‘I don’t trust my finance people.’ I’m 67 and trying to live on $2.2Ka-month of Social Security. I have $500K with an advisor, who charges 2%, but last year returned 26%. What are my moves?
Question: “I’m 67 years old – or trying to – live on $2,200 a month in Social Security. I don’t trust my financial person. I rolled over an estimated $500,000 IRA to him without really digesting how much the 2% AUM fee would add up to. He invests in about six different funds, Class A, which are expensive. They charge 2% to add additional money. My return was 26%, but I know from year to year that will vary.
He keeps bugging me for additional funds for my individual account (which I currently have on a 5% CD coming due in March). I need to get out of this situation but I don’t know much about investing. Even though I won’t be making the 26% return, can I roll the funds into a Vanguard or Fidelity account online? Should I let robo investors do that? What if they don’t accept my funds? Should I hire a new financial advisor to help me and if so, what kind?
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Answer: At the highest level, if you do not trust your adviser, get out – and this may be true in this case, because his fee is very high. “Indeed, the 2% AUM fee is quite high, regardless of whether the advisor only manages the portfolio or provides comprehensive financial planning services. To put you in a loaded mutual fund, which benefits directly on top of that, is amazing,” said a financial planner who certified by Bruce Primeau at Avantax. Usually the AUM fee is about 1%, and sometimes it can be negotiated from there.
What’s more, the burden you pay for the fund is a sunk cost, Primeau said. “In other words, you will not get any more if you decide to leave the advisor and sell the fund. My recommendation is to find an advisor who is a fiduciary for you – and not a company you work for – who will minimize your costs and invest your portfolio more effectively,” said Primeau. Basically, if you employ someone who pays you a sales fee or commission, they are not a fiduciary because there is an obvious conflict of interest that can interfere with what is best for you.
The extra 2% you’re charged in addition to the 2% AUM may be a sales charge, says certified financial planner Matt Bacon at Carmichael Hill & Associates. “You should ask your advisor about the business model to understand how to pay. Also, you can move money,” said Bacon. “It’s a 26% return like your account may be investing aggressively so you may need to consult with others to make sure you have the right allocation when you retire.”
In other words, your situation raises a big red flag in charging a 2% fee while also collecting commissions sounds like double dipping. “It is unacceptable. Commissions can complicate investment decisions because they can create incentives that are not aligned with your financial goals,” says Ryan Haiss at Flynn Zito Capital Management.
It’s understandable that you want to keep getting good returns, but it’s important to know if 26% is actually a good return because at this point, the S&P 500 has returned more than 30% in a year, so you might be better off. if you don’t have to pay such a high commission, said Alonso Rodriguez Segarra, a certified financial planner at Advise Financial. “The relationship between a financial advisor and a client should be based on fiduciary criteria, which means looking for the best for you and not the advisor. When trust is broken, it is always good to look for other options. Fortunately, other good advisors should not charge you more than 1% or as much as you say, the robo-advisor will charge you less,” Segarra said.
Yes, another option is to roll the funds into a Vanguard or Fidelity account that you will manage yourself (note that in a rollover, most funds are accepted) but it’s not like you’re leaning towards the DIY route.
It depends on several factors, including whether you want to talk to a human or not. “A robo-advisor can be good if you don’t want to do it yourself but don’t really need or want someone to talk to when it’s wrong,” said Bacon. You can also save money, as robo routes are usually cheaper than human routes, and tend to have no or less account minimums. This guide can help you decide between robo or human advisors.
That said, if you want to talk about investing with someone, a human advisor can be a good option. Even if you don’t want to go the AUM route, “you can hire a CFP who works by the hour or project and is a fee-only advisor who doesn’t want to manage the portfolio and give other opinions without a conflict of interest,” says Segarra. In addition to completing rigorous educational requirements and thousands of hours of work-related experience, CFPs must fulfill their fiduciary duties and put their clients’ interests above their own.
Also remember that investing money is only one dimension of financial planning. “You have to add tax planning, estate planning, long-term care costs and many others as well,” Segarra says. To find a CFP who can give you another opinion, Andrew J. Evans at Rossby Financial recommends asking for a referral from a like-minded friend. “Or you can use some online tools to find other advisors. Willow is one of the advisor ratings and research tools that individual investors can use to find similar people,” said Evans.
Ultimately, your choice is whether to work with a human or computer program. “In my experience, working with people has advantages over working with computers. In particular, you will get answers to the questions you have. The answers will not be based on, they will be answers to your specific situation,” said certified financial planner Mark Humphries in the Sentinel Financial Planning.
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