the OP referenced (https://olui2.fs.ml.com/MLIAP/MLIAPView ... leColorPDF) as the basis, we can estimate that. Feel free to double check my math:

This fund looks like its inception was just 2009 (how convenient for their marketing purposes). Looking at their 10 year annualized gross returns (given in that report at 13.0% from 4/1/09 to 3/31/19), when I pull up VTSAX and do a quick calc I'm seeing 13.6% gross returns (closing price of 19.65 on 4/1/09 and then 70.43 on 3/31/19. So it looks you would have given up an extra 0.6% in gross returns annually compared to VTSAX. And THEN you take into account their higher expenses. :oops: :oops:
And that is in a bull market! I think you just answered that question.
"We are what we repeatedly do. Excellence, then, is not an act, but a habit."

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Re: Fire my financial advisor now or later? (recent windfall help needed)

Post by Mr.BB » Fri Apr 19, 2019 6:17 pm

In a nut shell...the more complicated a financial plan is, the less beneficial it is to you!
"We are what we repeatedly do. Excellence, then, is not an act, but a habit."

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Re: Fire my financial advisor now or later? (recent windfall help needed)

Post by Jack FFR1846 » Fri Apr 19, 2019 7:17 pm

The market hits a new all time high, on average, every 18 days. If you're scared that we're at an all time high, move your money and invest....then wait 3 weeks (on average).

Oh, and also....you're paying way more than I do for my entire portfolio.......of $2.4M.
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Re: Fire my financial advisor now or later? (recent windfall help needed)

Post by prudent » Fri Apr 19, 2019 7:23 pm

I don't see any benefit to asking the advisor to justify her position with numbers. She will promise to get back to you, the back office people will feed her a bunch of carefully curated and incomprehensible data that "proves" her right, and then what? Is anyone's mind going to be changed? No.

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Re: Fire my financial advisor now or later? (recent windfall help needed)

Post by NYCwriter » Fri Apr 19, 2019 11:52 pm

Everyone added .02, here's mine, as someone who also got a small windfall.

I have a sizable taxable and Roth at Vanguard, outside of my employment retirement accounts. A chunk of that came from a small inheritance windfall from several years ago. It's a lot larger now. Total Stock is very tax efficient. Muni bond fund in taxable for my high tax state. Done. The only management I need is the self-control to leave it alone. I spent some time on this forum, applied some tax efficiency across my retirement accounts, and increased my retirement contributions to accommodate the increase in taxable.

Your FA knows that once you set up accounts and turn over some control to advisors, it's harder to change things down the line. I'd go as far as to say they are tapping into some expected anxiety, which is fairly common with any windfall. That you're here suggests you have the wherewithal to ask questions, and that's a good thing.

Don't overcomplicate things. In retrospect, I spent too much time agonizing, but the end result was simplicity that saved me a lot of money in fees.

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Re: Fire my financial advisor now or later? (recent windfall help needed)

Post by inbox788 » Sat Apr 20, 2019 6:04 am

investingdeacon wrote:
Fri Apr 19, 2019 8:45 am
My question pertains to how I ought to invest a recent windfall of $150k.
Easy, transfer the cash over to Vanguard and put it in VTSMX. In 3 years, compare to how the family is doing with ML. Bet you will be beating them by a wide margin.
I have connections to Merrill Lynch through my family, who have used them as investment advisors for generations.
You must come from old money that's been at ML Wealth Management for a long time. After you see how easy and much better you can do, maybe you can invest the family money and charge 0.75% for your services, and they'll still come out ahead.
Financial advisor doesn't know this.
Don't worry. Use this account and compare to any account that he's managing (hopefully not yours, but other family members). If you have the funds, you can look back some years and see how he has done against VTI or a 3 fund portfolio.
- open 529 accounts for my kids, put $4k each kid from each spouse to get things going
Where? At ML? NO! Their FUND FEES are too HIGH! What state are you in? Is there a tax deduction? How did you arrive at $4k x2 kids x2 parents = $16k? Seems arbitrary. Why not more or less? Depending on your commitment to college, you can do up to 5 years max at once -- great if you have the cash, but given the amounts you have, think about maxing out one year $15x2x2=$60k (you can do much more, but requires more gift tax paperwork at tax time). It's the equivalent to Roth as far as withdraws for education uses and you'll have over a decade of growth opportunity. Choose funds with TOTAL expense fees around 0.10. Vanguard 529 (Nevada) is always available for comparison even if you don't choose to use it.
- invest the remaining $134k in a Merrill Lynch CIO Equity ETF aggressive growth fund
Awful choice!!! https://olui2.fs.ml.com/MLIAP/MLIAPView ... leColorPDF
You're paying 0.75 management fees, Merrill Lynch Fee Rate of 2.00% plus the maximum Style Manager Expense Rate, and it's likely the "passive index" funds they're using also add fees. Fees wrapped around fees wrapped around more fees. And look at the 10 year performance. While the fund matches this "style index" 12%, net 9% is what you get and that is almost 3% less!!! And I'm not sure they don't take the 0.75 management fees on top of that. Oh, and how did the SP500 do the last 10 years? 13%! And you can get almost all of it by keeping your fees low. https://dqydj.com/sp-500-return-calculator/
- consider smaller amounts in some Leveraged Index Return Notes to "get alpha" - proposed a 3 year & 5 year LIRN from ScotiaBank.
Do you know what these are? I have no clue, but sounds complicated and risky.
I have pushed back on her a bit, telling her that from my reading that my overall goal is to maximize my long-term returns and that I continue to read that over a long period of time, almost everything underperforms a total stock market index such as VTSAX even on a gross basis, add on top of that AUM fees that I will be charged every year which will further lower my returns. I told her that at the current moment I am unconvinced that my best course of action is anything other than investing in low cost index funds.
Don't tell her anything, just do what you need to do. Are there other investments she's managing? If not, you don't need to talk to her at all if you're not buying what she's selling. Sales Advisor is a more appropriate title, not too different than at department stores.
a "managed passive strategy"
LOL!
Her reasoning about the tax loss harvesting flexibility with the basket of ETFs does make sense to me.
IMO, your premise is wrong.
Am I being foolish investing some of my money with her at ML while I'm still "learning the ropes?" I know that paying a 0.75% AUM fee over the long haul isn't best, but for right now it's only costing me $1125 and if her advice helps steer me out of trouble or out of big taxable events, perhaps the advice is worth it in the short term?
Yes. She's stirring you into trouble. Most management companies are just as bad and the only worse one is Edward Jones.
If I decide in a year or so, after learning more and becoming more confident, that I want to move away from ML and go on my own, how messy will that be from a tax perspective? Say I want to move all my holdings to Vanguard that I currently had at ML.
Ah, so you already know the trouble you're getting into. Why do something silly like that? Waste of time and money.
How important is tax loss harvesting when considering your overall returns?
IMO overated. It could even cost you depending on your tax brackets now and later if they go up. It's not a free lunch, just a discounted loan.
Once I do decide where/how to invest the money, do you recommend dollar cost averaging it in over the next year or lump sum? My advisor said that because market is at all time highs it may be smarter to DCA.
Wrong again. And may? or may not? You can't know until after the last DCA period which path was better. The better path is the smarter path.
Any other advice you have I would greatly appreciate! Thank you!
Transfer your money out of ML ASAP. You've taken the red pill and can see the truth, so start taking control. Avoid all future contact with ML advisor if you can avoid it.

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Re: Fire my financial advisor now or later? (recent windfall help needed)

Post by zeal » Sat Apr 20, 2019 6:22 am

As is posted very often around here:

"Once you know enough to pick a financial advisor, you won't need one."

Seems like you are at that point--you can manage this yourself. When you have questions, the answers are usually on the wiki. If you can't find the answer, post the question and someone will point you to it.

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Re: Fire my financial advisor now or later? (recent windfall help needed)

Post by ruralavalon » Sat Apr 20, 2019 9:25 am

Welcome to the forum :) .

Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) was an excllent choice for $60k of the $150k windfall, and would be an excellent choice for more. A turnover rate of 3% is tiny, the fund is very tax-efficient.

Her explanation of a different approach ( "a 'managed passive strategy' that monitors the index by subdividing it into sectors") sounds to me like complete nonsense. Do not use this person as an advisor.

You probably don't need anyone to manage your investments for a percentage of assets under management. You may want a planner to help you set up your portfolio for a fixed fee.

Here is a guide to help in deciding if you want or need an advisor: "The great paradox of using an advisor is that you must know some basics in order to evaluate the advice, and once you do, you also know enough to consider doing your own management." "Chapter 10 – On Your Own or Hire an Advisor".

1) You could post your financial details on this forum for ideas on investments and financial planning. Please see this for format: "Asking Portfolio Questions".

2) Vanguard offers a Personal Advisory Service, Fidelity and Schwab offer a similar service.

3) Harry Sit, who sometimes posts here, offers a service thru his blog to help people locate an advisor in their locality. "Advice-Only Search and Screening".

4) Two links for finding an advisor:
http://www.napfa.org/consumer/index.asp
http://www.garrettplanningnetwork.com/


Here is some more general advice on dealing with a windfall.
1) take your time, there is no rush;
2) temporarily park the money for a short time in a very safe place, such as federally insured savings accounts or federally insured short term CDs. A good resource for comparing rates is http://www.bankrate.com ;
3) educate yourself first. Here is a wiki article you could read to start educating yourself: "Bogleheads® investment philosophy. For a quick overview of investing basics for the new person read Dr. Bernstein's short book, "If You Can". I suggest reading one or two books on general investing. Wiki article, "Books: recommendations and reviews";
4) beware of anyone (family, friend, neighbor, co-worker, broker, banker, anyone at all) trying to sell anything (real estate, stocks, bonds, insurance, annuity, CDs, mutual fund, ETF, anything at all); and
5) make a plan first, then act.
Please see the wiki article, "Managing a Windfall".
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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Re: Fire my financial advisor now or later? (recent windfall help needed)

Post by zlandar » Sat Apr 20, 2019 10:29 am

You and your FA do not see eye-to-eye on some basic investment principles. I don't see the point of retaining her if you constantly second-guess her choices and motivation behind them.

Like other posters have mentioned using a FA that charges an AUM fee is extremely expensive over time. In her case it's $7500/year for every million. If you are earning a salary in the high six figures and putting a substantial amount away for retirement you will soon be paying her a 5-figure management fee every year.

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Re: Fire my financial advisor now or later? (recent windfall help needed)

Post by mhalley » Sat Apr 20, 2019 10:46 am

I don’t think anyone has discussed the Vbtlx yet. I like having some bonds in taxable. Wci also thinks it is fine, though many here don’t agree.

https://www.whitecoatinvestor.com/asset ... n-taxable/

The question is, should you be in taxable bonds or muni bonds. I think munis come out ahead at the 28% tax bracket, but I haven’t checked the tax equivalent yield in a while. Use one of the many calculators and see which is best for you. At high six figures, most likely it is munis.
As of 4/17/19, total bond sec yield is 2.93%, and int muni is 2.11%. You also need to see if there is a state muni for your state.
https://www.bankrate.com/calculators/re ... -tool.aspx

Kitces has a good article on the value of tax loss harvesting.
.while the benefit of tax loss harvesting is positive, it is not “huge” and is far smaller than “tax alpha” (calculated based on single-year tax savings alone) implies; with a 30% decline followed by 7% growth, the economic value of tax loss harvesting rises as high as almost 0.30%/year of additional annualized return equivalent at 15% tax rates (or 0.42% at 23.8% top capital gains rates), falling just below 0.20% and 0.30% (respectively) in the long run.
https://www.kitces.com/blog/evaluating- ... arvesting/

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Re: Fire my financial advisor now or later? (recent windfall help needed)

Post by grabiner » Sat Apr 20, 2019 3:28 pm

mhalley wrote:
Sat Apr 20, 2019 10:46 am
I don’t think anyone has discussed the Vbtlx yet. I like having some bonds in taxable. Wci also thinks it is fine, though many here don’t agree.

https://www.whitecoatinvestor.com/asset ... n-taxable/

The question is, should you be in taxable bonds or muni bonds. I think munis come out ahead at the 28% tax bracket, but I haven’t checked the tax equivalent yield in a while.
There is no 28% tax bracket now; the old 28% is now 24%.

However, the OP mentioned "high 6 figure income", implying a 35% or 37% tax bracket. At that tax rate, munis probably earn more after tax than taxable bonds of comparable risk. In addition, the extra tax cost on qualified dividends (taxed at 18.8% with the Net Investment Income Tax, or 23.8% in the top bracket) makes munis in taxable more attractive relative to stocks.

This is an easy issue to fix. You can sell the Total Bond Market Index, which won't have a large capital gain or loss, and buy a muni fund. Vanguard Intermediate-Term Tax-Exempt is a natural choice; it is similar in risk to Total Bond Market.
Wiki David Grabiner

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Re: Fire my financial advisor now or later? (recent windfall help needed)

Post by BL » Sat Apr 20, 2019 3:57 pm

You have gotten good advice. Don't let her invest in anything, since it will only be complicated and perhaps even difficult to get out of.

I suggest you have Vanguard "pull" everything from ML. Since they are the receiver, they have the incentive to get it done. If you tried to push out from ML, they have negative incentive to get it done, and may drag their feet as long as possible. It is ok to leave in a money market or similar low risk fund until you know what you want to do.

Vanguard has great muni bonds, and their Total stock market hasn't passed on any Capital Gains distributions in the ~15 years I have owned it there.

Moving to an online bank with high-yield savings is fine also as a short-time parking place. Just don't let them talk you into investing with them, as they are expensive and may want to sell you annuities, etc., as well.

You won't win an argument with a salesperson, so don't even bother. You won't change her mind, but she might manage to hook you since that is her specialty.

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investingdeacon
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Re: Fire my financial advisor now or later? (recent windfall help needed)

Post by investingdeacon » Tue Apr 23, 2019 3:54 pm

Ok Bogleheads, you've convinced me. What's the easiest way to have Vanguard request the funds and transfer them? Right now they are in a money market account at ML. I also have a Roth IRA there, is that easy/hard to transfer? Tax implications on the gains? Leave it? I guess it makes sense to just pull the Roth too if I'm going to pull the money from the money market account and just cut all ties.

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Re: Fire my financial advisor now or later? (recent windfall help needed)

Post by neilpilot » Tue Apr 23, 2019 4:03 pm

investingdeacon wrote:
Tue Apr 23, 2019 3:54 pm
Ok Bogleheads, you've convinced me. What's the easiest way to have Vanguard request the funds and transfer them? Right now they are in a money market account at ML. I also have a Roth IRA there, is that easy/hard to transfer? Tax implications on the gains? Leave it? I guess it makes sense to just pull the Roth too if I'm going to pull the money from the money market account and just cut all ties.
If taxable account is all MM, then it might be easiest to just have ML cut you a check. As for Roth, if you want to move it to Vanguard you will like need to liquidate it's assets first. No tax implication on any gains in a tIRA or Roth.

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Re: Fire my financial advisor now or later? (recent windfall help needed)

Post by nedsaid » Tue Apr 23, 2019 4:44 pm

investingdeacon wrote:
Tue Apr 23, 2019 3:54 pm
Ok Bogleheads, you've convinced me. What's the easiest way to have Vanguard request the funds and transfer them? Right now they are in a money market account at ML. I also have a Roth IRA there, is that easy/hard to transfer? Tax implications on the gains? Leave it? I guess it makes sense to just pull the Roth too if I'm going to pull the money from the money market account and just cut all ties.
If you have investments in a taxable account with imbedded capital gains, have Vanguard do an in-kind transfer for whatever will transfer. Some things will not, for example Institutional shares in a mutual fund usually do not or a Merrill Lynch house fund will not. Figure out what your potential capital gains and your Federal and State tax bill before you pull the trigger. Let Vanguard do all the work, no reason for you to interact with your financial advisor.
A fool and his money are good for business.

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Re: Fire my financial advisor now or later? (recent windfall help needed)

Post by 3-20Characters » Wed Apr 24, 2019 12:57 am

investingdeacon wrote:
Tue Apr 23, 2019 3:54 pm
Ok Bogleheads, you've convinced me. What's the easiest way to have Vanguard request the funds and transfer them? Right now they are in a money market account at ML. I also have a Roth IRA there, is that easy/hard to transfer? Tax implications on the gains? Leave it? I guess it makes sense to just pull the Roth too if I'm going to pull the money from the money market account and just cut all ties.
Transfer the Roth to vanguard. There are many threads on how to do this. I’m copying and pasting here from another thread.
Kevin M wrote:
Wed Jun 28, 2017 3:13 pm
The Vanguard trustee-to-trustee transfer form is available online. There's really no need to talk to anyone at Vanguard, but if you haven't done this before, it won't hurt. They may partially fill out the form for you, or perhaps walk you through it. Either way, you must fill out the form, sign it, and mail it to Vanguard. They will then fill in their part and mail it to the current custodian, who will then transfer the assets to Vanguard.

You'll want to check with your current custodian to see if they require a signature guarantee. It's rare, but some do. If so, this is the only hassle, since getting signature guarantees has become more difficult in recent years. There's a signature guarantee section on the Vanguard form, but the signature guarantee is not required unless your current custodian requires it.

Kevin
As for taxable, if it’s all really in money market, as others have said, it won’t matter how you get it over to vanguard. If you have to sell funds that have cap gains, follow advice given here but there may be some tax consequences. Get this done and move on. If your income is really in the high 6 figures, you look like a huge cash cow to them and they will do everything possible to hold on for the future profits. You are going to get bled dry and the “advice” that vtsax is not tax efficient is borderline sleazy. These advisors never cease to amaze me with their forked tounges.

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Re: Fire my financial advisor now or later? (recent windfall help needed)

Post by investingdeacon » Fri Apr 26, 2019 9:23 am

Initiated the transfer to Vanguard yesterday and already have 2 voicemails on my phone from Merrill Lynch.... gonna have to stay strong and stick to my guns!

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