Windfall...Financial Advisor? Updated-Ready for More Advice!

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Heather
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Windfall...Financial Advisor? Updated-Ready for More Advice!

Post by Heather »

Hello Bogleheads! I am about to ask your opinion on a financial advisor. I will also give you enough information about my circumstances to allow you to sound off, if you like, on a more general plane.
We have recently (mid Aug.) found out that we will be inheriting, when the dust settles, a sum of approximately $1.5 million due to the death of my husband’s Mom. I am 40, my husband is 46. He is a public school teacher, who earns $70,000/year. We have a 403b with about $80,000 in it. He could retire with about half his salary as a pension in 9 years. Due in part to a previous much smaller inheritance, we own our house and acreage, and have no debt, except a 7% loan on our newer (but bought used) car. We have 3 children, ages 16, 11 and 10.
I have immediately started to learn about investing, since we have embarrassingly little knowledge in this area. A month ago I didn’t know a stock from a bond. The first thing that I learned is that we should have been saving more all along. Sure this windfall, will “save” us, but when could my husband have retired without it? My kids are NEVER going to have their heads in the sand the way we did! Had we been saving all along and NOT with Ameriprise (the 403b group), we would have been able to be financially independent without Mom’s money.
This is how I met the person who we are considering hiring as an advisor: After doing our own taxes for years, we decided we needed a CPA when adopted our youngest child 2 years ago. This man does my parents' taxes, and prior to that has been a personal friend of my father’s for many years. When we went to him with our taxes the first year, we had some questions from previous tax years, and he answered them (“The IRS screwed up, tell them that they did and you want your money! etc.), telling us we could do this and a couple other things ourselves, this year, but we should come back next year, and pay him to do our taxes when the $10,000+ adoption credit would have to be rolled over for several tax years. So we left with out paying him anything that year, and came back the next. We didn’t expect to need him after the adoption credit was fully utilized. Then this inheritance surprised us, and we will have a much more complicated tax return for this year and, well, forever after, I guess. We made an appointment to talk to him about that and he mentioned Vanguard in our first meeting. So, when I went to look at investing books, I came up with “The Bogleheads Guide to Investing”, as well as “Investing for Dummies” and “Standard and Poor’s Guide to Personal Finance”. I didn’t know that this person did financial advising, but it turns out he does. He was up front in saying that his tax customers were frequently asking for investment advice, so he and his partner paid for their broker’s license so that they could (legally) provide this service. But they don’t sell anything. No commissions/loads. No reimbursement of any type other than the fee charged to us. If any trades require a broker we can use anyone we want. We can fire them at any time, and they can only charge for the time they were employed. They can’t do anything with our money unless we sign on it. The sample portfolios we have seen for different asset allocations have been entirely made up of Vanguard funds. (11 of them! + .5% cash on the one that looks most likely to us). He has advised us to pay off any debts, do a few home improvement things we’ve been considering and figure out roughly how much we’d like to have on a yearly basis for the few things we’d like to do (mostly a big family vacation and a little one w/out the kids, a very small yearly sum) now that we have more assets. He’s also advised us to start thinking about estate planning, to make sure the kids get the most and the government the least. We haven’t signed a contract with him yet, but we got one to look over. It says what he told us…just in bigger words.

Here are the things I think are plusses for hiring him:
#1 I believe him to be honest, and not greedy.
#2 I believe he feels that he has our best interests at heart.
#3 The estate involves a condo in FL and Mom had accounts EVERYWHERE. She was like a squirrel. The lawyer has found 10 or more accounts from 3mill to 20k many of them with horrendous expense ratios, ugly loads, and huge turnovers. It all has to be liquidated and divided into two piles(loser brother gets a custodial account for his half, then is no longer our problem) and this proposed advisor person would facilitate that process as part of the deal (I asked). We have already hired him to do the final tax return for Mom and the estate. This thing (getting all the accounts settled) seems like a giant hairball to me and (1)We don’t want to do it (2) I don’t think we’ll be as fast and efficient as he would be and (3) I like it that he would have a stake in keeping as much of the estate for us as possible.
#4 He is a CPA. He is tax savvy and he HATES to give money to the IRS. It’s like a personal war with him. I'd like to bring this know-how to our investment planning.
#5 It will save us the hassle. I know most of you probably don’t think this is a valid reason, but to us it means something. I’m not sure how many dollars worth, but definitely something. (And yes I read EmergDoc’s excellent post on this topic.)
#6 It doesn’t have to be forever. We can take over this job for ourselves when we feel ready. I think I can do so with no hard feelings, at some future point, IF we decide to hire him. If we do hire him I have every intention of telling him that we’d like to phase him out some day!

Here are the things I think are minuses for hiring him. There aren’t as many of them but they are biggies:
#1 He charges a 1% AUM fee. I checked and Vanguard charges .75% for the first million and .35 for the next.
#2 For a $1 million investor Vanguard will come up with an asset allocation plan for our approval, and do yearly check-ups free of charge…and I wonder if we really need anything else.

Here is a thing that I’m not sure if it’s a plus or a minus:
He will rebalance more frequently (advise us to do so, then take care of it if we say “yes”) than the annual rebalancing mentioned by Vanguard.

Comments?

Thanks in advance to the folks who take the time to respond.
Heather
Last edited by Heather on Wed Apr 16, 2008 9:54 am, edited 1 time in total.
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ddb
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Post by ddb »

I wonder if he has a Registered Investment Advisory firm, or if he is a representative of a broker-dealer. If you private message me his name and/or the name of his accounting practice (or website URL if he has one), I could point you to places where you can check up on his history, and discover information about his investment management practice.

- DDB
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Rager1
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Post by Rager1 »

Hello Heather,

First of all, welcome aboard! And, I'm sorry about your husband's loss of his Mother.

I want to show you what that 1% AUM fee on $1.5M will cost you over your investing lifetime of the next 40 years. Assume the mix of Vanguard funds he recommends earn 7% annually. Also assume that the money is left alone for that period of time (taxes are ignored here).

With his 1% fee deducted, the amount in the account at the end of 40 years is almost $15.5M. Not bad at all. Without the 1% fee, however, the amount in the account at the end of 40 years is almost $22.5M.

As I see it, the decision that you and your husband have to make is this: Is the advice that you will get from your CPA worth the $7M it will cost you over 40 years?

Since you can purchase Vanguard funds yourself, and you can hire necessary people to do the taxes, etc. you and he have to decide if this cost is worth it to you.

Ed
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alec
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Post by alec »

You can also do it yourself here, Check the Background of Your Investment Professional, for brokers, and here for RIA firms [like Rick's, Larry's, and Eric Haas's].

If he has securities licenses [Series 7, 63, etc.], then he is a broker registered at a FINRA member firm [i.e. brokerage firm]. You can't hold/use these licenses if you're not affiliated with a brokerage firm. Of course, people can work at a brokerage firm and an affiliated RIA as well.

The no commisions, AUM fee, and recommendation of low cost funds indicates that he's probably not a sheister (sp). But you should probably ask questions about his investment backround/knowledge. For examples, degrees in finance/econ, MBA, certifications like CFA or CFP, etc. Are the funds tax efficient [like tax managed funds, etfs, index funds, etc.]?

- Alec
LBMM
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Post by LBMM »

What exactly do you get for $15,000 PER YEAR in fees?

You can develop your own goals, asset allocation plan, put things on auto-pilot, and pay separately out-of-pocket for any tax and/or estate planning services. Perhaps an annual meeting for a checkup.
pkcrafter
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Post by pkcrafter »

That's a little curious about the broker license. As Alec noted, a broker must be affiliated with a firm. Maybe he is a Registered Investment Advisor (RIA), which does not have that requirement. I wonder about the rebalancing too. Ask him what criteria he would use to rebalance more than once a year.

I'm not certain you need a full time advisor (assets under management) or an advisor's consultation once a year for an hourly or fixed fee. Once the plan is established, a few hours per year just to check up on things is probably enough if you're using only VG funds. This could easily be included with your tax appointments.

I would be curious to see what VG funds he has recommended.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
tibbitts
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question ahd comment

Post by tibbitts »

I'm confused about the "licenses", you might want to clarify that. If he's only an RIA, and is purely dispensing fund selection advice, I think 1% at $1million is too much to pay. If it's for a combo deal on estate, tax, etc. issues then that may be another matter, particularly during the first year you have this money. But again, the investment selection issue is really trivial and not worth paying for - it's all the other stuff that's complicated. Rebalancing frequency is not an issue, just a decision to make. It can be quantified, even with tax implications included if you prefer that. It doesn't require an expert's constant attention.

I would want a cpa to help me pay the appropriate amount in taxes, not the least amount that might possibly be interpreted as sufficient by some tiny minority of tax experts. I don't think I'd want a cpa who has such an adversarial relationship with the irs.

Paul
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Mel Lindauer
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Post by Mel Lindauer »

Hi Heather:

Sorry to hear about your MIL.

Since you mentioned our book (The Bogleheads' Guide), have you carefully read Chapter 15 (How To Manage A Windfall Successfully). If it's not fresh in your mind, perhaps you should re-read both that chapter and Chapter 16 (Do You Need An Advisor?).

Good luck in whatever you decide to do.

Regards,

Mel
InvestingMom
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My 2 cents

Post by InvestingMom »

It is not clear to me whether you are only asking whether you should hire this CPA or whether you are also asking whether you should hire an investment advisor in general. You implied that you might be able to take it on yourself at least eventually.

If you are just asking about this guy, here are a couple of comments:
  • You were not clear, but I suspect your CPA and attorney will be paid appropriately in helping you straighten out the estate and dealing with the taxes and this won't be included in the annual fee. Therefore I doubt you really gain all that much from using your CPA to do your investing.

    As been suggested by others already, you don't need to rebalance every quarter. Annually is fine.
If you are asking whether you should use an investment advisor, I think most of the people on this forum would say NO...you can do it yourself. You have already shown that you are doing the right reading. In fact there are some good folks right on this forum who will practically build the portfolio for you (Laura and Ken being good examples of folks who will give you there time for free! I dunno they might yell at me for saying that. You should check out Laura's sticky on portfolio help) Also there are several "lazy" portfolios out there that you can follow which many would argue while lazy they will work just as well as the guys out there actively trading away. Check out fundadvice.com...although you should read Merriman's book to understand his approach. Also as a Flagship customer at Vanguard you can get a financial plan for free annually. I don't think it is great but it is a start and may give you the confidence to do it yourself.

If you do decide to use this guy, get him to knock down the fee. I suspect it is negotiable and you should be able to make the argument that investing through Vanguard, using ETF and mutual funds is quite easy.
leonard
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Windfall dilemma

Post by leonard »

Welcome to the diehards board. Here are my thoughts:

1. Read the "Windfall" section of the Bogleheads guide. Great advice there on how to think about a windfall and take the time needed to make the right decision.

I get the feeling from your post that you may be feeling overwhelmed and the advisor seems to be a quick answer. Take your time! You're a millionaire now. Millionaires can afford to take the time needed to make a good decision.

2. I think there are 2 facts you need to reconcile to decide about an advisor:

You posted:
#5 It will save us the hassle. I know most of you probably don’t think this is a valid reason, but to us it means something. I’m not sure how many dollars worth, but definitely something. (And yes I read EmergDoc’s excellent post on this topic.)
Rager1 Posted:
Is the advice that you will get from your CPA worth the $7M it will cost you over 40 years?
In my opinion, Rager1's example is right on. Sure, the amounts can be a little more or less depending on 20 vs 30 vs 40 years of compounding, but the magnitude of a 1% fee is absolutely huge. My opinion is that it is fully worth 20 hours more or less to learn investing and get accounts set up, to save what could be millions for your retirement and your family. The diehards are here to help set up a simple portfolio that you can easily manage yourself.

Bottomline: is it worth the "hassle" to save 1/3 of your potential networth? If someone offered you a job requiring a week or 2 of work that paid multiple millions of dollars in the future, would you take it?

The answer to this question dictates 2 very different paths, IMO.
heyyou
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Post by heyyou »

You have a menu of choices, most items are priced hourly but the last one is Assets Under Management for 1% a year. You are wise to hire him for those immediate jobs related to the deceased MIL's estate. My suggestion is that you also hire him to get all the dollars consolidated into a money market account at Vanguard. Ask him for a copy of his proposed allocation, and pay him for his time spent on it. Trot that in front of us here. That will tell us about his investing beliefs. Keep him as your tax professional. Educate yourself about investing, regardless of who you choose, since you need to understand what they do with your money. The cost of your investment book purchases may be deductible.

One low cost investment advisor suggests that investment services should not cost more than other professionals' hourly rates. What is the hourly rate for your guy's tax work? Will he manage your money for the same hourly rate? You have the same life, with a larger retirement fund. Nothing else has changed. It costs no more to manage $500,000 than 3 times as much. Why should the fee be 3X more?
Joe
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Heather
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Post by Heather »

Replies to each:
DDB, I think he is indeed a RIA because I was able to pull up info on his firm from the SEC site link posted by “Alec”. Thanks

Rager1 Thank you for the welcome, and sympathy. It was unexpected. She was quite the character and much loved. I know it’s a lot of $ over the long term. Heck it’s a lot over the short term! We don’t plan on using an advisor for 40 years, maybe 2.

Alec, Thanks for the check up websites. Here is what I found:

From the FINRA broker check firm summary:
“This firm is a brokerage firm and an investment adviser firm. For more information about investment adviser firms, visit the SEC's Investment Adviser Public Disclosure website at:” I did, see down 10 lines or so.

Further important info found there:

“Is this brokerage firm currently suspended with any regulator? No”

“Are there events disclosed about this firm? No”

“This firm conducts 12 types of businesses.” Looks like they own a bunch of properties as well as the tax biz.
“This firm is not affiliated with any financial or investment institutions.”
“This firm has referral or financial arrangements with other brokers or dealers.”

On the SEC’s Investment Advisor Public Disclosure site it says that this firm has approved registration in my state, and that they are “not currently notice filed”. All their ADV pages are there.

LBMM, That’s what I’m wondering too, and why I’m posting here, in part.

pkcrafter, I’m not sure that any of these were specifically recommended to us, yet. The ones used in his pie chart examples, or that he gave us bits of morningstar info on are

Value Index
Growth Index
Emerging Markets Index
Emerging Markets ETF
Mid-Cap Value Index
Mid Cap Growth Index
Mid Cap Blend Index
Small cap Value Index
Small Cap Growth Index
Short term Bond Index
Intermediate Term Bond Index
High Yield Bond Index
New Markets Bond Index

tibitts, I think the tax thing is totally separate from the investments advisory thing. I do not think he has an adversarial relationship with the IRS, anymore than the rest of us. He just doesn’t want to give up any money to them that doesn’t have to be given up. He doesn’t have an overbearing or abrasive personality. Thanks

Mel, thank you. I have read and re-read. Maybe I’m just looking for a push towards the do it yourself direction. Plus it’s a little sticky that he’s my Dad’s friend. I like him and don’t want to hurt his feelings by saying in effect “I think you’re getting kinda greedy here..” It is well within the going rate for such services, and the funds are low cost ones.

Investing Mom, I WAS asking both questions. I think you are right about the estate/taxes being totally separate from the AUM business. That was my understanding. However, I thought that he might be more motivated to help us and the attorney close the estate quickly if he was going to get to manage the funds. It just seems to figure, doesn’t it? I have thought about trying to negotiate a better fee, possibly a one time set up (I mentioned Vanguard”s free one-he didn’t think it was all that great either), followed by yearly check ups. What do you think I should pay? Give me a range if you don’t mind, I’d love it. It is uncomfortable for me to dicker for services. I guess I should get over that. Thanks

I have to quit working at this because my kids are getting home, and I tend to be obsessive with new interests. I’m limiting myself to a couple of hours a day of research. I have SO MUCH to learn, it’s not funny. Thanks to all, Heather
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Adrian Nenu
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Post by Adrian Nenu »

I'd retain him for CPA duties but not for asset management unless you can be sure that he has the formal education to be competent. 1% to manage assets is highway robbery. CPA courses do not teach the basics of investing. Minimum of a BS in Finance, then additional "hands on" experience should be required. Then make sure the cost is rock bottom and he uses MPT and EMH principles. Then make sure he is ethical - check ADV record. Check his own personal statements. Don't give ANYONE a dime to invest until you can properly evaluate the advisor. Do your homework - if not, you will regret it later big time. There are no do overs here, no second chances. Trust means nothing, competency and ethical behavior are everything. Good luck.

Adrian
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SoonerSunDevil
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Post by SoonerSunDevil »

Hi Heather,

A 1% AUM fee for a $1.5 million portfolio seems excessive to me, especially since you are already a client of his in other aspects of his business. I would negotiate a lower rate; offer him .5% instead and see what he says. The worst he can do is say no, and at best, you will save .5% a year for as long as you are with him.
leonard
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Area of Caution

Post by leonard »

To be clear, I think you should do it yourself. I see a couple of intangibles.

I see a couple comments that would really indicate stearing clear of most any advisor, but especially this one.
Plus it’s a little sticky that he’s my Dad’s friend.
Of course, I would always be respectful. But, I think you can make this a win/win for both of you, even if you don't let him manage your assets. He is still getting the opportunity to do some hourly, fee based work. In his mind, he is also getting the "option" to do further investment advice. He doesn't get AUM fees, but he does get additional business.

Indicating that you feel this situation is "sticky" takes negotiating power out of your hands when it comes to negotiating the AUM.
It is uncomfortable for me to dicker for services.
If you go with AUM fee based services, I believe you must get very comfortable with dickering for these services. Using Rager's example, 1% AUM = $7M. So, every fraction of a percent you reduce the AUM fee, is a HUGE dollar amount. It will pay for you to dicker, so is likely very worthwhile to do it.

I think negotiating a reasonable AUM fee with this advisor would be tough, given that you indicate it is "sticky" given your Dad's relationship and are not comfortable with negotiating.
tibbitts
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wording of my reply

Post by tibbitts »

I probably didn't express my reply properly. What I meant was, there are clearly aggressive and not-so-aggressive tax return preparers. Sadly the tax code is so complicated that there are a lot of gray areas, and then various shades of gray in those areas. You want a preparer who reflects your own philosophy - more aggressive isn't necessarily better.

I don't agree that 1% aum is typical for these services; I think it's high for your level of assets.

I would be curious to hear from any of the professional advisors on the forum as to what the cost of providing this kind of service would be. Given that he already has a business with its associated overhead, I'm wondering if there are actually any costs for the RIA business except additional liability insurance. I would assume liability insurance for a RIA is based on aum, but I have no idea if that's true. Does anyone have any experience with this? Is it possible that nobody else is actually paying him for this service, and he's pricing the service "at cost" to you to pay for his insurance?

Paul
psteinx
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Post by psteinx »

I'm not crazy about the fund choices. While I'd want to see his final recommended portfolio before passing judgement, I will say that if he is using those funds as the main vehicles for constructing a portfolio, then I think it will likely be a subpar portfolio.

The good thing is they're all Vanguard, and all indexes. That's good - he understands costs (although his OWN cost of 1% tacked on seems rather high to me).

BUT, he seems to be leaning towards a slice and dice portfolio, albeit a poorly conceived one.

There are two main schools of thought on these boards, both of which can be plausibly defended:

1) Don't slice and dice too much - just go for a broad representation of the domestic equity markets, along with a healthy slice of the broad international equity, and add as many bonds/fixed income instruments as you'd like to reach your comfort level.

i.e. This might be a 60/40 portfolio that's 60% equity (some combination of VTSMX and one of Vanguard's broad international funds), and 40% fixed income.

2) Value-tilting (possibly small-value tilting). Basically, start with something like the portfolio in 1, but replace a portion of your broad equity holdings with funds tilted towards small and/or small value.

Depending on how much complexity you can handle, you can perhaps get some small improvements on either of the above by adding some REITS, and possibly by splitting the international out into Europe, Pacific, and Emerging, with weights roughly mirroring those regions' weights in world (ex-US) indexes.

So that's more or less what you SHOULD be considering (IMO). Now, while this advisor DOES present a lot of varied slice and dice indexes, they're the wrong ones.

There's very little reason, for instance, to hold BOTH a value and a growth index. Holding both (at market weights) will approximate the same results as holding a broad index, but with additional complexity, additional expense ratios (style indexes generally have a bit higher ER than broad indexes), and additional transaction costs dragging down performance - when a stock graduates from the value to the growth index, the value index will sell the stock (possibly incurring a capital gain), and the value index will buy it, with some transaction costs likely. If you had simply held the broad index, none of that transactional cost would have incurred internally.

Essentially, there's no real reason to put half in value AND half in growth - a broad index will do this for you more efficiently.*

*OK, there may be other small differences between holding broad versus holding the two components, particularly if you don't hold the two components in proportions equal to the market. But I think at a general level, holding value and growth in separate funds is not likely to be a good idea.

So anyways, I'm concerned that he's got the wrong ideas about slice and dice.

Furthermore, rather than listing either a broad international fund, or funds for the 3 major international components (Europe, Pacific, Emerging), he's only showing one kind of international fund, and it's by far the smallest component (Emerging). If you want 1 international fund, buy a broad one, not an Emerging-only fund.

Anyways, ignoring the 1% AUM fee, you could construct a decent portfolio with these funds, but by simply considering a slightly different set of Vanguard funds, I think you could do better. The fact that he is apparently making this mistake makes me question the value of his proposed asset allocation services.
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stratton
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Post by stratton »

While working through all your issues a couple of suggestions.

1. Put what appears to be an all cash inheritance in a money market fund. Tax free or otherwise. This gives you time to decide what to do with the windfall.

2. Start maxing out retirement options through work and any Roths you can take. If that reduces wages to the point you can't live off them then use only enough cash from the inheritance to cover expenses. The idea is to decrease your tax exposure as much as possible.

Paul
Gekko
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Post by Gekko »

i'd nix the advisor and go direct with Vanguard and use their free Flagship services.


Flagship Services™

Where exclusive access, personal assistance, and complimentary services can help you reach your goals and protect your wealth when you invest more than $1 million in our mutual funds.

Complimentary expert advice and guidance

* Request a free consultation with a Certified Financial Planner™ from Vanguard for guidance about particular financial issues—whenever the need arises.
* Partner with a planner to develop a free Vanguard Financial Plan—a $1,000 value—for an in-depth analysis of your investments and saving strategy.
* Get free annual checkups of your financial plan.

https://personal.vanguard.com/VGApp/hnw ... ontent.jsp
CrossOverGuy
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Post by CrossOverGuy »

Hi Heather,

Sorry for your husband's loss.

I was a co-executor on my uncle's will - are you or your husband the executor by chance? Who is? Because I learned a lot doing that. For one thing, the executor sets up an account (paid out of the deceased person's assets) to eventually pay the various beneficiaries and also ongoing estate settlement expenses - but also he/she must track down all the accounts (and my uncle lived like the Collyer Brothers, with papers and dirt and a ossified dead mouse !! all over his apartment) -- plus it took a lot of tracking down of assets. Me and my cousin (mainly me) did all that -- plus we paid expenses for getting assets in a foreign country (extremely hard to get -- we had to hire foreign attorneys), plus pay accountant to do his current year taxes and final accounting, as well hiring a local attorney to do the court filings for probate and to obtain the first preliminary letters testamentary, then the "real" letters testamentary, make partial distributions, then final distributions, and basically have the accountant show what assets the decedent (deceased) had, what was spent settling the estate, then distributing it according to his will (or to distribute "pay on death" accounts, or "in trust" accounts that were set up - which override anything in the will). Now, once that is settled....

Put your money in something safe (I didn't inherit too much -- mainly went to my aunts and uncles... however, that didn't stop me from trying to educate myself so I could try to make the most of what was coming my way)... in a money market or the bank (being aware of the $100k insured per person per bank - though I think a joint account is insured for $200K). Anyway, then make a wish list -- and think of things you want, that you need, that you could possibly imagine to change your life for the better -- it could be along the lines of "how might this money give me more free time to do what I'd like.. ". Write them down. Digest them.. treat yourself a little. Don't tell many folks about your inheritance. As little as possible. Please. You don't want to be bothered or make people (i.e. friends) jealous. And you don't want financial professionals (or salesman of any kind) to come a-calling on you. Put your name on the "do not call" lists and if your bank or financial institution starts offering you things based on them seeing you made some big deposits, politely tell them you have your own plans for it and "thank you - goodbye".

You're doing a good thing by educating yourself with some of your books. I don't think you need to hire a "wrap" type of arrangement. After all, 1% of $1million is $10,000. Plus a lot of people like to set it and then forget about it. Sometimes that's a good thing--- if you're a long-term investor and you rebalance once or twice a year, that's a good thing. But sometimes, like in most 401(k)s, typically people (not Bogleheads, mind you) will just make a few decisions early on and never change it. I think you would be better off perhaps hiring someone (maybe that friend of your father's) to do the tax returns and the accounting. Hire an attorney if need be for setting up any trusts and wills, etc. you might need and for anything else if you are the executor. I'd also hire a fee-only advisor on an hourly basis who has nothing to sell you but advice. Even if you do decide to use your father's friend for some financial information, I don't think it would hurt to get a second opinion. If you keep reading good solid investment books, as you have been doing, and take your time, I think you'll be more clear-headed and be able to keep more of your assets, hopefully keep a respectful relationship with your Dad's advisor (but not one financially injurious to yourself), and have more of an idea of how you would like to proceed. Good luck.
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craigr
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Post by craigr »

Hi Heather,

Welcome to the board!
Heather wrote:Plus it’s a little sticky that he’s my Dad’s friend. I like him and don’t want to hurt his feelings by saying in effect “I think you’re getting kinda greedy here..” It is well within the going rate for such services, and the funds are low cost ones.
As others have stated, if he's using Vanguard funds anyway, why not just put the money in Vanguard, get Admiral status, and use their financial planning services for free?

Business ain't personal. Don't feel guilted into turning your money over to someone. More people have lost their money entrusting it to their (former) friends than you could probably imagine. If you feel so obliged, you can take him out to a nice dinner each year with the money you save.

Finally, this money will all be taxable funds I assume. Believe me when I say you don't even want to think about using a lot of funds. You will get absolutely positively killed with taxes and rebalancing costs. You should really consider keeping a very simple portfolio that has Total Stock Market for Domestic/Intl. as a core equity holding and a treasury bond fund such as an intermediate term Vanguard fund (or maybe a tax-free muni fund if your tax bracket is high enough, but it doesn't sound like it is).

I'd avoid corporate bond funds, high-yield funds, etc. They are very expensive for taxable investors to hold and are risky which is not why you hold bonds. I'd also avoid a lot of heavy slice and dice investing. The theoretical performance advantages are eaten up almost completely in a taxable account by higher turnover costs and when you rebalance.

Just my $.02 as someone who is largely a taxable investor.
Last edited by craigr on Fri Sep 28, 2007 10:35 pm, edited 1 time in total.
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Dale_G
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Post by Dale_G »

Hi Heather,

I think you already have a pretty good idea of the big picture, but:

1. You may be somewhat intimidated by the CPA (old relationships or whatever)
2. You may be somewhat intimidated by the idea of managing 1.5 million

I think you certainly want to use him to take care of the estate matters. And on an hourly basis he should be able to provide advice regarding the desirability of funding 529s for the children, fully funding 401ks and IRAs, and placement of assets for tax efficiency (your deferred accounts should hold only bonds or very tax-inefficient assets). Most CPAs provide this advice on an hourly basis.

But I don't think it is at all worthwhile to pay someone 1% of assets to do fund picking and handling the very minor rebalancing tasks.

Managing 1.5 million will become old hat to you in a very short period of time. It is no different than how you should be managing 100K.

Dale
Volatility is my friend
marco100
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Radical Plan

Post by marco100 »

I am going to offer a radical plan for your cconsideration.

1. Of the 1.5 million, set aside 50,000 in a money market account to pay off the car, do fix-ups of your house, and "play with," if you need to do that.

2. Of that 50,000.00, take $500.00 (if that) and purchase a library of books by Bogle, Larry Swedroe, Mel Lindauer, Rick Ferr, and other boglehead types. I believe someone can probably give you with a good list. Also perhaps Scott Burns/Coffeehouse.

3. Take $2,500.00 to your CPA friend and say: "I'm not prepared to hire you on a percentage of assets basis, at least not yet. I will pay you a flat fee of $2,500.00 for you to provide me with a comprehensive written asset allocation plan based on Vanguard Index funds, which I intend to use for the coming year."

4. Then take the money and split it into four parts. Using Vanguard Index funds, put 25% into the TIPS fund; 25% into the short-term treasury bond fund; 25% into Total Stock Market Index; 25% into the total international index.

5. Spend the next year reading the books in your library, and educating yourself on all things financial.

6. During this time, the markets will do whatever it is they will do. You will become an "expert" on your own finances. You will also have the asset allocation plan for the year suggested by your CPA. Which you can take or leave. You will spend the year evaluating what the CPA told you and see, based upon what you have learned, whether you think your CPA's planning efforts are in your best interests.

Unfortunately, I will think you will find otherwise. A 1% AUM fee is simply not in your best interests. Your "financial advisor" will not be able to add value, for example, by predicting which investments will or will not do well in the future. You can continue to use your CPA for specific services on a fee-for-services basis. If you doubt this, ask your CPA whether he can guarantee that whatever AA plan he can come up with will do better than the four-fund plan I've suggested as a "starter". Now you certainly don't need to use my four way plan. You can look at various other postings or Coffeehouse stuff for a pretty simple plan. You can even go super-simple and throw everything into the vanguard balanced fund index. I believe that historically has returned 8-9%/year.

So your money will be about as safe as it can be for the first year while you are learning.

Yes, if you have gains you will pay taxes. As you learn, you will decide the best way to deal with taxes, possibly with municipal bonds or a municipal bond fund. But you need to walk before you run.

You have no choice but to learn because unless you understand this stuff yourself you will have no way of judging the quality or usefulness of any advice you get from a financial adviser. Of course YMMV.

Good luck.
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Ted Valentine
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Post by Ted Valentine »

Sorry for your loss Heather.

One thing people are missing is that Heather, based on her post, is not experienced at all in investing. People around here have been DIY for so long they forget the fear of the unknown with investing. Having adopted myself (congrats to Heather, adoption is a wonderful thing), doing the child tax credit worksheet is not difficult. Recall that she hired this CPA to do that simple task.

I am encouraged she is becoming educated and is reading some good books. However, I think she really may need some help and solid advice to get this thing rolling. Maybe once everything is set according to a plan that she fully understands, then she can take over management after some time when she is more comfortable with managing the money. The CPA-family friend, as long as she trusts him, sounds like a reasonable solution for the time. Same thing for Vanguard's services. Given her lack of experience and knowlege with investing, it might penny wise but pound foolish to try and DIY from the jump.

Best to you Heather.
Although our intellect always longs for clarity and certainty, our nature often finds uncertainty fascinating.
Gekko
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Post by Gekko »

IMO - save yourself $15,000+ per year and use Vanguard's free CFPs!

https://personal.vanguard.com/VGApp/hnw ... ontent.jsp
joelesposito
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advisers

Post by joelesposito »

If you don't understand enough about investing you might now have the confidence to stay the course. That is one area in which a good adviser can help. From a psychological POV.
alexander
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Post by alexander »

Another option: instead of 1% AUM with the CPA, there are a number of respected financial planners who will manage your assets for 0.2%, many of whom frequent these boards.
Gekko
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Post by Gekko »

i like Mel's point. you pay that 1% for the rest of your life. 1% during the distribution phase represents 25% of your 4% safe withdrawal rate!
Confidence
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Post by Confidence »

Hi Heather,

I had a similar situation about 2 years ago,when we had received $2M to deal with.I know how you're feeling.I took the time i needed to figure out what to do with these funds.Two years after i just finished figuring it all out. Here are some ideas...

1.-Try to find a CFA "Chartered Financial Analyst" in you're area that will help you prepare a IPS "Investment Policy Statement".This person is to be paid by the hour.Should take around 5 to 8 Hr to do this!!Here in Canada i have paid up to $250 HR.

2-This CFA Advisor should also be able to assist you in implementing and executing the plan for a hour fee.

This is how i approached the situation,simple baby steps...

Keep a Steadyhand and things will work out just fine.Take you're time

Regards,

From Canada
SmallHi
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Post by SmallHi »

1% is far less costly that the performance penalties investors asses themselves by chasing performance (just take a look at all of the "why REIT" conversations we see today), failing to rebalance, and taking the time to understand how markets work, where risk comes from, and how much risk you should be taking to reach your goals.

Furthermore, for taxable investors, they could very easily cost themselves as much as 0.5% to 1% a year in fees just rebalancing their portfolios (assuming they even bother to do this) back to intra regional targets. Newer, integrated marketbased portfolios allow you to tilt to small/value without having to rebalance back and forth between L/S/G/V and pay the according capital gains taxes.

I don't think hiring somebody by the hour is really worth the effort. Most often, the advisor probably won't be very proactive, you won't be rebalancing as you need to (who likes to sell whats doing well?), and by the time you want to "pay again" for help, you have probably lost more money than you wanted to in the first place due to not maintaining your portfolio (assuming it was even appropriate in the first place).

Reading a few books (however good they may be) is not a suitable replacement for the kind of ongoing support and guidance you could receive from firms like Altruist, Equius, Portfolio Solutions or Buckingham. None of these firms would be willing to take you on for an hourly fee. That should tell you something. (although an affiliated firm of Equius, Ephiphany, will for limited, 1X per year consultations I believe).

Bottom line, this is a do-it-yourself board, so if you come here looking for help on a multimillion dollar investment portfolio (which I assume is much higher than the average poster here), you will be encouraged to spend $100 on a few investing books and manage the money on your own. Outside this board, that advice would most often be met with a chuckle and a "yeah, right".

Bill Bernstein, arguably the most well respected advisor/author in Diehard land, wrote about this here: http://www.efficientfrontier.com/ef/103/probable.htm

SH
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Heather
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Post by Heather »

Wow. Thank you all for your thoughts. I will print out the whole discussion, and think about each post carefully. I really appreciate the time it took each of you to give me your opinions. At this point my husband and I ( BTW he is named Personal Rep for the estate, and Successor Trustee) are leaning toward not hiring anyone to manage funds for at least one year. We will try to keep the CPA on board for consolidating the assets, and then put the money in a very simple portfolio, while we try to learn more. We will solicit and consider the free advice from Vanguard, and post the AA here as well. In one year's time I will know more, and be better prepared to decide what to do, and then we can tweak that AA to something that suits us best. Temporarily, it might not be the way to grow our pile the most , but $15,000 is too much to pay when you don't know exactly what you are spending it on. Hopefully one year of NOT hiring a manager won't cost us more than the price of management! Of course I will be respectful, when declining the services of our CPA as a manager.
We plan to begin maxing out my husbands 403b, and using the income received for being the Personal Representative to pay off our used car loan (our only debt), do a few minor household improvements, buy a couple doo-dads we’ve been wanting and establish an emergency fund. Also, our CPA has advised us to put 8k per year in a traditional non-deductible IRA that can be rolled over into a Roth for 3 years. Apparently this will not be allowed after 3 years, and with my husband regular income plus income from the inheritance we will be over the income limit for using a Roth. Does this sound right?
I had to laugh ruefully at the last reply by SmallHi that, if you follow the link, basically says: Most people are dumb as rocks and can't do a good job of this investing thing on their own! Well, investing might not seem as fascinating a subject as some others to me, but it is my responsibility to learn about it at this point. I think I can do this. Thank heavens this windfall didn't happen 2 years ago, when we had just gotten our new girl. I literally did not have the time then to tackle a new (and foreign!) subject. Therapeutic parenting for the new kid,(8 years old, abused& neglected by birth mom, followed by 2 years foster “care”, diagnosed ADHD, PTSD,RAD, and Bi-Polar, over-and-wrongly medicated, underweight, behind in school and scared of everything), plus regular parenting for the other 2 “normal” kids, didn’t leave much left over. It was a nice trick to just maintain my relationship with my husband, so our happy home would continue to be one! Looking back, I knew nothing about older child adoption at the beginning either. Many people go into that arena with a big heart, and little knowledge, and then end up with disaster, both financially and emotionally. We are all fine. It pays to do your homework. I’m sure it’s the same here. Thanks to all for your support, I will be listening in on this forum as part of my on-going education. Heather
leonard
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Great!

Post by leonard »

I for one think you are pointed in the right direction.

Just a couple things I would add as you begin researching your options:

1. Keep it simple. I recommend doing a query on Taylor's "4 fund portfolio" in this forum. In my opinion, the simplicity of this 4 fund portfolio is hard to beat. Sure, many would argue that you can get better diversification with more funds/asset classes, but it is more complex and may end up not being worth it. So, I think a good benchmark with each new investement porfolio you read about is "do I really think the added complexity of this portfolio will be better than the simple, 4 fund portfolio?" It is a great benchmark to help keep simplicity in focus.

2. Rebalancing your portfolio. Some raised the issue of tax cost when rebalancing in taxable with a large portfolio. Just want to mention that you can rebalance with new money added to your husbands retirement fund and to both of your IRA's. So, you won't necessarily take a tax hit when you rebalance.

3. Take advantage of 100% of Tax deferred contributions in 2007. This is the only issue that can't wait for your long term investment plan. Take your time with the investment portfolio, but make sure you fully fund all your tax deferred accounts (retirement and IRA's) in 2007. If this requires using a little bit of the $1.5M for current spending to offset the tax deferred contributions, it is worth doing that now.

4. Once you have a plan, I would recommend posting your plan back on the board - in the format Laura provides at the top of the forum - to get feedback from this board.

You are on the right track. As you get more familiar with investing and the diehard approach, i think you will see that it really can be quite simple and not take much of your time, once it is all set up.
660ky612
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Re:

Post by 660ky612 »

Dear Forum and Heather,

I would like to contribute to an understanding of fees accumulated over a life's time under the context of compound annual return. This is not intended just for your information, see note 1 below.

Money may be poured into the vast sea of investment in two ways: one-time contribution OR monthly contribution.
Let's start with one-time contribution.

Suppose return rate is 8% per year compounded yearly. One unit of money would become 1 * (1 + 0.08 )^30, which is 10.06 units of money after thirty years, note 2 below. Ten times, right? This is the so-called magic of compounding, but our intention here is on fees accumulated.

Consider the following table, the first row is related to "return rates", and the first column "years afterwards", note 3 below:

Code: Select all

    |   1.02     1.04     1.06	  1.08	    1.10	   1.12
----|--------------------------------------------------------
5   |   1.10     1.22     1.34 	  1.47 	  1.61      1.76 
10  |   1.22     1.48     1.79 	  2.16 	  2.59 	  3.11 
20  |   1.49     2.19     3.21 	  4.66 	  6.73 	  9.65 
30  |   1.81     3.24     5.74 	 10.06	   17.45 	29.96 
40  |   2.21     4.80    10.29 	 21.72 	  45.26 	93.05 
Fees accumulated

Suppose the return rate is indeed 8%. In forty years' time, one unit of money would become 21.72 units of money (magic?) However, if somebody took away 2% per year, then what you would get was just 10.29 units of money, reason is "see the column under 1.06".

One way to remember this result is: "With fees of 2% per year, more than 55% of your wealth would be gone in a period of forty years." Note however that ( 10.29 - 21.72 ) / 21.72, which is equal to 52.62% went to expenses, see note 4 below.

Thoughts on your wealth and fees, Heather?


Note
1. But a solicitation for your active participation to verify the figures so that understanding could be originated from within your soul. Only in this way people could be able to appreciate what is going on, and possibly change their attitude towards MANAGING money.

2a. The assumption of 8% per year return rate on average for a period of thirty years is certainly not day-dreaming at all. Would anyone point out some evidences?
2b. Had my mother known the "8% per year" thirty years ago, I would not have got the need to work anymore.

3. This table can be easily generated using Excel. Just enter on cell B2 the formula "=B$1^$A2".

4. Our argument contains flaws, not serious though. However, the purpose of this exercise had been achieved.



References (Don't take my word for it):
1. David Michael Webb of Hong Kong, articles
on 11-Feb-2007 http://webb-site.com/articles/MPFcosts.htm
on 23-June-2005 http://webb-site.com/articles/mpfcost.htm
[ see also http://www.webb-site.com/news/news070211.htm ]
2. Chapter 4 of
The little book of common sense investing : the only way to guarantee your fair share of market returns / John C. Bogle, 2007 (240 pages)

Fees and bills
Finally, the comment of fees and bills comes. First, the fees are very high, in a way most people could not probably appreciate. Secondly, fees should have a bill, but in the case of mutual funds (or financial advisers), expenses are deducted from the funds' NAV. Where is the bill? In USA, there has been the concept of expense ratio. At Hong Kong, only management fees are mentioned in funds' factsheet which help to give the clients a false idea of fees. The bills are actually buried in the funds' annual report in a way that most people do not understand. For me, I even do not know which pages to look at. Ladies and Gentlemen, take care of these mutual funds professionals, investment advisers as such.


660ky612 from Hong Kong
Email: lulu_fHongKong@yahoo.com
CrossOverGuy
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Post by CrossOverGuy »

Heather,

You seem to formulating a good, well-thought out plan - and you're getting some very sage (if a bit all over the place) advice.

Btw, if your husband is getting his income from being Personal Representative, that income is usually taxable. Since it is getting toward the end of the year, it might is possible to defer it to next year for income tax purposes (or make 1/2 payment to him this year and 1/2 next year if that would work for you). Something else to think about - of course, if deferred to January 1, 2008, you can put the (estimated) taxable amount in a CD (earn interest on it) and it won't be due on your income tax till April 15th of the following year.

All the best!
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Heather
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Post by Heather »

Again, three very thoughtful replies! Thank you.

Further info: we are having a heck of a time working with the 403b people at my husband’s workplace. They are telling us that we will incur a sizable penalty, (but we know how much…they claim it’s from/for the government ?!?) for changing from one 403b provider to another unless it’s one the district works with. When we asked who they had agreements with the reply said “we have no agreements with anyone at this time.” Well, duh. What about Ameriprise who has been “managing” his 403b for all these years? Or the Capital Group who recently gave a presentation to staff? It is impossible to get a straight answer! We are wondering if they are unethical or just incompetent. We have been told by our tax guy that we should be able to give a check to fully fund the 403b, and the office folks seem to think this is impossible, that we must payroll deduct only, which will make it tough to get much more in this year.

The other thing is that we actually haven’t seen ANY cash from the estate yet, although we have $12,000 or so in costs. Though applied for, we don’t yet have the “Letters of Administration” that will allow my husband to start liquidating some of the assets to pay the above costs, the lawyer, the tax guy, and the Personal Rep (himself). Soooo we don’t have the money to max out the 403b anyway at this time. We live below our means, but not far enough to fully fund the plan. We don’t have extra unless we can shake some loose from the estate. Furthermore, FYI, his employer does not put in any matching contributions, does this change anyone’s thoughts on maxing this out?

Our CPA said we should take all of his PR fee in this tax year. We did not ask him why. Money sooner might be better than money later, if it would allow us to get more in tax deferred accounts this year.

Goals:
Find out if it is allowed by the school’s plan that we transfer existing 403b funds from Ameriprise to Vanguard.

Find out if indeed there is a penalty for transferring, how much the penalty is, and whose pocket it goes into.

Consider the penalty, and transfer 403b to Vanguard if possible, and if the penalty could be reasonably expected to be offset by the lower costs of Vanguard funds.

Begin to send all new 403b contributions to Vanguard (this we think is allowed without penalty)

We’d be farther along with this if the school person would answer our e-mails, and if when she did she would actually answer the questions that we are asking! It’s so frustrating!

Thoughts on any of this? Heather
kaere
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I know this is a little off topic,

Post by kaere »

because you have received a variety of good advice. My two cents is that when you receive the funds, you may want to consider setting up 529 college savings plans for your children. What you learn about investing for yourselves will be helpful in researching and setting up 529 plans as well.
Meanwhile, go slowly as you are learning, and enjoy your family.
kaere
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House Blend
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Post by House Blend »

Heather wrote:Further info: we are having a heck of a time working with the 403b people at my husband’s workplace. They are telling us that we will incur a sizable penalty, (but we know how much…they claim it’s from/for the government ?!?) for changing from one 403b provider to another unless it’s one the district works with. When we asked who they had agreements with the reply said “we have no agreements with anyone at this time.” Well, duh. What about Ameriprise who has been “managing” his 403b for all these years? Or the Capital Group who recently gave a presentation to staff? It is impossible to get a straight answer! We are wondering if they are unethical or just incompetent. We have been told by our tax guy that we should be able to give a check to fully fund the 403b, and the office folks seem to think this is impossible, that we must payroll deduct only, which will make it tough to get much more in this year.

Goals:
Find out if it is allowed by the school’s plan that we transfer existing 403b funds from Ameriprise to Vanguard.

Find out if indeed there is a penalty for transferring, how much the penalty is, and whose pocket it goes into.

Consider the penalty, and transfer 403b to Vanguard if possible, and if the penalty could be reasonably expected to be offset by the lower costs of Vanguard funds.

Begin to send all new 403b contributions to Vanguard (this we think is allowed without penalty)
No doubt there can be exceptions, but until you leave the job (retire/quit/laid off), you are effectively limited to whatever options your employer provides, whether it be Ameriprise, Fidelity, or whomever. Some employers offer access to multiple providers, and you can make transfers among them without penality.

So unless Vanguard is on their list, I think you're stuck. Of course any flavor of IRA you might have (classic, Roth, rollover,...) can be held there.

(That's why you see lots of threads here from people complaining about the poor choices available in their 401k/403b plans. If everybody with a 403b could use Vanguard, the world would be a much nicer place.)

At my employer, they track three types of contributions separately:
(1) contributions from my paycheck up to the match
(2) contributions from my employer (the "match")
(3) extra amounts that I deduct beyond the match.
While I am currently employed there, I cannot cash out or transfer any of (1) or (2). The amounts in (3) cannot be cashed out or transfered until age 59.5 or financial hardship or disability.

What your tax guy said about writing a check to fund your 403b sounds completely wrong. As far as I know, you can only do this sort of thing through payroll deduction.

In the long run, the fact that you can't max out the 403b this year is no big deal. Take out what you can this year, and focus on getting things right next year. (And fully fund a Roth, if you're eligible.)

In short, the 403b story from your employer sounds irritatingly normal.
tibbitts
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my thoughts

Post by tibbitts »

I would ask VG these questions, and maybe TRP and Fidelity too. Having gone through the 403b rollover and then various pension rollovers, it's much too expensive and complicated to make a mistake, so you need several opinions.

We have the tax laws to thank for the complexity... it would be really nice if there was just one type of retirement account and, as should be the case with health insurance, it had no link to employment. I suspect the HR people are just confused (me too.)

I don't believe there are rollover/transfer penalties under any circumstances, unless you actually withdraw the funds and then invest the leftover in a taxable account, which would be a horrible idea.

Paul
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Barry Barnitz
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403b Transfers

Post by Barry Barnitz »

Further info: we are having a heck of a time working with the 403b people at my husband’s workplace. They are telling us that we will incur a sizable penalty, (but we know how much…they claim it’s from/for the government ?!?) for changing from one 403b provider to another unless it’s one the district works with. When we asked who they had agreements with the reply said “we have no agreements with anyone at this time.” Well, duh. What about Ameriprise who has been “managing” his 403b for all these years? Or the Capital Group who recently gave a presentation to staff? It is impossible to get a straight answer! We are wondering if they are unethical or just incompetent. We have been told by our tax guy that we should be able to give a check to fully fund the 403b, and the office folks seem to think this is impossible, that we must payroll deduct only, which will make it tough to get much more in this year.
The recent finalized regulations for 403-b plans have placed these plans onto a state of flux. The former right to in-service account transfers, which would have permitted you to transfer 403-b account balances to a fiduciary of your own choosing, has been rescinded as of September 24, 2007.

The current status of transfer procedures is summarized at an excellent resource for 403-b planholders, the website 403bwise. Here is a link:

403-b Transfers

regards,
Additional administrative tasks: Financial Page bogleheads.org. blog; finiki the Canadian wiki; The Bogle Center for Financial Literacy site; Wiki Bogleheads® España.
660ky612
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Re:

Post by 660ky612 »

Dear Heather,

Please visit http://diehards.org/forum/viewtopic.php?t=6291 for books to read so as to defend ourselves, among other things, in the vast sea of investment.

Regards,
660ky612 from Hong Kong

PS. Many middle-aged women, moms I mean, have been turned round and round by the gurus, brokers, investment banks, and the mass media HERE in Hong Kong because of just one simple and honorable reason: "She has to take care of the family's finance."
Topic Author
Heather
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Post by Heather »

Thanks for the support!
Kaere: 529 plans exist as part of the estate. Nana was wild about education. Decisions about further funding for these are just another part of the job we are faced with. Factors are AGE: oldest child is in 11th grade (yikes!) other two are 4th and 6th graders. NEED: adopted daughter has free ride, but only in TX. In any event, academics are very difficult for her, and college may not be something she’s able to handle, at least at the usual age. Also, I don’t know if I want her that far from us and I’m not really counting on that “free ride” since what the government giveth they can also taketh away. The other daughter is not as brainy as our oldest child but could do college and we will encourage her to go but she is very headstrong and we will not be able to boss her around much when she reaches legal adulthood. LOOK OUT world! I do dearly enjoy them. I may seem focused on this stuff, but I’m only doing it a couple of hours a day. Right now they are in school most of they day and no one is having a crisis at the moment!

House Blend, Paul and Barry: This 403b stuff is starting to make some sense thanks to you. Barry, that is a TERRIFIC site. It clears up most of the confusion I had from the garbled stuff I was getting from the school personnel. They are still working the bugs out, so it will be awhile before the dust settles with these new changes, I guess. I feel more charitable toward the school person now. Still, when my husband asked to see their summary plan description the response was something like “What plan? There is no plan! Why do you want to see it? No one has ever asked for that before!” So you can see that we aren’t dealing with the sharpest pencils in the box!

660ky612 from Hong Kong: I promise to be careful! Also, to go slowly. I am not alone either. I just have more time than my husband to learn about this stuff. I talk about my thoughts on what I’ve learned with him every night. We make decisions together. You are right; many people will take advantage of you if you let them. I am excited about getting some new books. I really am not done with the first ones, though. As I assimilate the information, I go back and re-read chapters and they make more sense to me than the first time I read them. Best wishes to you.

Heather
Last edited by Heather on Fri Oct 05, 2007 7:20 am, edited 1 time in total.
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aisa
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One more thing to consider....

Post by aisa »

"...the BCT study found that the raw returns of equally weighted mutual funds (net of all expenses) for 1996 to 2002 were 6.626% for the investors working on their own and were 2.924% for funds provided by advisors.

In other words, the public working on its own did more than 100% better than financial advisors when it came to selecting equity mutual funds. After factoring in inflation and taxes, clients of financial advisors lost money and lost purchasing power."

http://advisor.morningstar.com/articles ... 482&pgNo=0

Heather, I have found that doing my own investing (I am a Flagship client) is much easier than I ever imagined and knowing for sure what is happening to my money is priceless.

Cheers!!
heyyou
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Post by heyyou »

Good for you on being wise enough to re-read. The big picture is just not enough, the details matter. Re-reading gives you those.

You had to learn parenting but you sound like you are doing a good job at it. The wise and patient handling of money is just another skill to acquire. No one was born knowing all this stuff. We just read the same books earlier than you.

Try to live the same lifestyle. You aren't truly wealthy, you just have no more worries about retirement or making the car and house payments. That is a pretty good life with focus on your family, if you don't escalate your spending. That sets an example for the kids, too.
Joe
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estate question

Post by tibbitts »

This sounds like a very complicated estate. Are you sure that 1.5 million won't turn into 1.5 million minus 1.4 million in estate legal fees? Might solve the whole investing problem for you!

Probably a lesson for the rest of us to clean up our act before it's too late and we leave a mess behind.

Paul
PatrickS
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Post by PatrickS »

I think Marco had the right idea about putting it all in a safe investment, and educating yourself until you're ready to do it yourself. Lot's of good stuff on the recommended reading list.

My take is that the most important thing you can do right now is to not go out on a spending spree. Windfall money is easily spent. I came into money easily in 1999/2000 when my stock options took off. I thought I was rich. Started looking at large boats. Fortunately, the stock market crashed and I took some considerable losses on individual stocks and I started to read about real investing versus speculation.

1% is way too much to pay for a financial adviser. When you stop to consider that 4% is generally thought to be a "safe" withdrawal rate for someone retiring at age 65, paying 1% to an adviser drops your retirement income from the portfolio by 25%!!!

One other point- Starting out with the adviser now with the intent of doing it yourself later may get you a portfolio you end up not liking with capital gains built up that would cost you money in taxes to change into other investments later.

Why not take out a small amount for things you know you'd like to buy or do (within reason) and put the rest into a 1 year CD while you learn?
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Barry Barnitz
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Post by Barry Barnitz »

Why not take out a small amount for things you know you'd like to buy or do (within reason) and put the rest into a 1 year CD while you learn?
Patrick & Heather:

Keep in mind that a CD is a bank instrument and that the FDIC Insurance limit is $100,000. It is not prudent to place a large capital estate settlement into a bank and run the risk of a bank failure wiping out the inheritance.

A much safer option, assuming one wishes to invest with Vanguard, is to place the assets, or at least the assets beyond the FDIC insurance limits, into the Vanguard Admiral Treasury Money Market Fund. The assets can then be invested 100% in "full faith and credit" Treasury bills at 15 basis points of annual expense.

regards,
Additional administrative tasks: Financial Page bogleheads.org. blog; finiki the Canadian wiki; The Bogle Center for Financial Literacy site; Wiki Bogleheads® España.
660ky612
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Re:

Post by 660ky612 »

660ky612 wrote:Dear Forum and Heather,

I would like to contribute to an understanding of fees accumulated over a life's time under the context of compound annual return. This is not intended just for your information, see note 1 below.

Money may be poured into the vast sea of investment in two ways: one-time contribution OR monthly contribution.
Let's start with one-time contribution.

Suppose return rate is 8% per year compounded yearly. One unit of money would become 1 * (1 + 0.08 )^30, which is 10.06 units of money after thirty years, note 2 below. Ten times, right? This is the so-called magic of compounding, but our intention here is on fees accumulated.

Consider the following table, the first row is related to "return rates", and the first column "years afterwards", note 3 below:

Code: Select all

    |   1.02     1.04     1.06	  1.08	    1.10	   1.12
----|--------------------------------------------------------
5   |   1.10     1.22     1.34 	  1.47 	  1.61      1.76 
10  |   1.22     1.48     1.79 	  2.16 	  2.59 	  3.11 
20  |   1.49     2.19     3.21 	  4.66 	  6.73 	  9.65 
30  |   1.81     3.24     5.74 	 10.06	   17.45 	29.96 
40  |   2.21     4.80    10.29 	 21.72 	  45.26 	93.05 
Fees accumulated

Suppose the return rate is indeed 8%. In forty years' time, one unit of money would become 21.72 units of money (magic?) However, if somebody took away 2% per year, then what you would get was just 10.29 units of money, reason is "see the column under 1.06".

One way to remember this result is: "With fees of 2% per year, more than 55% of your wealth would be gone in a period of forty years." Note however that ( 10.29 - 21.72 ) / 21.72, which is equal to 52.62% went to expenses, see note 4 below.

Thoughts on your wealth and fees, Heather?


Note
1. But a solicitation for your active participation to verify the figures so that understanding could be originated from within your soul. Only in this way people could be able to appreciate what is going on, and possibly change their attitude towards MANAGING money.

2a. The assumption of 8% per year return rate on average for a period of thirty years is certainly not day-dreaming at all. Would anyone point out some evidences?
2b. Had my mother known the "8% per year" thirty years ago, I would not have got the need to work anymore.

3. This table can be easily generated using Excel. Just enter on cell B2 the formula "=B$1^$A2".

4. Our argument contains flaws, not serious though. However, the purpose of this exercise had been achieved.



References (Don't take my word for it):
1. David Michael Webb of Hong Kong, articles
on 11-Feb-2007 http://webb-site.com/articles/MPFcosts.htm
on 23-June-2005 http://webb-site.com/articles/mpfcost.htm
[ see also http://www.webb-site.com/news/news070211.htm ]
2. Chapter 4 of
The little book of common sense investing : the only way to guarantee your fair share of market returns / John C. Bogle, 2007 (240 pages)

Fees and bills
Finally, the comment of fees and bills comes. First, the fees are very high, in a way most people could not probably appreciate. Secondly, fees should have a bill, but in the case of mutual funds (or financial advisers), expenses are deducted from the funds' NAV. Where is the bill? In USA, there has been the concept of expense ratio. At Hong Kong, only management fees are mentioned in funds' factsheet which help to give the clients a false idea of fees. The bills are actually buried in the funds' annual report in a way that most people do not understand. For me, I even do not know which pages to look at. Ladies and Gentlemen, take care of these mutual funds professionals, investment advisers as such.


660ky612 from Hong Kong
Email: lulu_fHongKong@yahoo.com
> 2a. The assumption of 8% per year return rate on average for a period of thirty years is certainly not day-dreaming at all.
> Would anyone point out some evidences?


A minimal piece of historical performance evidence:
https://personal.vanguard.com/VGApp/hnw ... ontent.jsp
(see notes below)

Another important point:
After thinking of a well-thought plan - diversified stock index funds portfolio with bonds, must stay the course AND rebalancing. If you think you cannot, hire a low-cost, honest and competent advisor.

Thanks,
660ky612 from Hong Kong


PS. Historical performance data
o Nowadays stocks should perhaps add some international stocks

o Note that the return of S&P 500 from 1981 to 2000 was over 17.3% annually (what is the significance?)

o The performance of small-cap stocks was historically very good if relative to large-cap. High S.D. however.

Would anyone point out some evidences? Same question again.


PS. Many middle-aged women, moms I mean, have been turned round and round by the gurus, brokers, investment banks, and the mass media HERE in Hong Kong because of just one simple and honorable reason: "She has to take care of the family's finance."
http://diehards.org/forum/viewtopic.php ... highlight= "active management by individual investors"
http://diehards.org/forum/viewtopic.php ... highlight= "Warrants at Hong Kong"
http://diehards.org/forum/viewtopic.php ... highlight= "Selling ELN, with Prize"
http://www.diehards.org/forum/viewtopic.php?t=6847 "Mr. Martin Wheatley at Hong Kong"
Topic Author
Heather
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Post by Heather »

Dear Bogleheads,
I want to thank you for being such good people. In an environment where many people want to take advantage, any advantage, you are refreshingly different. Thank heavens I picked The Bogleheads' Guide to Investing in my first batch of books. We now own a small library of personal finance books and the Guide is still the one I would recommend, if you had to read just one...Thank you Mr.'s Larimore, Lindauer, and LeBoeuf!
The Estate I talked about in my earlier posts has moved along and we are approaching the day when we will receive disbursements, so it's time to trot out our plan and see what you all think of it. I still don't have actual numbers, but the earlier estimate of a 1.5 million dollar figure is going to be very close. My husband has received payment for the job of being personal rep for the estate, and this is what we have done so far:

First, we took everyone's good advice and:

paid off our little car loan (our only debt),
purchased a 2 million dollar umbrella policy,
and rolled over to our home state's plan the existing 529's that Nana had held with Putnam. Our home state's 529 plan is administered by Tiaa-Cref, ER o.4, and it comes with a state income tax break. We chose the 60/40 stock/bond option. We added 15,000 to each of our daughter's 529's and plan to bring that total to $50,000 per girl, when we receive the disbursement(s). The girls are 11.
We have a 17 year old as well. The roll-over 529 in his name has about $10,000 in it. We are considering keeping $100,000 in a money market or short term bond fund for his college expenses, but really, we could just pull from whichever of our few funds seems the most prudent. We might even consider this a rebalancing opportunity!
We switched my husband's 403b funding to Vanguard and are maxing this out. We will continue to do this for the next 7 years, at which time my husband will be eligible for retirement with a pension of maybe $35,000 per year. He is eager to retire! Sadly, we have been unable to move the $80,000 in the previous 403b out of Ameriprise (variable annuity), but we will do so as soon as we can, either when my husbands school signs the new info sharing agreement with VG or if they don't sign with Ameriprise, and it becomes an "orphan plan", OR if all else fails, when he retires. This thing really stinks, and even changing to their least expensive option, (an S and P 500 index fund with an er of .5-gag) is prohibitively costly because of the 5.75% front load.
We need to find an attorney who does a really great job with estate planning, and update our will to reflect our changed circumstances. Should I appeal to our local Bogleheads for an attorney referral? This summer we are going to pay our 17 year old to read the Bogleheads Guide, with the idea of grooming him to be Successor Trustee of the trust we intend to set up. The girls show no self control with money, and until they do, I think we need to set up our estate plan so that their portion is managed by their brother (for a .25% annual fee!), and they are given an allowance. The one daughter who we feel is able to understand this, agrees with the plan, and thinks it is a good idea. The other daughter needs this help even more!
We've funded IRAs for 2007, traditional with plan to do the Roth conversion in 2010. We will continue to add maximum yearly contributions to our IRAs until my husband retires in 7 years. Also, if one of us wants to work for earned income at any date beyond that (You never know; it could happen!) We'll use Roth's if possible, traditional if our income exceeds the limit. I have a hard time getting a handle on what our taxable income will be in the future, and of course it will vary with the markets.

Now, (finally! thanks for your patience) to the "meat" of what you can see will be a mostly taxable portfolio. We feel we can sleep at night with a 60/40 to 70/30 stock/bond ratio range, and we'd like the stock portion to be split 60/40 domestic/international.
With goals of simplicity and tax reduction, these are the funds we have been thinking might work for us.

For an all Vanguard Portfolio

Taxable:
Stocks
Total Stock Market Index
FTSE All World ex-Us Index
Bonds
Intermediate Term Tax Exempt Fund
Money Market Fund
We are using Prime Money Market Fund at this time
Non Taxable (this will be just a few percentage points of the total, maybe swelling to 10% over a number of years)
REIT Index fund, and possibly TIPS

If we wanted to add a little bit of complexity we could consider a state specific muni fund. We've found one, but it has an expense ratio of .49, and it's not at Vanguard. Another fund we are considering is VG Tax-Managed Small Cap, but each additional fund adds a bit of complexity and we not sure it's worth it.

We will have interest and dividends directed to our money market fund, and use that to rebalance as much as possible. We plan to rebalance at least annually or more often if things get really out of balance.

We intend for the next 7 years to withdraw only a tiny portion of the portfolio (other than college expenses as planned for) each year to take a couple of nice vacations. Also, although this isn't really a withdrawal, we will need to use some money from the portfolio to continue to live at our usual level since we are now taking money out of our normal income stream to max out the 403b. Prior to this major event in our lives we lived below our means, and had little debt, but we didn't save much.

I am excited about reading your comments, but whatever you all think of our plan, I thank you for as a group, being altruistic and willing to teach. 8 months ago, when my Mother -In -Law died, I literally did not know a stock from a bond, and this group has saved us from being gobbled up by investment sharks.

With deep gratitude,
Heather
leonard
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Post by leonard »

Wow. Great progress and a great first pass. Congratulations on really taking control of this. Just outstanding.
Heather wrote:Bonds
Intermediate Term Tax Exempt Fund
Money Market Fund
We are using Prime Money Market Fund at this time
First issue I see. You are using Intermediate Tax exempt for bonds, but your money market is fully taxable. I would expect either (1) both the bond fund and the money market to be tax exempt or (2) both the bond and the money market to be fully taxable. I would not expect you to have one tax exempt and the other to be taxable.

The choice of scenario (1) or (2) will depend on your marginal tax rate. Ask question if you have them on calculating after tax rate of return to choose between Muni's and taxable.
Stocks
Total Stock Market Index
Depending on whether you plan to withdraw money from this fund, you might consider the VG Tax Managed Cap Appreciation fund instead of this fund, in combination with the VG Tax Managed Small Cap fund you mentioned. The Tax managed funds have redemption fees for 5 years. So, there is a fee of 1% of redeemed amount if you sell, including for tax loss harvesting. But, the TM Cap Appreciation is very tax efficient. But, you can't really go wrong with any of these choices.
Another fund we are considering is VG Tax-Managed Small Cap
I would consider overweighting Small Cap, using the Tax Managed Small Cap fund. You are already asking yourself the right question, which is "do I want the extra complexity of another asset class?" If you don't want the complexity, you will do great with just Total Stock Market or TM Cap Appreciation. If you are ok with the complexity, there is data out there that indicates you get diversification benefit out of holding small cap.

And, make sure your husband knows what you did for you family by saving that 1% AUM fee! You are a great example of how people can plan for a windfall, avoid the sharks, and do it themselves.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.
leonard
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Move Forums

Post by leonard »

Heather - you may want to request that the moderators move this post to the "Portfolio Help" forum, which should get you more feedback.

[Thanks for noticing that, leonard. I moved it.]
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.
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