Should I leave my $400,000 IRA in a managed account, or should I place it in a low cost dividend stock?
My financial advisor is an old family friend who my parents employed to manage their estate. Upon their death, I kept my portion of the estate with the financial planner, who is employed by a large international Swiss bank. I rolled over my IRA into her care, which she placed in a managed dividend stock account with wrap fees of 1.5% yearly. I feel a certain loyalty to the financial planner. However, is it in my best interest to look for lower fees?
That decision can only be made by you. However, if you can answer this simple question, it will lead you to the logical decision. You mentioned the fee is 1.5%. Can you find out what’s the return for your portfolio so far for this year? When you mentioned your advisor uses a dividend-driven strategy, that means you’re heavily invested in the value stock. So, use that as a clue, the return you should get is 7.07% (based on the Russell 1000 benchmark, https://ycharts.com/indices/%5ERLV/ytd_return). Then, you subtract 1.5%, you get 6.02%. Is that what your return is?
What if you use a Russell 1000 growth, the year-to-date return is 22.35% (https://ycharts.com/indices/%5ERLG/one_year_return). Why wouldn’t that be a consideration? Was the chosen value strategy based on your age, time horizon for investment, and risk tolerance, or was it transferred from your parents’?
When you can get those answers to your satisfaction, you will know what to do next. BTW, just a little note: usually the investment fees are negotiable, and it goes down when the asset balance grows. Best!
What fees are you paying for the portion of the estate that is being managed outside of your IRA? If you have more than one account, you should be able to negotiate a lower fee for the accounts depending on the total assets you have with your current advisor. If you are not happy with the return relative to the fees you are paying then yes, it is in your best interest to try to negotiate a better rate. Whether that is with your current advisor or looking elsewhere.
There are many different investment choices that may be appropriate so a low cost dividend stock is not your only option and there are also different fee structures:
- Percentage of assets that they manage on your behalf, typically anywhere from 1% - 2% per year. The more assets you have, the lower the fee.
- Commissions paid to them from financial products you buy through them.
- Combination of fees and commissions.
- Hourly rate.
- Flat fee to complete a specified project.
There are times that the percentage of assets is appropriate then there are other times that a commission is to your advantage. Personally, I use both. It depends on the client and the client's assets. At times it is not in the client's best interest to be paying an ongoing fee specifically when their account activity demonstrates that they would be better served by being in a commission/transaction based account. This is a subject that should be discussed prior to investing or entering into a relationship with an advisor. Or in your case, this is a subject you should have with your current advisor to make certain you are getting the performance and service you deserve. A broker's recommendation should be consistent with their client's best interests.
This question is much more complex than you may think. You need to sit down and determine what your objectives are with this portfolio and then rank them in order of importance.
From your question, I can guess that income, lower fees and loyalty are some of your objectives. However, these may not be all of your objectives and you may not even know some of your objectives at this point. Many times, an investor’s true objectives are not revealed until it is too late.
For instance, is risk management one of your objectives? Could you stand seeing your portfolio drop $40,000 in a month? 10% swings in the market are relatively common. How about losing $80,000? Bear markets happen once every 5 to 10 years on average. The last bear market was in 2008. We may be due for one.
Proactive money management could be one of your objectives. You may not realize it right now, but if a bear market were to happen, would you want someone to get you out of its way? Do you know the signs of a bear market and would you know when to get out and get back in?
You suggest an alternative is to buy a dividend paying stock. Putting all your eggs into one basket is rarely a good idea. A perfect example is General Electric (GE). GE was considered the cream of the crop, the bluest of the blue chips. But in 2009, they cut their dividend from 31 cents a quarter down to 10 cents per quarter. And GE’s stock price dropped from over $40/sh in 2007 to under $10/sh in 2008 according to Zacks Research.
One of your objectives might be good research and portfolio construction. If you are like many people, you do not have the time required to do the proper research and maintenance of a stock portfolio. A diversified portfolio of dividend paying stocks would be a better idea than putting it all into one stock, but now you have that many more stocks to understand and follow. Again, if you are like many people, managing your portfolio is not your primary job, but it is the primary job of a money manager.
One of your goals was to reduce fees. You can buy stocks on your own at a variety of discount and online traders. But you have to do everything yourself. When to buy and sell? That’s up to you. Research? You’ve got to do it. One of your stocks is about to cut its dividend? You have to figure out which one. Make an error in your account? Too bad, that’s on you. Scared by a 5% decline and sell everything? You will be like so many others that run their own portfolios, letting emotions guide them instead of a fundamental research, a sound investment strategy and a long-term perspective. These and so many other things come with the 1.50% annual fee. Operational and administrative help is all included in the fee.
So the question is, are fees your highest priority? I’m going to touch the 3rd rail of investing and suggest that fees, contrary to what the investing media tells you, should not be your highest priority. Let’s put this into perspective. If your oldest child was arrested, would you hire the best defense attorney you can afford, or go through the yellow pages looking for Discount Lawyers ’r Us? If your doctor told you to see a cardiologist, would you get your own EGK machine and hook yourself up, or would you get recommendations for the best heart doc around?
A seasoned professional money manager deals with issues, strategies and research that many individual investors cannot hope to comprehend or have the time to learn. Their experience can let them know if a bad news report about a stock is a buying opportunity or a sign of worse things to come. Certain strategies require the discipline to stay the course when many investors would panic and get out. They know that events and situations can have a long-term impact or be just market noise. Experience and wisdom are the keys a professional money manager brings.
The rule for fiduciaries is that fees are reasonable. It doesn’t say they have to be the lowest. The question is “Are you getting value for the fees you pay?” A good money manager should have a Service Model that will spell out the various services they offer that are included in your fee.
The last objective you mentioned is loyalty. I can appreciate loyalty. But, is it misplaced? Is this person looking out for your best interests? Are they managing your money in a way you want? Are they offering services that you need? Are they doing the things I mentioned above?
Notice I didn’t say anything about performance. Again, contrary to what the financial media tells you, seeking the very best performance is not necessarily the right measuring stick for your money manager. Performance is relative to your objectives. If you have told your money manager that you are very conservative, you shouldn’t expect to outperform the markets.
If your money manager has determined your personal risk level and has built a portfolio to match, then she is doing her job. If she has done a financial plan for you and is following it, she is doing her job. If the money manager trades appropriately, according to the strategy and your objectives, then she is doing her job.
Paying a 1.50% fee may be money well spent if she offers the types of services mentioned here and helps minimize declines. Let’s say the market drops 20%, but your portfolio with the money manager drops only 7% thanks to her strategies and research. The 1.50% annual fee may be a good investment.
Now is 1.50% the right fee level, or should it be 2.00% or 1.00%. That I can’t tell you. It all depends on the services you receive for the fees you pay. If you feel you are getting a good value, then the fees are appropriate.
Take some time to think about your objectives, rank them and be honest with yourself. Only you will know these answers.
John Riley, registered Research Analyst and the Chief Investment Strategist at CIS, has been defending his clients from the surprises Wall Street misses since 1999.
Disclosure: Third party posts do not reflect the views of Cantella & Co Inc. or Cornerstone Investment Services, LLC. Any links to third party sites are believed to be reliable but have not been independently reviewed by Cantella & Co. Inc or Cornerstone Investment Services, LLC. Securities offered through Cantella & Co., Inc., Member FINRA/SIPC. Advisory Services offered through Cornerstone Investment Services, LLC's RIA. Please refer to my website for states in which I am registered.
Although you may feel loyalty to this advisor, it would be a good idea to begin with an appraisal of the progress of this account. When doing so, you would compare the returns of the account over a market cycle of three to five years with an appropriate benchmark. If these are U.S. stocks, one benchmark would be the Standard & Poor's 500. Since you refer to this as a managed dividend account, another useful benchmark would be one of the well-known dividend exchange-traded funds, such as VIG (Vanguard Dividend Growth). At a minimum, the returns on your account should exceed those of VIG by at least the 1.5% wrap fee you are being charged.
The 1.5% fee is excessive. Your starting point should be a discussion about having the fee reduced. In the absence of a sizable reduction, you should give serious thought to moving the account elsewhere. For a list of nearby advisors, go to https://www.napfa.org/find-an-advisor. That's the website of the National Association of Personal Financial Advisors, an organization that includes the many of the finest planners in the country. I expect the fees will be substantially lower than what you are paying now.
This is a great question as the fee debate is one that continues to get more and more attention. Beyond the nominal level of the fee, it is even more important to figure out the total value of that fee.
First, you want to understand what services are included and if there are any hidden fees that are not obvious. There are many times when you have a management fee and then there are also underlying fund fees as well.
Next, you want to know what value add the advisor brings. A good financial advisor will justify the fee through careful tax planning, retirement planning, asset protection, estate planning, investment management etc. Additionally, the advisor can help guide you through different situations in the market that can better your return over time.
At the end of the day, your interests, level of attention, and care must be aligned with your advisor. There are different styles of advisors and making sure that your expectations match will go a long way towards future success.