[Advisor suggests same allocation across account types]

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solonseneca
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[Advisor suggests same allocation across account types]

Post by solonseneca » Wed Jun 27, 2012 1:21 pm

Someone must have dropped me on my head when I was kid or something, 'cause I still don't get it. Can one of you smart people educate me?

Being inadequate, we decided to hire an advisor-- portfolio solutions-- and we're just getting started with them. No complaints by the way.

We opted for a 50/50 allocation. To get started, we're moving over just cash and as well three smaller IRAs that are in my wife's name. (I also have an IRA with work.) They came back with three nice looking though slightly different portfolios-- but all managed to the same 50/50 allocation.

That doesn't make a lick of sense to me. I'd assume you put all the highest yielding stuff in the tax deferred bucket (which in our case is relatively small compared to the taxable account) instead of balancing that portfolio. The other two accounts are also balanced. In our case, we have individual trusts setup for my each of us 'cause some wicked smart tax guy said that's the way to go (in case my wife knocks me in the head one of these nights and then she dies of heart attack out of guilt immediately afterward-- somehow the kids are better off. But I digress.)

The question to this forum is why should you balance these 3 portfolios separately? The portfolio solutions guy started to explain it, but it didn't make sense to me. And then I asked him whether if my 401k was also under their management if they would buy different stuff and he said yes. Again I'm lost. To us, it's all one pot of money that evil accountants have had us put into different buckets for arcane and ineffable reasons.

I pressed the guy on Reits. "Shouldn't I have some Reit allocation? I see this post from Rick where he allocates stuff there."

He said something like "No, in the near term you've got a tax problem, so they don't belong in the taxable section. And your tax deferred account is too small." But I asked if you added in my 401k, wouldn't it be large enough? "Yes, but we also would balance that account to 50/50-- so maybe not."

So I'm lost. 4 accounts of varying sizes, 2 taxable, 2 deferred. And he says they all should be balanced to 50/50. My thinking is that all the tax deferred should be high yielding stuff. He's going to send me some links to posts on this forum that explains it and I said in meanwhile I'd throw up this question so folks can make fun of me.

Thanks in advance.

staythecourse
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Re: Even after they explain it, I'm confused

Post by staythecourse » Wed Jun 27, 2012 1:56 pm

I don't think your query is unreasonable. I personally would put the most heavily taxable stuff in deferred accounts vs. less taxable, i.e. asset location. I would treat the portoflio as a whole then separate portfolios. (lot less headaches managing them this way). If you need more bonds and run out of tax deferred then just go muni's in taxable.

Investing should not be this complicated. Folks (including FA) make it more complicated then it needs to be. Paraphrasing Mr. Bogle: The key to do just a few things right and avoid any big mistakes.

Good luck.

p.s. Even if you wanted the REITS vanguard has a VA that you could start.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

dbr
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Re: Even after they explain it, I'm confused

Post by dbr » Wed Jun 27, 2012 2:08 pm

The one flag (not red, just a flag) raised in your description is that the three accounts that appear to be all balanced on their own are your (tax-deferred?) account and two trusts. Assuming from your description that these are pass-through trusts designed to prevent excessive possible taxation of your estate on its way into your children's hands while being available for income to each of you as spouses, then the three portfolios really are not all one bucket. You seem to have no idea at all why you have these trusts, and that is concerning.

solonseneca
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Re: Even after they explain it, I'm confused

Post by solonseneca » Wed Jun 27, 2012 2:24 pm

I setup the trusts based on a recommendation of our accountant. One trust is in mine name and one in my wife's name. We each have power over the other's trust. We then split assets in a shared Schwab account into separate trusts, which we then in turn used to fund our investments with portfolio solutions. The advantage of the trusts are several-- some having to do with estate planning. Excuse my humor.

My wife has 3 separate tax deferred accounts-- one from an old employer, a roth and then a sep. I have an 401k with my employer.

The bulk of our assets are all in taxable accounts. My thought was to treat all assets as one account for purposes of asset allocation. I was surpised by the recommendation from Portfolio solutions. He said their advice was based on rebalancing but I couldn't see how it rightfully applied since only circa 5% of the assets are in tax deferred accounts. For example, I've seen model portfolios from Rick F that showed allocations to Reits. I would assume that if the both tax deferred accounts were treated as single group that we should essentially use all the tax deferred accounts for Reits or other high yielding asset classes. It was suggested instead that those accounts be balanced separately. The logic still escapes me.

I've been amazed at the wisdom I've seen on this forum and I hoped someone could explain the missing logic to me. Again, sorry I'm flippant.

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Re: Even after they explain it, I'm confused

Post by House Blend » Wed Jun 27, 2012 2:31 pm

solonseneca wrote:So I'm lost. 4 accounts of varying sizes, 2 taxable, 2 deferred. And he says they all should be balanced to 50/50.


Uhh, if I had an advisor who recommended that, and I could resist the urge to fire him on the spot, I would start quizzing him to see how little he understands about the taxation of investments. (Does he even know what tax bracket you are in? Has he asked? If he hasn't, that by itself would be a fireable offense.)

FWIW, I have seen a few Bogleheads defend the notion of maintaining the same AA across all accounts. Maybe one or two of them will chime in here and explain. In the meantime, what I vaguely recall is that the defense was primarily behavioral. That is, if one of your accounts were 100% equity, and the market crashed 50%, you would inevitably panic and be unable to stay the course. But if all your accounts had the same balanced AA, the ride would look smoother. (I guess we are supposed to ignore the higher tax bill, since it comes out of a different pocket. Or something like that.)

Please understand that I'm very much in the allocate-accounts-according-to-tax-efficiency camp, so unable to give an unbiased presentation of the other side. (I have a taxable account that is more or less 100% equity, and hold a mix of bonds and equity in tax-advantaged accounts.)

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Re: Even after they explain it, I'm confused

Post by YDNAL » Wed Jun 27, 2012 2:34 pm

solonseneca wrote:In our case, we have individual trusts setup for my each of us 'cause some wicked smart tax guy said that's the way to go (in case my wife knocks me in the head one of these nights and then she dies of heart attack out of guilt immediately afterward-- somehow the kids are better off. But I digress.)

You have a good sense of humor, solonseneca. :D

The question to this forum is why should you balance these 3 portfolios separately? The portfolio solutions guy started to explain it, but it didn't make sense to me. And then I asked him whether if my 401k was also under their management if they would buy different stuff and he said yes. Again I'm lost. To us, it's all one pot of money that evil accountants have had us put into different buckets for arcane and ineffable reasons.

You are right, it is ONE pot of money from which to create a unified portfolio.

    1. However, the 2 trusts are separate animals. You can't take from one to rebalance the other, or take from one/both to rebalance Taxable.

    2. Taxable should hold tax-EFFicient stuff.
    http://www.bogleheads.org/wiki/Principl ... _Placement
    I'd assume you put all the highest yielding stuff in the tax deferred bucket (which in our case is relatively small compared to the taxable account) instead of balancing that portfolio.

    3. The rest (smaller IRA accounts) should hold tax-INefficient stuff.
    To get started, we're moving over just cash and as well three smaller IRAs that are in my wife's name. (I also have an IRA with work.)
Landy | Be yourself, everyone else is already taken -- Oscar Wilde

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HomerJ
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Re: Even after they explain it, I'm confused

Post by HomerJ » Wed Jun 27, 2012 2:53 pm

We have:
  • Wife IRA at Vanguard
  • My IRA at Vanguard
  • Joint taxable at Vanguard
  • Wife 401k at work
  • My 401k at work

About 50% is in Taxable accounts, 50% in tax-deferred.

We also happen to have a 50/50 stocks/bonds AA

I didn't put ALL my bonds in tax-deferred and ALL my stocks in taxable, but it's pretty close

About 90% of my bond funds are in tax-deferred with 10% stocks
About 90% of my stock funds are in taxable with 10% bonds (Intermediate Tax-Exempt).

This allows me to rebalance if needed (although usually I try to rebalance with new money first, then rebalance in tax-deferred, and finally in taxable).

I'm not sure why the advisors are so stuck on 50/50 for each fund, instead of looking at the whole picture... Of course, maybe part of the problem is that they don't control the whole picture, and are reluctant to so heavily weight a single asset class like REITs in the portion they do control.

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Re: Even after they explain it, I'm confused

Post by livesoft » Wed Jun 27, 2012 3:06 pm

I believe that previously on this forum the portfolio solutions guy has stated that many clients have difficulty with one overall asset allocation for a portfolio of many accounts. So they try to make each account have the desired AA.

Nevertheless, they should be able to articulate that easily, so I expect a nice response right here in this thread. :)
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Rick Ferri
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Re: Even after they explain it, I'm confused

Post by Rick Ferri » Wed Jun 27, 2012 3:31 pm

Tax location is tricky for everyone and is even harder for someone who is transitioning into retiring or retired.

First, we can't know what a client's tax rate will be when they need money or if tax rates will be different in the future as they are now, and when that change will occur. A taxable account may be in a high tax bracket this year and low one next year if a client retires or something else occurs. So, my default suggestion is to have the same allocation across all portfolio. If a client has a good grasp of exactly what their needs will be in the future, then we can have a conversation about increasing equity in the taxable account and increasing bonds in the tax-sheltered account.

Second, there is a hidden risk with having different allocations in taxable versus non-taxable, and we saw this risk turn into reality during 2008 and early 2009. A few clients terminated their higher risk taxable portfolio because that specific portfolio was losing more money than the more conservative non-taxable portfolio. In other words, they separated their portfolios in their mind and compared returns rather than looking at the big picture.

The most important aspect of a total portfolio approach is the overall asset allocation between all accounts. How that is divided among accounts is much less important. If a client wants to make asset location important, then we can have a conversation about it.

Rick Ferri
The views expressed by Rick Ferri are strictly his own as a private investor and author and do not reflect the views of any entity or other persons.

staythecourse
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Re: Even after they explain it, I'm confused

Post by staythecourse » Wed Jun 27, 2012 3:33 pm

Rick Ferri wrote:Tax location is tricky for everyone and is even harder for someone who is transitioning into retiring or retired.

First, we can't know what a client's tax rate will be when they need money or if tax rates will be different in the future as they are now, and when that change will occur. A taxable account may be in a high tax bracket this year and low one next year if a client retires or something else occurs. So, my default suggestion is to have the same allocation across all portfolio. If a client has a good grasp of exactly what their needs will be in the future, then we can have a conversation about increasing equity in the taxable account and increasing bonds in the tax-sheltered account.

Second, there is a hidden risk with having different allocations in taxable versus non-taxable, and we saw this risk turn into reality during 2008 and early 2009. A few clients terminated their higher risk taxable portfolio because that specific portfolio was losing more money than the more conservative non-taxable portfolio. In other words, they separated their portfolios in their mind and compared returns rather than looking at the big picture.

The most important aspect of a total portfolio approach is the overall asset allocation between all accounts. How that is divided among accounts is much less important. If a client wants to make asset location important, then we can have a conversation about it.

Rick Ferri


That seems like a reasonable answer. Just curious if you have written that philosophy in any of your books, because it is the first I have heard you talk about it. Of course, I could just be forgetting. :D

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

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Rick Ferri
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Re: Even after they explain it, I'm confused

Post by Rick Ferri » Wed Jun 27, 2012 3:36 pm

I do. It's in All About Asset Allocation 2nd ed, pages 267-269.

I just reread those pageas and I had said the same thing (whew!).

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solonseneca
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Re: Even after they explain it, I'm confused

Post by solonseneca » Wed Jun 27, 2012 3:53 pm

Thanks Rick

Given our circumstances where my wife and I are treating all of our the assets as single pile even if they are in separate accounts and that we still have other accounts not under management, we have plenty of assets so that we won't be touching the tax deferred accounts until uncle Sam tells us that they are no longer tax deferred, the size of combined portfolio is such that we want to take advantage of the best thinking on asset allocation rather than be constrained by treating the smaller accounts as separate-- given all this, would you think the recommendation of some these posters is right? That in essence the tax deferred account need not be balanced separately -- or is that an overstatement?


Thanks again

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Rick Ferri
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Re: Even after they explain it, I'm confused

Post by Rick Ferri » Wed Jun 27, 2012 4:10 pm

It all depends on what happens to long-term capital gain tax rates and dividend tax rates next year. Hate to kick the can down the road, but I'd probably be able to answer that question better in 6 months.

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Re: Even after they explain it, I'm confused

Post by pingo » Wed Jun 27, 2012 4:47 pm

I'm pleased and impressed that Mr. Ferri has responded to this thread.

I'll be honest that I started getting uncomfortable at the idea that Bogleheads might be offer advice or criticisms to compete with Portfolio Solutions while having few-to-no specifics about solonseneca's financial situation. Or, that anyone from PS might be expected to explain/justify/defend their advice on this forum with such little information. As well, I think PS would have an obligation of confidentiality, which also ties their hands, even if they even know which client the OP may be.

I guess it just seems like a losing position to be in, even if no one has done anything wrong. I hope we'll keep that in mind.

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Re: Even after they explain it, I'm confused

Post by bdpb » Wed Jun 27, 2012 5:09 pm

Rick Ferri wrote:Tax location is tricky for everyone and is even harder for someone who is transitioning into retiring or retired.

First, we can't know what a client's tax rate will be when they need money or if tax rates will be different in the future as they are now, and when that change will occur. A taxable account may be in a high tax bracket this year and low one next year if a client retires or something else occurs. So, my default suggestion is to have the same allocation across all portfolio. If a client has a good grasp of exactly what their needs will be in the future, then we can have a conversation about increasing equity in the taxable account and increasing bonds in the tax-sheltered account.

Second, there is a hidden risk with having different allocations in taxable versus non-taxable, and we saw this risk turn into reality during 2008 and early 2009. A few clients terminated their higher risk taxable portfolio because that specific portfolio was losing more money than the more conservative non-taxable portfolio. In other words, they separated their portfolios in their mind and compared returns rather than looking at the big picture.

The most important aspect of a total portfolio approach is the overall asset allocation between all accounts. How that is divided among accounts is much less important. If a client wants to make asset location important, then we can have a conversation about it.


I'll have to admit I'm not as impressed with Rick's answer as everyone else. If the service provider can't help the client with
number one and can't stop them from number two, then what are they getting paid for?

It sounds like the OP may have a grasp on their tax situation.

OP,
It sounds like with a little more effort you may be able to do things on your own.
What are you expecting for the price you are paying?

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Re: Even after they explain it, I'm confused

Post by Rick Ferri » Wed Jun 27, 2012 5:43 pm

There is a rule in portfolio management that every experienced adviser knows.

Managed the portfolio first; worry about taxes second. Don't let taxes get in the vway of managing a portfolio. When taxes decisions become the dominant driver of portfolio decisions, the wrong decisions tend to be made.

We can help control portfolio risk with a proper asset allocation help; we can ensure a portfolio stays on course with a diciplined rebalancing strategy; we can prevent people from making mistakes in difficult tines; but we are very limited on what we can do to lower the tax burden of making money. That's really out of the hands of an investment adviser.

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solonseneca
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Re: Even after they explain it, I'm confused

Post by solonseneca » Wed Jun 27, 2012 5:47 pm

I'm happy with portfolio solutions. When I didn't understand the explanation given, they said they get me more info and they had no issue with me bringing the topic up on this forum.

I remain impressed with this forum and I am thankful for everyone's willingness to share their thoughts.

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Re: Even after they explain it, I'm confused

Post by retiredjg » Wed Jun 27, 2012 6:09 pm

It is easy to think of the way you learn something to be "the right way". So it is with Bogleheads. I remember being shocked to learn that not everybody "knows" that tax-efficient placement is "right". That's because I first learned about portfolio construction here.

Since then, I've read here that more than a few financial advisors (including Portfolio Solutions) suggest this way of setting up a portfolio. The reasons given have been the same that Rick mentioned - people tend to freak out and sell when one account is taking a dive; and we don't know what future tax law changes will do, so it may not make sense to set up things with current laws in mind.

I have no opinion or comment on what you should do, but you should know that this approach is not unusual. It's just different from what we usually suggest here. And not even all Boglehead's follow the tax efficient method either. Some people just like the other approach better.

Good luck with your portfolio!

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Re: Even after they explain it, I'm confused

Post by brick-house » Wed Jun 27, 2012 8:56 pm

Bpdb wrote:
I'll have to admit I'm not as impressed with Rick's answer as everyone else. If the service provider can't help the client with
number one and can't stop them from number two, then what are they getting paid for?

It sounds like the OP may have a grasp on their tax situation.

OP,
It sounds like with a little more effort you may be able to do things on your own.
What are you expecting for the price you are paying?


+1… Boglehead Wiki has a great section on the importance of asset location.

http://www.bogleheads.org/wiki/Principl ... _Placement

If you have both taxable and tax-advantaged accounts, you generally want to hold bonds in a retirement account and stocks in a taxable account. The advantages for holding stocks in a taxable account include:

Tax-deferred accounts convert long-term capital gains into ordinary income upon distribution; long-term capital gains have, at most times, been taxed at a lower rate than ordinary income.
Qualified dividends are currently (until Dec. 31, 2012) [1] taxed at a lower rate.
Long-term capital gains are only due when realized, which offers an additional means of deferring taxes.
Ability to harvest losses.
Ability to donate appreciated shares to charity, avoiding all taxes.
Estate planning; there is a potential for stepped-up cost basis upon death.


This article shows you how to reduce your taxes by strategically placing your investments into appropriate accounts. In practice, the size of the tax-advantaged accounts often prevents the ideal strategy from being fully implemented. But, after many years of compounding, appropriately placing most of your portfolio can generate a significant increase in your return.
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Re: Even after they explain it, I'm confused

Post by bdpb » Wed Jun 27, 2012 11:45 pm

Rick Ferri wrote:We can help control portfolio risk with a proper asset allocation help;

we can prevent people from making mistakes in difficult tines;

but we are very limited on what we can do to lower the tax burden of making money.
That's really out of the hands of an investment adviser.

The first part sounds like a one time fee.

You've already admitted you can't do part two.

I don't understand why you would be "very limited" when it comes to tax burdens.
I'm sure you know the tax laws. I'm expecting that you gather tons of info from the client.
It sounds like there was tax discussion with the client. Is there no discussion
about future contribution selections (deductible or Roth), Roth conversions, timing of SS, etc.?
Maybe you can't get this kind of input for 1% of your portfolio (or 2% of your stock portfolio in a 50/50 AA).

Not to belabor the point, but to the OP: What are you expecting for what you're paying for?
You can put your money in a 50/50 Target retirement fund and save yourself a ton of money.

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Re: Even after they explain it, I'm confused

Post by Blue » Thu Jun 28, 2012 6:30 am

Agree with some of the comments. As a DIY investor, I've always wondered if hiring a financial advisor would help reduce our personal tax burden by "optimal placement" of funds, more aggressive tax loss harvesting, etc.

In this scenario it almost seems as if hiring an advisor is counter-productive to looking at individual tax considerations.

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Re: Even after they explain it, I'm confused

Post by YDNAL » Thu Jun 28, 2012 7:18 am

bdpb wrote:I'll have to admit I'm not as impressed with Rick's answer as everyone else. If the service provider can't help the client with number one and can't stop them from number two, then what are they getting paid for?

I can't disagree with bdpb's general assessment.

Especially "number two:"
Rick Ferri wrote:Second, there is a hidden risk with having different allocations in taxable versus non-taxable, and we saw this risk turn into reality during 2008 and early 2009. A few clients terminated their higher risk taxable portfolio because that specific portfolio was losing more money than the more conservative non-taxable portfolio. In other words, they separated their portfolios in their mind and compared returns rather than looking at the big picture.

Time and again and again we hear that investors need help in developing plan, AA, etc, but need help mostly during turmoils in the Markets to make sure they make the right decision(s). It seems to me that clients pay the advisor so they do exactly what they proclaim to be one of their (main?) functions.

Additionally, OP has admitted to "being inadequate" in managing their Assets, thus hired and advisor and started this thread because "even after they explain it, I'm confused." That is a bit troubling.

By the way, I wouldn't pay 33%, 35% tax on taxable Bond dividends (for instance) in Taxable regardless of how anyone spins this subject.
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Re: Even after they explain it, I'm confused

Post by HomerJ » Thu Jun 28, 2012 8:24 am

YDNAL wrote:By the way, I wouldn't pay 33%, 35% tax on taxable Bond dividends (for instance) in Taxable regardless of how anyone spins this subject.


You can have tax-exempt bonds in a taxable account.

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Re: Even after they explain it, I'm confused

Post by YDNAL » Thu Jun 28, 2012 8:51 am

rrosenkoetter wrote:
YDNAL wrote:By the way, I wouldn't pay 33%, 35% tax on taxable Bond dividends (for instance) in Taxable regardless of how anyone spins this subject.

You can have tax-exempt bonds in a taxable account.

Why?

1. You may have tax-exempt in taxable accounts IF you need to for lack of space and other overall portfolio priorities.
2. Since you mention it, I believe that Rick is a strong proponent of Bond diversification to the point which includes High Yield and Mortgage-Backed Bonds.
Landy | Be yourself, everyone else is already taken -- Oscar Wilde

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Re: Even after they explain it, I'm confused

Post by bdpb » Thu Jun 28, 2012 8:57 am

YDNAL wrote:Especially "number two:"
Rick Ferri wrote:Second, there is a hidden risk with having different allocations in taxable versus non-taxable, and we saw this risk turn into reality during 2008 and early 2009. A few clients terminated their higher risk taxable portfolio because that specific portfolio was losing more money than the more conservative non-taxable portfolio. In other words, they separated their portfolios in their mind and compared returns rather than looking at the big picture.

Time and again and again we hear that investors need help in developing plan, AA, etc, but need help mostly during turmoils in the Markets to make sure they make the right decision(s). It seems to me that clients pay the advisor so they do exactly what they proclaim to be one of their (main?) functions.

Additionally, OP has admitted to "being inadequate" in managing their Assets, thus hired and advisor and started this thread because "even after they explain it, I'm confused." That is a bit troubling.

By the way, I wouldn't pay 33%, 35% tax on taxable Bond dividends (for instance) in Taxable regardless of how anyone spins this subject.

I don't disagree that an advisor can provide help during market turmoil. I just think it's a little oversold, thus expensive.
Maybe the client in this example was Tax Loss Harvesting. :D In this example, it doesn't sound like the advisor did
what they said they can do.

The OP doesn't sound so inadequate when it comes to managing taxes. I feel that I'm more than adequate when
it comes to managing my assets and after all this discussion, I'm still confused why taxes are not taken more into
consideration when creating both an AA and locating assets. I just don't see how REITs can be left out of a portfolio
and/or bonds be put in a taxable account when tax free space is available. The claim that locating AA the same
in all accounts makes the advisor's job easier to keep the client invested during market turmoils doesn't do it for me.

So, does the client have to tell the advisor, "put all my bonds in tax free accounts so that I don't have to pay 35% tax"?

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Re: Even after they explain it, I'm confused

Post by YDNAL » Thu Jun 28, 2012 9:12 am

bdpb wrote:
Additionally, OP has admitted to "being inadequate" in managing their Assets, thus hired and advisor and started this thread because "even after they explain it, I'm confused." That is a bit troubling.

The OP doesn't sound so inadequate when it comes to managing taxes.

I wouldn't make that ascertion unless it comes from the OP.

What is "troubling" is the advisor leaving a client "confused" after a discussion to develop a plan.
Landy | Be yourself, everyone else is already taken -- Oscar Wilde

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Re: Even after they explain it, I'm confused

Post by solonseneca » Thu Jun 28, 2012 9:20 am

First in defense of the advisor:

This was a half hour teleconference that covered a lot of material. Once the basic portfolio review was completed, he asked us if we had any questions. I had about 5 minutes before I had to get on another call. The short answer given during the meeting was unsatisfactory to me-- but they promised me to follow up and they encouraged to collect the wisdom of the bogglehead forum.


I believe rrosenkoetter and others above gave great rules of thumb answer. YDNAL first post echoed my thinking.

The more nuanced answers from others like Rick & others were also very helpful.

The point bdpb is making-- which I'll paraphrase as "why are you paying an advisor that doesn't explain stuff particularly well-- and with little more effort, you could handle it all yourself." --that's a great point.

Let me address that. Investing is scary, you people are braver then I, and I don't trust myself.

I came into a pile of money last year and found my myself frightened at the notion of putting that money to work in a market that was zigzagging seemingly irrationally, with bonds that didn't appear to me to pay the right risk premium and with external events like the inability of congress to get a debt ceiling deal done and the potential of a complete European meltdown.

I bought and read all the recommended books but frankly I read them like one reads People magazine in the dentist office before an appointment. "Oh, that's a nice chart about asset allocation. And Brad and Angeline are adopting a new kid. How nice."

In a few years, I may reclaim my portfolio but in the meantime paying a pro that adheres to a passive indexing philosophy and who doesn't rip me off with outrageous fees seemed like the right thing to do. At least for me and my wife right now.

With that said, the first 1/2 hour with my advisor has made me realize that even with an advisor I'll have questions. I am comforted to know that this forum exists and I can get straight talk from veterans.

When my advisor gets back to with a fuller explanation of their thinking, I'll be better armed for the conversation.

Thanks again.

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CaliJim
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Re: Even after they explain it, I'm confused

Post by CaliJim » Thu Jun 28, 2012 9:40 am

I'm only a couple of years into the withdrawal phase, so I don't have a ton of experience. But in my limited sample size of one person over one handful of years: my marginal tax rates have been so low that tax efficient placement has not mattered at all.
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dbr
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Re: Even after they explain it, I'm confused

Post by dbr » Thu Jun 28, 2012 9:50 am

CaliJim wrote:I'm only a couple of years into the withdrawal phase, so I don't have a ton of experience. But in my limited sample size of one person over one handful of years: my marginal tax rates have been so low that tax efficient placement has not mattered at all.


So it would be one thing to point out that the "possibly defective" asset location is, in fact, an effective plan, and it would be another thing to say that good tax planning is too hard to do or can't be done. It is a fact that in individual cases problems that can develop from "bad" location decisions do not in fact occur. Tax planning is notoriously specific to individual situations.

I would also resurrect the comment that tax planning in those trusts is different from tax planning for the other portions of the assets.

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Re: Even after they explain it, I'm confused

Post by YDNAL » Thu Jun 28, 2012 10:13 am

CaliJim wrote:I'm only a couple of years into the withdrawal phase, so I don't have a ton of experience. But in my limited sample size of one person over one handful of years: my marginal tax rates have been so low that tax efficient placement has not mattered at all.

Very eloquent way to state the basis of your analysis. :)

The fact your "marginal tax rates have been so low" is not unusual and has been extensively discussed in all the "401K versus Roth 401K" threads. There have been real-life situations discussed of "wealthy" taxpayers at the low(er) tax brackets in retirement.

However, OP doesn't seem to be retired or near-retired, is perhaps young(er), and likely in a high(er) bracket and shouldn't be holding INefficient stuff in Taxable based on the things stated previously.
solonseneca (OP) wrote:I came into a pile of money last year and found my myself frightened at the notion of putting that money to work in a market that was zigzagging seemingly irrationally, with bonds that didn't appear to me to pay the right risk premium and with external events....


solonseneca wrote:YDNAL first post echoed my thinking.

Good to know that you agree - that was supposed to be the extent of my participation in your thread.

For the record, my subsequent posts have been prompted by questionable spins on certain important topics and I believe that you (yourself) stated your thoughts quite nicely in the original post.
We opted for a 50/50 allocation. To get started, we're moving over just cash and as well three smaller IRAs that are in my wife's name. (I also have an IRA with work.) They came back with three nice looking though slightly different portfolios-- but all managed to the same 50/50 allocation.

That doesn't make a lick of sense to me.
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Re: Even after they explain it, I'm confused

Post by nolo » Thu Jun 28, 2012 7:37 pm

solonseneca wrote:The question to this forum is why should you balance these 3 portfolios separately? The portfolio solutions guy started to explain it, but it didn't make sense to me. And then I asked him whether if my 401k was also under their management if they would buy different stuff and he said yes. Again I'm lost. To us, it's all one pot of money that evil accountants have had us put into different buckets for arcane and ineffable reasons.

I pressed the guy on Reits. "Shouldn't I have some Reit allocation? I see this post from Rick where he allocates stuff there."

He said something like "No, in the near term you've got a tax problem, so they don't belong in the taxable section. And your tax deferred account is too small." But I asked if you added in my 401k, wouldn't it be large enough? "Yes, but we also would balance that account to 50/50-- so maybe not."

So I'm lost. 4 accounts of varying sizes, 2 taxable, 2 deferred. And he says they all should be balanced to 50/50. My thinking is that all the tax deferred should be high yielding stuff. He's going to send me some links to posts on this forum that explains it and I said in meanwhile I'd throw up this question so folks can make fun of me.



Sounds like the same conversation I had with PS when I was considering them. At one point I was told the reason for the separate allocations was to make it easier to re-balance. As I pressed them I kept getting different answers on how/where my smaller retirement accounts would be invested after pointing out that it didn't make sense to split a $75K retirement account into six funds-- they agreed.

Personally I believe PS is suitable for folks who don't really want to spend time educating themselves, don't want any input into their portfolio (my understanding was their recommendations are fixed and not for discussion) and just want to turn their portfolios over to an advisor. That said, I decided that I wanted an advisor who would answer all my questions--especially in the beginning and would be consistent in his answers, let me have input into my portfolio selection and do it for a fee comparable to that of PS. It took some time but I found one -- only thing he can't do is make the market act more favorably :happy

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Rick Ferri
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Re: Even after they explain it, I'm confused

Post by Rick Ferri » Thu Jun 28, 2012 7:51 pm

After 25 years in the business of managing other people's money, there are some things I do that appear on the surface to be counterintuitive. Rebalancing into stocks at what appears to be a terrible time in the market Is one, not getting sucked into losing commodity positions is another, and how we view tax management is another. All have worked very well for our long-term investors.

Nolo, I am happy to hear you found an adviser that fits your unique needs and is willing to discount his fee to the low rate that Portfolio Solutions has been charging all clients for 13 years.

Rick Ferri
The views expressed by Rick Ferri are strictly his own as a private investor and author and do not reflect the views of any entity or other persons.

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abuss368
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Re: Even after they explain it, I'm confused

Post by abuss368 » Wed Oct 17, 2012 7:21 pm

Rick Ferri wrote:Tax location is tricky for everyone and is even harder for someone who is transitioning into retiring or retired.

First, we can't know what a client's tax rate will be when they need money or if tax rates will be different in the future as they are now, and when that change will occur. A taxable account may be in a high tax bracket this year and low one next year if a client retires or something else occurs. So, my default suggestion is to have the same allocation across all portfolio. If a client has a good grasp of exactly what their needs will be in the future, then we can have a conversation about increasing equity in the taxable account and increasing bonds in the tax-sheltered account.

Second, there is a hidden risk with having different allocations in taxable versus non-taxable, and we saw this risk turn into reality during 2008 and early 2009. A few clients terminated their higher risk taxable portfolio because that specific portfolio was losing more money than the more conservative non-taxable portfolio. In other words, they separated their portfolios in their mind and compared returns rather than looking at the big picture.

The most important aspect of a total portfolio approach is the overall asset allocation between all accounts. How that is divided among accounts is much less important. If a client wants to make asset location important, then we can have a conversation about it.

Rick Ferri



Related to another thread currently on the forum, this thread was again referenced.

This note speaks to me.

Thank you Rick!
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DWolf
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Re: [Advisor suggests same allocation across account types]

Post by DWolf » Wed Oct 17, 2012 10:20 pm

I wonder if the answer is partly what's easier for a firm to manage? Although rebalancing your own account across a multitude of accounts isn't that difficult, I wonder how easily it is accomplished when you manage billions. Especially when you don't have custody of accounts like 401(k) accounts that are held in an employer's 401(k). I wonder if it is just easier to have software that automatically rebalances to a model portfolio than having to manually input across multiple accounts? Maybe it's about what's more efficient for the manager and less about what is most efficient of the investor? Anyone know the answer to this?

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