IRA account - professional investment service

[ej401]

Hello experts! Your kind advice please.

A friend’s 71 yo father has kept his IRA in cash since 2007 – not a large account, but reasonable – he lost quite a bit. But he needed to keep it liquid in case his cancer recurred and was afraid if kept in market would be worth less when he needed the cash for medical care and dependent children.

He just started taking RMD’s, taxable at almost 30%, federal and state. Fidelity has advised him to have them professionally handle the account for about 1.2 % fee. He knows basically nothing about investing – which adds to the fear factor. Fear is still there, but the greater fear now is the continuing loss in value due to taxable RMDs on top of the big possibility of outliving his resources. Now he thinks ok to go with the professional service – thinking that Fidelity should be able to make above the 0.1 % that the cash is making now.

Appreciate very much comments, suggestions, advice. Thank you!

[ej401]

Thanks.  I came to this board hoping I could help my friend; problem is his father does not trust anyone, family or friends who he thinks may have a biased opinion or advice.

[Ombud]

If he truly doesn't trust anyone and wants to keep fluid, he could diversify into:

(1) SPY for growth

(2) SCHD for income

(3) short term CDs for rapid access

or just a low cost balanced fund. Suggest no load 5 ★ S&P rated vehicles. A lot less than 1.2%. A good easy tool to let him know how much in each bucket is www.ipers.org/calcs/AssetAllocator.html

[ej401]

Many thanks Ombud!

[Ombud]

One final note: Fidelity will assign an account mgr who will make generalized suggestions for free. Just utilize the KISS philosophy if he won't 'watch' it weekly -- keep it short & sweet

[ej401]

Thanks again Ombud! So very kind of you.

Fidelity Account Executive offered very little general information - said his best suggestion was to have an account managed via the discretionary management services of the Strategic Advisers in their Portfolio Advisory Service (PAS); will allocate funds 70 fixed income/30 equities - but they will be almost 100% Fidelity mutual funds; fee 1.35% of assets. This is the puzzler - pay them a fee even with a loss in portfolio, which is quite possible in this market?? 

This is the big conundrum that the kind help of the experts here was sought.  

[Ombud]

Wow. Big difference from Schwab (Fidelity put my son into 9 funds and he only had 10k)! My advice is back to the website for allocation and very little research will put him into low cost funds. You will pay fees in mutual funds whether they go up or down. But he has lost a lot in purchasing power & compounding since 2007

FUSVX is Fidelity's version of SPY, expense ratio 0.07%. Another low cost family of funds is Vanguard

If he's 70 & has never invested, he has to trust someone eventually or just lose out

[ej401]

Ombud - am a little confused.  Are you saying Schwab is better for professional management services?  Only thing is he cannot take the funds out of Fidelity - if he did, he'll have to pay income tax on it.  Indeed, he'll have to trust someone or continue to lose out - this is why I am trying to help my friend at least in getting some information from a trusted, expert source such as the kind, helpful people in this forum.

Perhaps I can look into Schwab or Fidelity myself for my 20K.  Fidelity is managing your son's 10K? Is this in the PAS?  or is his account piggybacked to yours?

Thank you soooo much! 

[Ombud]

HE can't take funds out of Fidelity but Schwab can transfer them out of Fidelity and into Schwab without incurring a tax liability. If Fidelity won't give him free advice, then yes Schwab is better. At the initial FREE interview, they'll set him up with a plan that matches his needs. My annual review is around 20 pages. The initial set-up took 2 meetings each about an hour so it can be time consuming (asked for it when I inherited a lump sum - it covers EVERYTHING - housing / living expenses / future travels / retirement / grandkids needs / legacy). My annual review is a heck of a lot faster and it always helps to have another set of eyes making sure it's still on track.

My son's Roth is at Fidelity. I just had to 'correct' it. Based on his age, he only needs 70% SPY & 30% BUFBX reinvesting cap gains / dividends for both (80%+ stocks). His age group needs growth.

[spartan7886]

Sept 7, 2013 15:27:38 GMT -5 ej401 said:

Ombud - am a little confused.  Are you saying Schwab is better for professional management services?  Only thing is he cannot take the funds out of Fidelity - if he did, he'll have to pay income tax on it.  Indeed, he'll have to trust someone or continue to lose out - this is why I am trying to help my friend at least in getting some information from a trusted, expert source such as the kind, helpful people in this forum.

Perhaps I can look into Schwab or Fidelity myself for my 20K.  Fidelity is managing your son's 10K? Is this in the PAS?  or is his account piggybacked to yours?

Thank you soooo much! 

He can absolutely roll over to another company if he wants to, but he has to follow the proper procedures. The easiest way is to open an IRA at the new company and ask them to initiate the transfer.

Personally, I wouldn't get professional management. I would pick an asset allocation and either it in a corresponding Target Retirement fund - Fidelity's are called the Fidelity Freedom funds, although most all of the companies have them, or a balanced fund like Vanguard's Wellington or Wellesley or Fidelity Four-in-One. The fund manager will keep the assets balanced according to the fund prospectus, and you only have to pay the fees for the funds, not an additional management fee on top.

[Ombud]

Ej, re: PAS

Pardon my language but oh he!! no! DS is smart just sort of young. No way would I let him pay the kind of fees associated with the PAS. I don't like target funds and most mutual funds for the same reason. We're not forking over money to buy or sell funds or incur excessive operating expenses

Spartan, good call on those Vanguard funds. Vanguard tends to have lower cost investment products.

[spartan7886]

I agree that for myself I don't use TR or balanced funds, but instead make up my asset allocation via low cost indexes. What I was thinking was that the right balanced fund basically serves the same purpose as PAS for lower fees by keeping things very simple, even if they aren't as low as what you or I can get with a little more hands on attention.

[ej401]

Thank you Ombud and Spartan - so very kind of you.

I know close to nothing on investing - I just really wanted to help my friend because he was worried and felt very helpless for his father's situation.  But I am myself learning from your comments/suggestions.  Even with my near-zero investing knowledge, it does seem logical that "the right balanced fund basically serves the same purpose as PAS for lower fees by keeping things very simple."  Simple is key - especially to someone who has never invested before. 

Will talk to a Schwab rep.  Fidelity gave free advice but it was not much of an advice as the conversation was more centered on the advantages of a PAS account - I guess for a higher earning potential.

Spartan - would you be so kind as to expound on "asset allocation via low cost indexes".

Thanks again!

[Ombud]

I know you asked Spartan but she hasn't answered so:

All asset allocation using low cost indexes is is going to www.ipers.org/calcs/AssetAllocator.html, figuring the ratio you should have in stocks / bonds / cash, and investing in either low cost ETFs (like SPY) that cover the entire market or a 5★ (making it rated as one of the best) balanced or flexible income mutual fund (like BUFBX) that puts a % into stocks / bonds / cash & monitors it to keep it at that %


Read ONE UP ON WALL STREET and THE INTELLIGENT INVESTOR to start as we are not CFAs.

[spartan7886]

So let's say you decide you want 35% stocks and 65% bonds.

You could go to FAS and pay 1.2% plus the fees on whatever they buy and they would keep you there if that's what you told them you wanted.

Or you could go to Vanguard and buy Wellesley (VWINX) and pay 0.25%, and then you'd just your money into one fund and they keep up with rebalancing to maintain 35/65 even if, for example, bonds crash and stocks run up.

Or you could do what I do (remaining at Vanguard since I'm already on that website) and buy 35% Total Stock Market (VSTMX) and pay .17% on that and 65% VBMFX and pay .20% on that for an average of around .19%, but then you have to keep an eye on it and rebalance yourself.

There's a possibility that FAS could get you higher returns, but the odds that they will get enough higher returns to make up for their fees aren't great.

[Ombud]

I had no idea Vanguard had one tipped toward bonds!!! I'm primarily in ETFs in my 401k / IRA & individual stocks in my brokerage account (utilize the core - explore philosophy). The ratio in VWINX might be what my older sister needs (no investment knowledge / won't make it again / on early SSA due to job loss). Thanks for the tip

Suggesting she look at VWIAX (sister to VWINX) with a .18% expense ratio as she has over 50k to put there

[spartan7886]

Glad to help, Ombud.

I suspect Vanguard would automatically convert her to VWIAX if she bought more than $50k. I know Fidelity does with their funds, and it doesn't count as a sale or anything, so no tax consequences. I just figured it was easier to stay with the Investor funds for the explanation. Interesting that with the OP's numbers, Wellesley might actually wind up cheaper, since the father wouldn't have enough for Advisor class if he broke it up into the underlying asset classes.

[Ombud]

No tax consequences on trading within an IRA or Roth. Tax consequences on withdrawing from the IRA but never on the Roth

[ej401]

Thanks again Ombud and Spartan for your kind help!

[jarrett1]

I think Fidelity and Schwab both suck and you can get professional mgt for less than 1.2%. I have people with complaints in front of both firms...so there!

First search for "Fantastic 51" you will find a fund company with 80+ years and no losses in any 3, 5, 10+ year period and not losses in any 10 or 20 year rolling period.
They have the lowest expense's in the bottom quartile...as well as consistent management.

A 71 year old person wants to trust a 80+ year old company who has never lost any money in any market...and since its one of the first company's to offer investments...a 71 year old probably knows their name.

[Ombud]

Why would anyone pay Schwab for financial advice??? Frankly I'm happy there with the $8.95 transaction fee

[ej401]

Thanks Jarrett!
Which of the American funds do you think is most suited for a 71-year old who never really invested before and is just looking for a conservative moderate growth-income fund? By the way - American Funds seem to have sales charges. How do the funds' net returns compare with other funds?

Thanks Ombud!
Transaction fee is great.  Would the Vanguard funds that Spartan suggested cost anything to buy directly from Vanguard.  Your SPY, SCHD, and CD suggestions are good.  My friend is helping his Dad look into all these.

[jarrett1]

hey ej...its not what do the funds do...its what does your friends father want to achieve?

If it is monthly income then you want a growth mix with a dividend mix and when the markets under perform you can spend the accumulated growth and if not you have a great total return of 10+% to do a 4-6% systematic withdrawal.

If you read the report the returns shown are NET all fees and expenses; its not what a fund or investment charges-its what it returns-amortize your cost over your holding period and you tell me

[Ombud]

Which is great unless he is extremely risk adverse (I posted a thread to the most basic site I could find which will guide them towards the optimal mix of stocks / bonds / cash) in which case a conservative allocation fund is better. That's why I suggested a FREE consultation along with the website to validate the consultation .... why pay? Who knows, he might be better in long term CDs with 5% yield paying monthly + conservative allocation no-load mutual fund?

That site is so basic even his son could do it for him

[ej401]

Thank you, thank you everyone for being so generous in sharing your wealth of knowledge and experience.

Wxyz - The poor man realizes the big 'fear' mistake; with much improved health, he is now determined to "not be jumping in and out in fear" again.

Jarrett - Gotcha!  It's not the charges but the returns.  Seems like Vanguard, et al, have done very well in selling the idea (fact?) that performance is better with low expense ratios?

Mutual funds you all suggested are impressive. The asset allocator calculation came out as 41% stocks, 40% bonds, 19% cash. So now - where to put in the money.  Is there a mutual fund that would resemble this mix?    

Ombud,  Pray tell - where are these "long term CDs with 5% yield paying monthly"?

[spartan7886]

Sept 14, 2013 14:39:52 GMT -5 ej401 said:

Thank you, thank you everyone for being so generous in sharing your wealth of knowledge and experience.

Wxyz - The poor man realizes the big 'fear' mistake; with much improved health, he is now determined to "not be jumping in and out in fear" again.

Jarrett - Gotcha!  It's not the charges but the returns.  Seems like Vanguard, et al, have done very well in selling the idea (fact?) that performance is better with low expense ratios?

Mutual funds you all suggested are impressive. The asset allocator calculation came out as 41% stocks, 40% bonds, 19% cash. So now - where to put in the money.  Is there a mutual fund that would resemble this mix?    

Ombud,  Pray tell - where are these "long term CDs with 5% yield paying monthly"?

Morningstar has done studies and shown that the single best predictor of future returns (within a given fund category) is lower expense ratios. www.cbsnews.com/8301-505123_162-41141142/morningstar-low-mutual-fund-fees-trump-our-star-ratings/

[Ombud]

Sept 14, 2013 14:39:52 GMT -5 ej401 said:

Ombud,  Pray tell - where are these "long term CDs with 5% yield paying monthly"?

Sorry for the delayed response. Yesterday was Yom Kippur and today I was building a sukkah and making 14 apple strudels for Friday night.

That said :: get to a discount brokerage firm (I like schwab as they don't try to 'sell' me anything -- don't like fidelity as they always harp their annuities & I hate annuities). The CDs are out there as are munis if you're willing to go long enough. As I stated before we are not CFAs so there's many aspects to a best investment approach that needs to be considered (taxes / longevity / legacy) & we aren't the best place to start

[ej401]

Thanks again everyone!