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.

Investing, Choosing an Advisor
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July 2017

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®

July 2017
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