Where should I go for advice regarding my 401(k), IRA, brokerage, and cash flow?
I just inherited a lot of money and I'm now trying to understand how to invest it. Who helps me look at EVERYTHING? Investment companies don't want to think about your 401(k) which is very significant. They want you to hand them over $250K or more and let them manage it for a percentage. The fee based planner I went to didn't sound great and wanted $2,000 for a 'project'. It seems to me like once I sat down and truly looked at what I want my cash flow to be, when I want to retire, if I should continue to max out my IRA and 401(k) and not pay off my house, and my risk aversion, etc., that I've already got a lot of things done. The rest is just actually picking the funds. Can I do this by myself or have I gone mad? Should I just keep meeting with fee based planners until I like one? Some of the financial people I have spoken to are rather disparaging of a fee-based planner.
You have asked some very good, common questions and I know it can be confusing. I will try to answer all of your questions in as complete an answer as I can in this short forum and educate you on the various "business models" of money management.
I would recommend interviewing a few fee based only advisors who are active money managers that can also help you with estate, retirement planning or any other planning you need including cash flow analysis. Regarding your comments of disparaging fee based "planners," this normally comes from brokers with conflicts of interest. That said, there are some "planners" that simply write you a plan to implement using a basket of mutual funds based upon your age, net worth, risk tolerance etc.. and give you a passive pie chart. I disagree with this approach as I believe there is a better way. This is because most mutual funds must be fully invested - 90% to 95% - in their genre at all times. So it is then up to you to know when to hold or when to sell the fund.
And there are well documented 7 to 8 year bear markets going back to the early 1900s, and before that the data gets sketchy. So if you go with a passive pie chart you must be willing to put up with 25% or even 35% to 40% drawdowns every 8 years or so. This is because when we have those periods, correlations between asset classes come together and almost all decline in unison albeit at different rates. So just when you need the benefits of diversification, it isn't there.
Therefore, being defensive is sometimes the right move. And it is more about how much risks are in the markets, sector or individual stock, than your risk tolerance. Peoples' risk tolerance changes over time and when the market is going up everyone wants in, but when the market goes down everyone wants out. Once pain thresholds are hit, stop losses are triggered, selling begets selling, and more stop losses are triggered. I am not talking about mild pullbacks or fluctuations but markets under stress.
Now at our shop, we currently are bullish and fully invested, but this could change next week, next month, or longer. You dial up & down risks by moving to cash in increments. We also have a sell discipline for every position in our portfolios. Flexibility in the changing economic & market environment is essential. I do not believe in one pie chart for all seasons & market environments. An expanding and/or inflationary economy, contracting and/or deflationary economy, rising interest rate environment versus dropping interest rate environment all need different allocations and portfolio weightings. This is the main difference between active management and a passive pie chart.
Another reason I suggested a fee based manager is you should separate the advice from the custodian. Even at discount brokerage firms (custodians) the advice can be biased. This is because they get paid more on some funds than others, and they obviously get paid more on their own in-house funds. So you normally will get an allocation of a few of their own funds with a few outside funds so the incestuous relationship isn't so obvious. But even with the outside funds, you may be getting funds that the brokerage firm gets paid more on than a better fund in that same space.
Now you can find brokers who manage money on a fee basis, but they are a captive agent of their brokerage firm. So they may be getting pushed or incentivized to place you in funds that are beneficial to their firm. If they have their Series 6 or Series 7 License, then they are a broker and there are conflicts of interest that you have to constantly be on guard for even if they are paid on a fee basis by you.
So again, you should separate the advice from the custodian. For instance, we use two different discount brokerage firms and don't care which one the client selects. And the custodian doesn't push any funds or tell us what to do. We do all of our research in-house and occasionally procure outside, buy-side-only (investor) research. Only the client pays us. We don't accept any outside fees from anyone including referral fees, 12b-1 fund fees or the like when managing money.
What you need is strategy, not products (like annuities). If you do need life insurance to insure a risk(s), then it is almost always better to do cheap term & invest the difference. Do not let an insurance agent tell you that a permanent insurance policy is a good investment. It is not.
Figure out what strategy is best for you and makes sense, then where to custody the assets and in what type of account becomes clear. And with today's technology, you don't even have to have an advisor in your same city or even state. You could have it managed from anywhere in the country as long as you use a national, discount brokerage firm like a Charles Schwab, TD Ameritrade, or Fidelity. You can also log in anytime, even daily if you like, to view your balances & performance on the custodians website in addition to being provided by the advisor. This separation of duties avoids conflicts of interest while safeguarding your assets.
Hope this helps and best of luck, Dan Stewart CFA®
You’re one of many who came to me had the similar experience. You are open to learning from a pro, but you have the trouble to identify who has the knowledge you need, earns your trust and hard-earned money.
The very fact you posed the question on this platform tells me that you are comfortable with technology, which opens up the entire world for you (if you decide to retire in a different country, other than the U.S., you may need an international CFP to plan the overseas tax & local arrangement). You’re not limited to a local planner if you can’t find a good one. This demands a due diligence or up-front homework from you to find the right planner whom you believe and trust.
Secondly, many people mistakenly think financial planning or financial planner only deals with the investment. That’s really an understatement of what a true planner can do, considering investment is only one seventh of one’s financial life; the others include cash management, education, estate plan, risk management, retirement plan, and tax management. One can’t possibly think the success of investment along will decide one’s security and comfort in the retirement.
I just wrapped up a comprehensive financial plan for a client who has no debt, with $1.6 million in rental properties, and also received $2 million divorce settlement. Would you think that client’s retirement is settled? Well, if your retirement living expense is only $30-50k per year, may be. But, with a goal of $150k/yr. annual living expense, plus many other wants and wishes, that client only had a 52% possibility to reach all of the goals. To show the client investment alone isn’t the solution, I did a scenario that investment every penny of the $2 million divorce settlement to a 100% stock portfolio. Yes, the return was high, but it only improved the probability by 12%, to 64%.
Would you feel confident of knowing you only have 64% chance to succeed all of your planned dreams and goals for the retirement? I wouldn’t. The point is you may think investment is easy—who does not know how to click a button to buy and sell a stock/fund? With 8000 mutual funds/ETFs, which one is the best for your needs? Also, just because the funds rated high today, can it guarantee the future success? Most likely not. You need to have a professional who’s there monitoring it for you and ready to dump a possible deteriorating fund whether it’s because of an experienced manager retiring with no successor in sight, or the fund is too bloated and caused the returns suffer.
What about tax? You can do it yourself, but when the time comes to call your financial institution for a tax question, the most likely answer you hear is “We don’t give tax advice, and you need to consult with your own local tax advisor.” So, you call a CPA, who’re great at crunch numbers and you may only meet once or twice a year. Unless you know what to ask, many don’t volunteer to give you the answer or the most tax deductions you need because they don’t have the time to listen to during the tax season. The lack of knowledge in tax will cost you, and you don’t even know it until the time comes--you receive the letter from the Social Security Administration informs you that your premiums for the next year go up.
The long-winded answer is everyone needs a financial planner on his/her side, but you decide how much the services you need from the planner and value/compensation that planner deserves. Besides the fee-based planner, there’re hourly services or retainer-fee compensation models to explore. Best!
Its actually a great problem to have. However, a financial planner or investment advisor should be able to help you with either. It looks like you have multiple investment accounts and it maybe easier to first consoldiate the statements, if possible. This means rolling over any old 401ks to IRAs and also transferring everything to the same brokerage company or custodian. Now, that you know your risk tolerance base on your meeting with the financial planner please understand that picking stocks, bonds, mutual funds or ETFs for a portfolio or otherwise should probably be left to a professional. I'm not saying this so you can pay a fee. I'm saying this because you need a non-propietary discipline approach to investing. This also means the best stragety can win without emotional attachement. The main question you want to ask yourself is "Where am I getting my research and can I trust it"? Do I have time to manage my retirement account? Is my nest egg safer with me managing it versus a professional? How often do I rebalance my strategy or when do I abandon it completely? If you can answer these questions you may have a start. Otherwise, leave it to the professionals and find one that you can trust and speak your financial language.
If you go to a fee-based investment advisor they shouldn't charge you for simply sitting down and developing a plan. That should always be free of charge even if you don't end up doing business with them. Don't settle until you meet someone that really impresses you. You're correct about the 401k being an important piece to the plan so if the advisor is ignoring your 401k holdings, then you need to move on. He shouldn't pressure you to move the 401k, instead simply help you to make sure your 401k and your other investments complement each other well.
As a fee-based planner I think this is the way you should go. Clearly I'm biased, but my experience working with clients is always holistic, which absolutely takes a look at --and advises on-- assets I don't manage directly (like 401(k)s, real estate, etc.). It's my belief that I can't possibly give investment guidance or manage investments without knowing the details of your outside assets, your spending goals, insurance situation, estate plan, tax profile, etc.
If you don't want to hire an advisor, you absolutely can do your own research and choose your own funds. Here is the value that I think an advisor provides (most important at the top)
- Balance Sheet Coaching (i.e. careful use of debt, wealth-building opportunities)
- Consistent Savings/Investment (this may not be as important for you, but advisors often have access to tools that can automatically invest savings in a cost effective way)
- Strategic Financial Planning (i.e. sophisticated tax planning techniques, strategic use of insurance, etc.)
- Behavior Management and Investing Psychology (This is probably the most important reason to hire an advisor.)
- Asset Allocation and Asset Location (i.e. optimizing both the asset allocation and the tax profile of a portfolio is key)
- Cost Management
- Portfolio Rebalancing
- Security Access and Selection
Like the advisors you've seen, my fees are only collected based on assets I manage, but I absolutely look at everything. In fact, my client portal is designed to link in, track, and provide analytics based on outside assets (like 401(k)s). What I think you're finding is that, like any profession, there can be a significant difference between professionals.
In any event, I still would urge you to go with fee-based advisors, and if the advisor being nearby isn't a high priority to you, I'd be happy to provide some insight and a general plan at no cost.
Adam Harding | Investments & Planning