Arbus Capital Management, LLC
Arden Rodgers, CFA, is the founder and president of Arbus Capital Management, LLC, an independent registered investment advisory firm serving institutions and high-net-worth individuals. Since 2008, he has provided clients with personalized investment consulting and management services, with a focus on ETFs. Rodgers’ specialties include managing concentrated stock holdings and stock options, advising directors and officers on SEC filings and developing investment policy statements.
As a member of the CFA Institute, Rodgers is bound by a strict code of ethics. He also is a member of the Investment Management Consultants Association® (IMCA), the Financial Planning Association® (FPA)® and The New York Society of Security Analysts, Inc.,© (NYSSA) .
Rodgers regularly speaks to media about investment and personal finance issues and has been quoted in publications including Bloomberg Businessweek, U.S. News and World Report and ETF Report.
Prior to founding Arbus Capital Management, Rodgers was a successful software entrepreneur and was a founding member of a database software firm that was acquired by Intuit, Inc. At Intuit, he was awarded U.S. Patent #7,065,526 for a scalable database management system.
Rodgers holds the Chartered Financial Analyst® (CFA)® charter which is the globally recognized mark of distinction and benchmark for measuring the expertise, experience, and ethics of serious investment professionals. No credential is as widely respected in the industry as the CFA charter. And none is harder to obtain.
An avid cyclist, Rodgers is a member and former treasurer of the New York Cycle Club. He also regularly volunteers with PAWS NY whose motto is “helping people by helping pets.”
BS, Computer Science & English Literature University of Michigan
Nothing contained in this publication or any answer provided is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The general “as-is” information contained in this publication or in any answer should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.
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The question of fees is one of the two most important questions any investor can ask. (The other is inquiring about asset allocation.) However, before we get to level of fees you can expect to pay, we need to provide some context.
To begin with, financial advisers charge fees based on the type of services they are providing. They are paid for their services by three different methods:
1)Directly by you,
2)From commissions they receive from the products or services they sell to you or,
3)By a combination of both.
Financial advisers who receive compensation exclusively from their clients and do not accept any commissions are referred to as “fee-only” advisers. Those who sell insurance or annuities, for example, almost always receive commissions as part of their compensation. They are known as “commissioned-based” advisers. Other advisers, such as are registered representatives (“stock brokers”) may be paid by you, by commissions, or both.
A second element in setting the level of fees dependent upon the type of service you need. For example, you may want to hire a financial adviser to manage your investments for you. An investment manager is a professional who is typically given full discretionary authority to trade securities on your behalf. These investment managers usually charge a percentage of your assets under management (“AUM”) each year. This AUM fee can vary based on a number of factors including, the expertise of manager you hire, the size of the firm, their investment strategy, the amount of money you are investing, if there is a lock up period, etc. On the high end of the fee scale, a hedge fund manager typically charges “2 and 20”, which means that they charge a 2% per year on-going management fee in addition to retaining 20% of the profits. On the low end there are automated electronic platforms (“robo advisers”) that will charge a 0.25% (1/4 of 1%, or 25 basis points) or less AUM fee. The typical range of AUM fees for investment managers is 0.5% to 3.0% but it depends on the factors previously mentioned.
Another type of service that financial advisers provide is financial planning. If you need help with such questions as how to get out of debt; how (and how much) to save for a down payment, your retirement, or college tuition; or what type of insurance you need then you may want to hire a financial adviser or financial planner to create a financial plan for you. The fee for these plans may be based on the number of hours worked, the same way an attorney would bill for her hours. Or it could be a flat fee, which would be similar to a project fee that is a fixed amount of money regardless of the number of hours required. Finally, there may be no additional fee if you are already paying fees for other services. The planning fee is essentially rolled into your other fees. The fee for a financial plan can vary widely from “no cost” to $10,000 or more depending on the firm, complexity of the plan, expertise required, etc. So it pays to shop around.
When you work with a commissioned-based financial adviser you may not be charged a direct, out-of-pocket fee. Instead, the financial adviser will be paid by the company whose product or services you purchase or use. For example, some “loaded” mutual funds have embedded sales charges that will then be paid as commissions to the salesperson. You don’t pay this fee directly. However, some of your money goes to pay for the commission and only the rest is invested in the mutual fund. These fees or “loads” can range up to 5% or more of your initial investment. Besides mutual funds, a financial adviser who sells you life insurance may receive a commission in the range of 100% of your first year’s premiums.
Remember, most financial advisers, unless they are doing volunteer or pro-bono work, do not provide their products or services for free. So if you hear “there is no cost to you” this only means there is no direct cost to you. Rest assured there is a cost. You should ask any adviser you are considering exactly how, and how much, they will be paid as a result of working with you. If she or he can’t, or won’t, tell you then you should keep looking.
Yes, you can give stock as a gift. It can be a great way to encourage an interest in investing to a younger generation. You can contact your brokerage firm to obtain the paperwork to make the gift transfer. However, the bigger question is should you give stock as a gift? The answer revolves around taxes and the use of the gift.
Let’s start with a simple counter example. You decide that you want to give your niece a gift and you write her a check for $14,000. In this case of giving cash, as long as your check is below the annual gift tax exclusion amount of $14,000 for 2016, then there are no tax considerations. Your niece can do anything she wants with the cash, including pay off credit card debt, pay school tuition or investing in stock without paying additional taxes.
However, suppose you also own $14,000 worth of FaceBook, Inc. stock (FB) that you purchased for $10,000 more than a year ago. Your gain in the stock is $4,000, also known as a capital gain, while your cost basis, the purchase price, is $10,000. You decide to give this stock to your niece instead of writing her a check.
She is happy to get the gift. But if she really needs the cash instead and wants to pay off debt or pay school tuition with your gift, she will have to sell the stock, and there’s the rub. The IRS is very interested in the capital gain amount realized because whenever the stock is sold, the current owner will owe a capital gains tax on the $4,000 capital gain.
Federal capital gains tax rates for 2016 are 0%, 15%, or 20% with a possible extra 3.8% Medicare surtax is added on to the top rate. When this stock is sold, a federal capital gains tax will be due of one of $0, $600, $800 or $952 depending on the seller’s capital gains tax bracket. If your niece is in the 15% bracket (a single filer making between $37,650 and $91,150 in 2016), she will only net $13,400 after she pays the $600 in taxes.
You have avoided paying capital gains taxes but have passed on a potential tax bill to your niece. The good news is that if your niece is in a lower tax bracket than you are in, the overall taxes paid will be less. But the bad news is that you gave her $600 less than it appeared.
Therefore, if your niece needs the money and will only sell the gift stock, give her the cash instead, to avoid capital gains taxes and commissions. But if you are certain that she will hold onto the stock, purchase brand new stock and transfer it to her. By purchasing new stock, without a capital gain, you avoid passing on an additional tax liability as part of your gift.
Like stocks, ETFs trade throughout the day, whereas a mutual fund trades only at the end of the day. Trading ETFs will give you the same type of trading experience as trading individual stocks. You will need to be aware of bid-ask spreads, order types and other concepts relevant to stock trading.
On the one hand, there are some broad based index ETFs that are extremely low cost and are fantastic for long-term by-and-hold investors. For example, if you wanted to invest in stocks from the entire world you could place a single buy order for the Vanguard Total World Stock ETF (VT). By holding this one ETF for years, or even decades, you would maintain a balanced exposure to essentially all of the equity markets in the world.
On the other hand, there are specialty ETFs that are used by traders to take very short-term positions in a stock or commodity. If you wanted to day trade oil for instance, you could buy and sell the ProShares Ultra Bloomberg Crude Oil ETF (UCO) which attempts to provide 2x the daily return of WTI crude. This is a very volatile, leveraged fund that would need to be traded with extreme care.
Neither of these should be taken as investment recommendations, rather they are just examples of two of the types of ETFs available. An excellent resource for further ETF research is ETF.COM.
First, congratulations on being free from debt and having saved $120,000 at such a young age.That is quite an accomplishment.
A home is a real asset and there is no guarantee that the price you pay for it today will be the price you will be able to sell it for in the future. If you are unlucky enough to engage in a bidding war you may easily end up overpaying for your house. We all saw that in the 2008 financial crisis home prices fell across the country. Many people were left with mortgages that were higher than the value of their homes or so-called under-water mortgages. So there is a risk that the home you are buying today will not appreciate in value, or may even lose value, by the time you want to sell it. A buyer-agent, since they only work for you, may be able to give you a sense of what a fair price is. This along with doing your own research and seeing a number of properties can help you judge what a current reasonable price should be. However, keep in mind that houses in your area may, in general, be overvalued and yet you will only be able to see this with the benefit of hindsight.
The other risk is that of illiquidity. You stated that you have saved $120,000 which I assume is in a bank, CD or money market account. As such your money it is fairly safe and very liquid, meaning that it could be used for any reason at any time. A house is an illiquid investment. Once you make your down payment you cannot easily use or access that money for any other purpose. If you needed all or a portion of your $120,000 down payment, even a day after your closing, you would have to obtain a home equity line of credit or some other financing vehicle to attempt to access your funds. However, given that you expect to earn $95,000 a year, that you are debt free and will still have an emergency fund you should not be overly concerned with the lack of liquidity in owning real estate.
The other background that you stated, that you expect to stay in the area for 5-7 years means that you should be able to offset your closing costs. You would not want to buy a house and incur all the necessary purchase fees if you were not going to stay in the house for a good amount of time.
Now that you understand the risks, there are a number of financial calculators that will help you make the rent vs. buy decision along with figuring out the terms of a mortgage such as paying points. Best of luck.
While each choice has pros and cons, rolling over the 403(b) directly to an IRA is generally the better option for most people.
First, some background: A 403(b) plan is a tax-deferred retirement plan, akin to a 401(k), for public school and nonprofit employees. All qualified retirement plans such as 403(b) accounts can be rolled over to another qualified plan, such as an IRA or 401(k) plan.
The main advantage of IRAs is that they offer unlimited investment choices and lower fees. Unlike 403(b) and 401(k) accounts, fees charged by brokerage firms for IRAs tend to be low – typically $25 - $50 per year. Some low-cost brokerage firms, such as Vanguard or Fidelity charge no fee at all. In addition, the fees generally are stated clearly. While the broader range of investment choices puts more responsibility on the account holder to choose among many investments, most brokerage firms will provide some advice and/or model retirement portfolios to help you set it up.
There are cases where rolling over to the 401(k) would make more sense than choosing the IRA. 401(k) plans offer substantially greater withdrawal flexibility. In addition, with some plans, it’s possible to borrow against the account. If these aspects are appealing, your daughter might consider the 401(k) – but only if the plan isn’t saddled with high fees and poor investment options.
How can an investor such as your daughter evaluate a 401(k) plan? The first question to ask is, does the new 401(k) plan even accept rollovers? Not every company allows employees to roll over outside money.
Assuming that it does accept rollovers, look at the plan details. Are there good investment options in the new 401(k) plan? The best plans have a wide range of low-cost investment options to choose from, enough to compare favorably with IRAs. But others offer only a limited selection of high-fee mutual funds. Your daughter should examine the expense ratios and sales charges of the mutual funds and also understand what share classes are being offered.
What fees are being charged by the 401(k) plan? Understanding the fees behind a 401(k) plan can be difficult, even for experts. These 401(k) fees can be above and beyond those mutual fund fees and sales charges. Your daughter should ask about plan administration fees, investment fees and individual service fees. She also could examine the 401(k) plan’s summary plan description (SPD) along with the plan’s 5500 annual report.
If the 401(k) plan offers both good investment choices and reasonable plan fees, then it might be worth considering. A 401(k) plan might allow for withdrawals beginning at age 55, without penalties, if your daughter leaves her job. With an IRA she would have to wait until age 59½ to access her money, or pay an early-withdrawal penalty.
401(k) plans have another advantage over IRAs: Plan holders aren’t required to start taking distributions as long as they are still working, whereas IRAs require distributions to start by age 70½, regardless of employment. While holders of both types of accounts eventually need to pay tax on distributions, 401(k) investors potentially can wait until they are retired, and in a lower tax bracket, before beginning the distribution process.
Your daughter might be able to take a loan out against her 401(k) plan, even for the rolled over amount, but she would have to check with her new HR department. And depending upon the state where your daughter works, her 401(k) plan may have better protection from creditors and lawsuits than funds in an IRA.
With either the 401(k) or the IRA, your daughter should do what’s known as a “direct rollover.” This means that the retirement funds never pass through your daughter’s hands and instead are moved directly from her prior employer’s custodian 403(b) account to either her new job’s 401(k) or her new brokerage IRA account. To initiate a direct rollover, she would contact either her new employer or her new brokerage firm and fill out the forms to instruct the company to move the funds directly from her old 403(b) to her new account. This avoids risks associated with an indirect rollover, which triggers taxes and penalties if the 403(b) rollover check isn’t deposited within 60 days.