Father's CFA recommended retirement portfolio

jlev

My father has just turned 70 and is about to retire and start drawing social security. He recently met with a CFP who is going to be managing his retirement accounts for 1% of assets as a fee. He really likes the guy and feels well taken care of, but the Portfolio seems a bit all over the place. It's not truly large enough for his retirement needs so he's hoping to keep a somewhat aggressive tilt and has about one third in an IRA that is 100% invested in the Blackrock Global Tactical Strategies Portfolio and the rest in a 401k with the funds summarized in the image below:


I'm glad that he feels like he is in good hands, but I'm concerned that the advisor is spreading him too thin to be useful (for commissions?) and the fee seems excessive since he is already concerned that he doesn't have enough for retirement. The fee does includes general planning help beyond just portfolio management whenever my father has questions along with some proactive discovery in order to get a good background.

I wondered what people's thoughts here might be?

Alex

This is a fee generator. Just a quick glance shows that many if not most are front-loaded funds. Big hurdle to overcome.

Charles

I fear Alex is right, especially if your father is paying the front-loads on these funds. Is he? Imperative you find out. The situation is my penultimate fear...very glad you are helping protect him.

Is the CFA charging an addition fee, beyond the loads and er listed?

Please read this thread: Ouch...biting commentary on Edward Jones

The series of painful articles by Sylvia Kronstadt...exploitation of uninformed or less able investors.

Here is full article: Edward Jones Saga

Besides that, there are just way too many funds here, in my opinion...you are right to be concerned.

jlev

Very good point that I didn't even check into. I'll send an email now and followup with a phone call next week to see if he paid loads on these.

He is paying a 1% of assets fee to the advisor.

rjb112

What is the expense ratio of the Blackrock Global Tactical Strategies Portfolio. I didn't see it listed in the pdf. Also, what is the performance record of this Blackrock Portfolio? It could be compared with other tactical allocation funds, such as LCORX, which is somewhat similar.

jlev

I had run into a brick wall last time I tried to get any additional information about it, but I just learned that its invested in by some type (GMIB?) of variable annuity held in his IRA through MetLife. I found their summary prospectus and am editing the OP to link to it.

New link

Original link

rjb112

By the way, there is an error in the pdf explaining this Blackrock Portfolio. On page 3, they go into the continuum of risk, but they got it backwards. On the far left it says "low risk", when in fact the far left is the highest risk in their mix, with the highest amount of equities and opportunistic investments, and no cash.

Dex

Have a conference call with a Vanguard Adviser and see what they suggest.
At 70 your father should be looking for simplicity and things he can understand.

jlev

As I understand it, the x-axis is their measure of global market volatility/risk, with the allocations showing that during periods of "measured high risk" they shift their tactical allocation towards cash etc. then during "measured low-risk" periods they switch to the opportunistic investments.

rjb112

"but I just learned that its invested in by some type (GMIB?) of variable annuity held in his IRA through MetLife".....

Which leads to this question: what is a variable annuity doing inside an IRA?
IRA's are tax sheltered, and so are variable annuities. If a person has an IRA and they are looking for investments to put inside it, they should not consider placing a variable annuity inside.............

cman

First, anyone who thinks their financial planner is a professional and a good one should watch this TV commercial



CFPs, like real estate agents and masseuses vary a lot from charlatans to experienced experts.

The first red flag is recommendation of funds with loads. You need to ask if the CFP receives commissions from the funds. If so, walk away because, the CFP has a conflict of interest and will not be able to provide recommendations wholly in your interests.

If the CFP does not receive fees and is not lying about it, ask for justification of load funds when similar no load funds are available. The answer will be important hints to evaluate.

Next, unless the financial plan involves planning and continuous monitoring of all finances, taxes, estate planning, etc on a regular basis, an asset percentage based arrangement is wasteful. If it is primarily portfolio planning with occasional planning of other finances, look for a flat fee financial planner.

The number if funds is a more difficult question to answer even after the above issues have been resolved. It can happen due to historical reasons, brokerages used, what funds are available where, etc.

The financial planners themselves have their own strategies and biases which may include a large number of funds for one or more of the following reasons:

1. Some advisors limit the allocation to any one fund to a maximum percentage to manage systemic fund or fund family risks. This may require a number of funds for large portfolios. Too many funds with small allocations (<5%) might indicate a problem with the advisor.

2. Some advisors manage their own risks via diversifying rather than manage the client's risks. This is particularly true of advisors who have come from a fund management background than portfolio management. It is always a good thing for a money manager's career to have some well performing assets at all times than take concentrated bets on fewer assets. Many of the latter may go through severe drawdowns and draw angry questions from clients at the end of every quarter even if that is the right thing over the long term. Moreover, having a small allocation to a risky fund that returns a great return in any quarter can psychologically mask mistakes elsewhere and can even grow the advisor's reputation as a genius.

Managing other people's money is never as simple as managing your own money.

3. Advisors are not immune from the same "fund collection" kitchen sink strategy as some participants here and have a tendency to add any fund that currently looks good just in case their earlier choices turn out to be not that great. It is human nature to always look for the next big thing.

Unfortunately, many look at their financial planners just like their doctors. As ultimate authorities that should not be questioned. This may result in unrecoverable tragedies.

Some suggestions to evaluating advisors:

1. Resolve all conflicts if interest.
2. Ask them to explain in simple terms their strategy for you without getting lost in fund names and lists. They should then justify their fund selection in the context of that strategy. If the cannot do this or unwilling to do this walk away.
3. See if they will set up a good benchmark for your portfolio performance, ideally a simple index fund allocation for your risk level against which your portfolio can be measured. This is where you will likely lose most advisors because nothing shows up an advisor's competence or lack of more than a suitable benchmark. Good advisors should be able to create a good benchmark and satisfactorily explain the deviations in your portfolio.

If it is just portfolio management that is needed, you can also explore cheaper online services like WealthFront or Betterment as an alternative.

jerry

I n will join the crowd. 1% looks fair but clearly isn't if the client is put into load funds. To be a little fair to the advisor we don't know when these funds were acquired . Is it possible that your father got into them as a result of suggestions by a different advisor.

Also the phrase retirement accounts was used. Are these in IRAs or some other tax sheltered account or all in taxable.

msf

Loads are typically waived for investments through wrap accounts. For example, quoting from the prospectus of TPINX, sales charges are waived for:

Advisory Fee Programs. Shares acquired by an investor in connection
with a comprehensive fee or other advisory fee arrangement between
the investor and a registered broker-dealer or investment adviser, trust
company or bank (referred to as the “Sponsor”) in which the investor
pays that Sponsor a fee for investment advisory services and the
Sponsor or a broker-dealer through whom the shares are acquired has
an agreement with Distributors authorizing the sale of Fund shares.

Of course the planner is receiving trailing fees (12b-1) from the funds. Not loads. An obvious tip off is the use of TRP Advisor class shares. These are shares with an extra 0.25% 12b-1 fee. Quoting from a TRP prospectus:

Advisor Class shares are sold only through unaffiliated brokers and other unaffiliated financial intermediaries that are compensated by the class for distribution, shareholder servicing, and/or certain administrative services under a Board-approved Rule 12b-1 plan.

The question I would ask is whether the wrap fee is reduced by the amount of trailing fees that the planner receives.

For example, here's Edward Jones' brochure about its Unified Management Account (wrap account) program.

"Fee Offsets. ... If we receive Rule 12b-1 fees for the shares in your account, we will credit the amount received to your account."

jlev

@msf Here is the wording regarding fees that I see:

"We receive service fees from Fidelity for various custodial support services we provide, which are based upon the amount of NTF funds and total client assets held in custody by Fidelity. When support service fees are generated by retirement plan assets, we offset these fees against the account fee payable by the retirement plan."

This seems like the desired outcome you indicated, it appears from what I can read that.

Also, the wrap subadvisor indicates in its that the combined subadvising fee and CFP management fee, contractually cannot exceed 125 bps as a condition of being a subadvisor. Seemed like a good sign.

@charles looking at his decently detailed year-end summary and based on his input amounts and year end amounts it looks like the loads were waived. And the advisor is a IAR and should follow fiduciary standards I believe? I don't see much churn in general which would have perhaps suggested some of the EDJones issues discussed in that thread.

@cman There is more than just portfolio management to be done.

Other research to be done. I'm mollified about some things, but still need to do followups on other things people have mentioned.

Charles

@jlev. Good new, if true. After you do the research, perhaps you should ask to have a discussion with the CFA. Make sure about the loads. Make sure about lack of churn. Then ask, why so many funds? Is the CFA being mandated by his firm to buy many funds? What is the CFA's investing philosophy?

You'll get lots of opinions on the boards, but I like to keep as few holdings as possible. If I have more than 4-5 funds (easy to do hanging out here), I start looking to pare back.

I think it is just great you are doing this due diligence. Thanks for sharing your concern and what you learn from it with the board.

Sven

My father has just turned 70 and is about to
I'm glad that he feels like he is in good hands, but I'm concerned that the advisor is spreading him too thin to be useful (for commissions?) and the fee seems excessive
since he is already concerned that he doesn't have enough for retirement. The fee does includes general planning help beyond just portfolio management whenever my father has questions along with some proactive discovery in order to get a good background.

I wondered what people's thoughts here might be?

I was in similar situation to yours a number years ago. We went with Vanguard and never look back. Depending on your needs there are several options available and their management cost. Please see link below.
https://investor.vanguard.com/what-we-offer/investing-help/choose-the-help-thats-right-for-you
Overall we are very happy with Vanguard's service and advise. Also you are receiving excellent advices from many folks here. Good luck.

WallStreetRanter

As someone mentioned, as this appears to be a wrap account (since he is getting paid 1% of AUM) those loads are most certainly waived. However, I would question why this advisor cannot get access to the cheaper share classes on his platform. He should be buying F2 shares with American Funds, The Pimco fund should be an I share, Templeton should be Adv shares, Hartford should be I shares, just a lot of questions about this advisors platform and why he can only get the load waived, instead of cheaper share classes.

catch22

@jlev

1. If I understand this properly, your father has an IRA (1/3 of his money) with the single holding of the Blackrock Tactical Global Strategies which is inside of a Metlife variable annuity.
Current Blackrock fund summary

2. The remaining 2/3's of his retirement holdings are currently within a company 401k.

Questions:

1. The advisor has not been hired yet, yes?

2. Is the advisor's plan to rollover the existing IRA and the 401k into a new IRA account with the advisor's organization?

3. Has the advisor provided a contractual form in writing and signed that defines all fees and expenses for his/her services?

A few general thoughts and agreements with other statements already posted:

Others noted too many funds, class of funds used, choices, benchmarking and % of allocations.

Indeed.

--- likely too much overlap among funds
--- 5 investments would cover a lot of investment ground for some diversification.

One fund choice in particular strikes me as very odd; and that is the FTEXX. The 10 year return is 1.1%, the expense ratio alone guarantees an ongoing negative flow.....DUH?

As to a benchmark, although U.S.-centric:

If one invested 50/50, 10 years ago today, in VTI and AGG (not my favorite bond choice, but...) the combined annualized return, dividends reinvested, is 8%. 'Course one may have encountered what I call the "twitches"; as VTI traveled downward about -55% from October of 2007 through March of 2009.

Both VTI and AGG are U.S.-centric etf's. VTI recently is about 75% large cap and 25% mid-cap size companies. AGG notes to attempt to hold investment grade bonds; however, the current mix is about 1/3 each of U.S. gov't. bonds, investment grade and below investment grade. Not a global or sector diversified mix; but.....

For this mix in addition to the 10 year return:
---5 year = 13.9%
---3 year = 9.4%
---1 year = 10.9%
---2013 = 15.8%
---YTD = 1.3%

Best to you and your father sorting this situation; and I agree with others to investigate an account with Fidelity, Vanguard or similar (as a means of comparison for the current consideration).

Regards,
Catch

msf

WallStreetRanter said:

As someone mentioned, as this appears to be a wrap account (since he is getting paid 1% of AUM) those loads are most certainly waived. However, I would question why this advisor cannot get access to the cheaper share classes on his platform. He should be buying F2 shares with American Funds, The Pimco fund should be an I share, Templeton should be Adv shares, Hartford should be I shares, just a lot of questions about this advisors platform and why he can only get the load waived, instead of cheaper share classes.

Thus my question about getting the 12b-1 fees credited to the account (i.e. credited against wrap fee). To a large extent, the difference between A shares and I shares is the 12b-1 fee. For example, TPINX (A shares) cost 0.86%, including a 0.25% 12b-1 fee; TGBAX (Advisor shares) cost 0.61%.

My theory (based on no evidence whatsoever) is that larger firms can get the I shares (perhaps because their clients' investments, aggregated meet the min?), while smaller firms/advisers deal with A shares and fee credits.

hank

Fascinating - Though I have no opinion on the plan's appropriateness or wisdom.

1. It's good for a "retiree" in the sense that keeping track of all these funds gives him plenty to do with all that spare time.

2. Nice to see TEMWX there. For about 15 years it was my first & only fund. Damn good fund under Sir John back in the 70s and 80s.

3. Plan is quite a bit more aggressive than I''d want at this stage. We mostly keep to very diversified value oriented equity funds, lots of moderate allocation types, and a strong dose of cash or intermediate bonds.

4 Agree with letting it grow for several years in retirement before tapping.

msf

A thought about going to Vanguard, Fidelity, whatever. They may be better in their recommendations; certainly they will be less pushy. But don't be lulled into thinking that they don't have their own (institutionally backed) biases as well.

Several years ago, I had my mother take advantage of Vanguard's free (for Voyager customers at the time, now you need to be Voyager Select) CFA financial plan. The guy did a very good, thorough job - spent a good amount of time talking with my mother, inventoried assets, talked about needs. Suggested asset allocation was appropriate, etc.

However, and not surprisingly, the suggested portfolio was all Vanguard funds. This made little sense IMHO for someone with a fair number of muni bonds. No reason to sell off that portfolio just to buy a muni bond fund, especially since transaction costs on bonds are prohibitive (bonds are often best viewed as B&H investments until they mature).

In addition, the LC blend recommendation was VFINX, at a time that Vanguard was touting how it worked with MSCI to get better indexes. (That difference was real, because of the use of buffer zones - S&P was the last to adopt these.) Vanguard had, and has VLCAX. (At the time, the price difference was just 1 basis pt.) While I did ask, I was never clear on the answer, and I guessed that it was the easier sale - everyone knows S&P 500.

Regarding Fidelity - their reps get compensated based on AUM, with higher rates for the more profitable products. Insurance products and Porfolio Advisory Services (PAS) being at the top of the list. Here's their FAQ on pricing and the detailed (13 p) pdf with details on representative's compensation.

On the plus side, they're not making this hard to find, and the incentives aren't large. On the negative side, this could explain why Fidelity kept urging me to suggest PAS to friends and family (not for me, though; Fidelity knows better than that).

Take all advice with a grain of salt.

jlev

Thank you all for the advice and suggestions so far. I sent an email with questions to both father and advisor and the advisor is waiting for Dad's permission to discuss it with me. This way I'll get answers in writing, but he seemed to think my questions (thanks to your collective help) were good.

@catch22 The advisor has already been hired and was before I started taking an interest in such things, and there's a 500k inheritance being sorted out at the moment and is partly why I'm both concerned about how its being handled and about switching horses mid-stream. (In other news my family members live forever).

I'll see if I can get a copy of the formal fee declaration and structure. My general inclination is to let the next few years play out to make sure things in his portfolio and other financial areas steady themselves out and then look to manage everything sans advisor. A post 9/11 unemployment phase left him doing some early drawdowns and he is still catching up.

davidrmoran

You are doing everything right and thoughtfully and the adviser may well not be evil or close. It is unlikely loads are being paid. But assuming you have to leave things quite as they are, or almost certainly so, then the next step would not be calling Fido or Vanguard or the like, but would be expense clarification, and the crucial step after that would be to drop the sheer number of funds from two dozen (damn) down to 6 or fewer, in appropriate proportions (stocks large and small, US and foreign, plus solid bonds of some sort) and all in highly rated funds that are as cheap as feasible within this structure of choices and adviser preferences. Even this simplification process can get, or be, fraught, but it sounds as though you are aware of most of the issues current and potential.

ibartman

EasyAllocator.org

LINKS
http://easyallocator.org/
http://easyallocator.org/fundratings.aspx

The above free (registration required) site provides a set of ideas / examples of asset allocations based on relatively few number of broad funds/ETFs for specific circumstances and risk preferences.

Very interesting.