Passive vs active for parent's retirement

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Bob_Sacamano
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Joined: Sat Dec 26, 2015 8:47 pm

Passive vs active for parent's retirement

Post by Bob_Sacamano » Sun Jul 14, 2019 2:56 pm

I opened a T-IRA for my parents in April 2015 and deposited their funds into VTTVX which is a Vanguard 2025 target retirement fund. The balance is now at 45k (6k net gain, 6.5% rate of return) to give you an idea of its performance thus far.

I am meeting with a financial advisor with Edward Jones on Wednesday. He's actually a family friend who can offer a friends/family discount for his services (0.15% for passive and 1.08% for active). This forum seems to follow the belief that active fund managers rarely outperform low cost index funds. Can someone provide some literature that I can present to make this case? Or should I in fact consider investing with Edward Jones given the discount? The advisor wants to increase the amount of international funds and have a 50/50 mix of stocks/bonds to limit risk.

dbr
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Re: Passive vs active for parent's retirement

Post by dbr » Sun Jul 14, 2019 3:20 pm

One thing for sure if 1.08% is after the discount, then investing this way because you are getting a discount does not compute. Your cost is not limited to the AUM but also includes the expense ratios of whatever funds you will be in and the internal trading costs in those funds that are not reported in the ER (about 1% for every 100% in turnover). Your actual cost in this deal can be 2% or more possibly even 3% compared to an all-in for a Vanguard Index Fund of maybe 0.1%-0.2%. No matter what the performance cost is a sure fire loss each year, every year.

Here are some references to previous discussion of this question here: https://www.google.com/search?sitesearc ... sive+funds

billfromct
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Re: Passive vs active for parent's retirement

Post by billfromct » Sun Jul 14, 2019 3:23 pm

This would be a big mistake because the EJ sales people will probably put your parent's funds into high cost (high expense ratio) funds and/or funds with "loads" or sales charges. Funds that have "loads" or sales charges take between 4.75%-5.25% off the top of the contribution. So if you initially contribute $1,000, only $9,475-$9,525 would actually be invested.

These sales people also put the money into many mutual funds to try to make the investment as complicated as possible so the client thinks that they really need a financial advisor to manage the complicated investment.

Don't even meet with the "family friend".

The Vanguard target date retirement funds generally have an expense ratio of about .15%.

The .15% or 1.08% EJ "assets under management" (AUM) fee is on top of the individual mutual fund expense ratio & sales charges.

bill
Last edited by billfromct on Sun Jul 14, 2019 8:28 pm, edited 3 times in total.

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GerryL
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Re: Passive vs active for parent's retirement

Post by GerryL » Sun Jul 14, 2019 3:24 pm

I think many people on this forum will tell you:
1) Don't mix friends with personal finance
2) Stay far away from Edward Jones.

Let me be the first.

increment
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Re: Passive vs active for parent's retirement

Post by increment » Sun Jul 14, 2019 3:30 pm

Bob_Sacamano wrote:
Sun Jul 14, 2019 2:56 pm
I am meeting with a financial advisor with Edward Jones on Wednesday. He's actually a family friend who can offer a friends/family discount for his services (0.15% for passive and 1.08% for active). This forum seems to follow the belief that active fund managers rarely outperform low cost index funds. Can someone provide some literature that I can present to make this case?
Present to whom? Will some literature that you get from an internet forum convince the advisor/salesman that his claims are wrong?

dbr
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Re: Passive vs active for parent's retirement

Post by dbr » Sun Jul 14, 2019 3:35 pm

Oh, I forgot to add in the load mentioned by a poster above.

So, let me pile on with the others:

1. Don't even think of going with EJ.

2. Don't even think of investing with a family friend.

3. 1. & 2 again.

As far as your question about active funds, you should read on the subject, but that issue really has little to do with why you should stay away from this broker. If you want an actively managed fund you could look at Wellesley or Wellington at Vanguard.

PS You are wasting your time to argue with the advisor. He couldn't care less what your arguments are and is skilled, trained, and experienced at defeating your arguments even if he is still wrong.

mhalley
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Re: Passive vs active for parent's retirement

Post by mhalley » Sun Jul 14, 2019 3:38 pm

Cancel the meeting. These guys are trained to counter any arguments you might come up with. Your parents won’t want to upset their friend, plus you suffer from “powdered butt syndrome”. This states that anyone who powdered your butt will never take your advice on matters of finance.
Why and who setup this meeting?
In the meantime, check out these articles on costs
https://investor.vanguard.com/investing ... t-of-costs
https://www.sec.gov/investor/alerts/ib_ ... penses.pdf
https://www.fool.com/retirement/2017/11 ... turns.aspx
https://www.thestreet.com/story/577399/ ... turns.html
Last edited by mhalley on Sun Jul 14, 2019 3:41 pm, edited 1 time in total.

Dottie57
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Re: Passive vs active for parent's retirement

Post by Dottie57 » Sun Jul 14, 2019 3:40 pm

GerryL wrote:
Sun Jul 14, 2019 3:24 pm
I think many people on this forum will tell you:
1) Don't mix friends with personal finance
2) Stay far away from Edward Jones.

Let me be the first.
Run away from Edward Jones. FAST!

Passive s a great way to go.

Dottie57
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Re: Passive vs active for parent's retirement

Post by Dottie57 » Sun Jul 14, 2019 3:42 pm

Dottie57 wrote:
Sun Jul 14, 2019 3:40 pm
GerryL wrote:
Sun Jul 14, 2019 3:24 pm
I think many people on this forum will tell you:
1) Don't mix friends with personal finance
2) Stay far away from Edward Jones.

Let me be the first.
Run away from Edward Jones. FAST! Cancel the meeting. He will give you a sales pitch and never ever acknowledge passive may be better. You stand to get snookered.

Passive s a great way to go.

John Z
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Re: Passive vs active for parent's retirement

Post by John Z » Sun Jul 14, 2019 6:40 pm

You requested literature, right? This is the only piece of information you and your parents need to read about active vs. passive:

The SPIVA® U.S. Scorecard: https://www.spglobal.com/_assets/docume ... h-2019.pdf

What is SPIVA? S&P Indices Versus Active [Management}

"A UNIQUE SCORECARD FOR THE ACTIVE VERSUS PASSIVE DEBATE
There is nothing novel about the index versus active debate. It has been a contentious subject for decades, and there are few strong believers on both sides, with the vast majority of market participants falling somewhere in between. Since its first publication 16 years ago, the SPIVA Scorecard has served as the de facto scorekeeper of the active versus passive debate. For more than a decade, we have heard passionate arguments from believers in both camps when headline numbers have deviated from their beliefs.
Beyond the SPIVA Scorecard’s widely cited headline numbers is a rich data set that addresses issues related to measurement techniques, universe composition, and fund survivorship that are far less frequently discussed, but are often far more fascinating."

This report shows how many active funds underperformed their corresponding index.

Edited to fix formatting.

delamer
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Re: Passive vs active for parent's retirement

Post by delamer » Sun Jul 14, 2019 6:53 pm

Surely you don’t think that if you allow the Edward Jones guy to invest your parents’ money that that will be the end of it.

He is going to want to manage your money, your in-laws’ money, your kids’ money, and your best friend’s money.

Are you sure the money is currently in an IRA? IRAs are owned by individuals, not spouses. And you can’t put $39,000 at one time (although I may have misunderstood that part).

HawkeyePierce
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Re: Passive vs active for parent's retirement

Post by HawkeyePierce » Sun Jul 14, 2019 7:06 pm

My father learned the hard way to never invest with a friend. 65 years old and he's still with his advisor despite terrible performance and high fees because he doesn't want to hurt the friendship. Huge turnover, tons of individual stocks, active funds with high fees, annuities, whole life, you name it he has it. I've seen the numbers and he'd probably have another million or two more for retirement if not for this advisor.

I learned the lesson when I opened my first IRA through a college roommate turned FA (Primerica, even worse than EJ). Fortunately I got out while the balance was just a couple thousand so the impact wasn't bad. Lost the friend though.

If Vanguard or Fidelity or Schwab do something you don't like, when you call up to transfer the account away you'll be talking to some customer service rep you've never met and neither of you will feel any emotional pain completing the transfer process. It's just business. When your family friend does something you don't like or you realize the impact of his fees, you'll be reluctant to transfer your assets away because this friendship will cloud your judgement. It's no longer just business, a personal relationship has been introduced to the mix.

If you do feel a need for an advisor, find a fee-only advisor you don't have a personal relationship with.

STINGRAY75
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Location: Central Wisconsin

Re: Passive vs active for parent's retirement

Post by STINGRAY75 » Sun Jul 14, 2019 7:15 pm

EJ has done a great job enticing folks lacking investment knowledge to begin a retirement / education savings plan. As time passes, education grows and many see the associated cost in remaining with someone trained to become their neighborhood friend. Don’t take a step backwards!

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CAsage
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Re: Passive vs active for parent's retirement

Post by CAsage » Sun Jul 14, 2019 7:22 pm

Go read any book by John Bogle on Mutual Funds, or "Random Walk down Wall Street" by Burton Malkiel, or "Irrational Exuberance" by Shiller, or pretty much any good author who isn't shilling for sales (ignore, for example, Susie Orman). You will find chapters of solid academic proof that active funds drag over time, there is no way any advisor can consistently offset that with skill or guessing. Kind of like betting on a race where one person has weighted shoes...... And EJ is a particularly bad example of high fee funds and overall entrapment and expenses. Your parents don't deserve that!
Salvia Clevelandii "Winifred Gilman" my favorite. YMMV; not a professional advisor.

jjface
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Re: Passive vs active for parent's retirement

Post by jjface » Sun Jul 14, 2019 7:42 pm

Beyond the usual warnings about EJ I will say to never mix family/friends and money. It is one of the golden rules.

bradinsky
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Re: Passive vs active for parent's retirement

Post by bradinsky » Sun Jul 14, 2019 9:15 pm

OP, I believe you will be making a big mistake if you go with Edward Jones. As a recent EJ escapee, we were given the 1.08% special AUM fee. For that, we were given below average returns, complexity and many excuses as to why we weren’t doing as well as I believe we should have been. Our advisor took trips abroad, twice a year, that were company paid (read my money), as bonuses for all the $$ he brought into EJ. Your local EJ advisor is active in the community, and is friends with everyone. Christmas cards, birthday cards, and even pictures of their grandchildren are the norm. Family and friends are easy targets because they trust him. When you end up leaving them, I’ll bet $$$ that they are no longer your friend. When my wife & I left them, we ended up with about 60 funds & individual stocks to clean up. Best move we ever made was to get up the courage to leave them. FWIW, I’m still cleaning up the balance of the 60, and am almost 100% boglehead. RUN!!!!!

Brad

sawhorse
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Re: Passive vs active for parent's retirement

Post by sawhorse » Sun Jul 14, 2019 9:27 pm

Almost every week we have a thread on this board of someone trying to get out of a bad Edward Jones situation. They realize after many years that they have been misled and mishandled by greedy "advisors". But Edward Jones is making it hard to get out. Someone was charged something like $75 per fund to get out, and the advisor had them in a dozen funds.

A few years ago there was a proposed law - I don't know what the outcome was - that would require financial advisors to adopt a fiduciary standard, meaning they would be required to act in their clients' best interest.

Edward Jones, Raymond James, and other similar companies lobbied tooth and nail against that law. Think about that. They used money from client fees to lobby against having to act in their clients' best interest.

02nz
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Re: Passive vs active for parent's retirement

Post by 02nz » Sun Jul 14, 2019 9:39 pm

sawhorse wrote:
Sun Jul 14, 2019 9:27 pm
A few years ago there was a proposed law - I don't know what the outcome was - that would require financial advisors to adopt a fiduciary standard, meaning they would be required to act in their clients' best interest.
It was a regulation, not a law. The Trump administration got rid of it: https://www.latimes.com/business/la-fi- ... story.html

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BL
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Re: Passive vs active for parent's retirement

Post by BL » Sun Jul 14, 2019 10:17 pm

Here is a quick 16-page free pdf with lots of good info. Read hurdle #5 about those who want to handle your money:
https://www.etf.com/docs/IfYouCan.pdf

Then read a couple books from recommended list in Wiki.

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Stinky
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Re: Passive vs active for parent's retirement

Post by Stinky » Mon Jul 15, 2019 10:21 am

GerryL wrote:
Sun Jul 14, 2019 3:24 pm
I think many people on this forum will tell you:
1) Don't mix friends with personal finance
2) Stay far away from Edward Jones.

Let me be the first.
+1

If you take the meeting, you will regret it. You will be upsold, and will end up paying much more in fees than the “advisor” has suggested.
It's a GREAT day to be alive - Travis Tritt

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