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Basic question about how FA work

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  • Avatar Adrian 
    Participant
    Status: Physician
    Posts: 42
    Joined: 01/05/2018

    Only started reading this forum 2 weeks ago and learning so much at a very steep rate! Thank you so much guys!

    I saw a FA, he is affiliated with Merrill Lynch. We have about 200k in an old 403b in a Vanguard Target Retirement 2045 Fund. Had a 22% return rate last year. My current 403b is with Fidelity – Fidelity Freedom 2045 and had 22.3% return rate last year.

    I thought he is going to “tweak” the allocations but leave them where they are and actively manage them moving forward.

    Instead he said that

    1. He cannot “touch” my current plan, but will give me advice on allocations “free of charge”

    2. Wants to roll over the old 403b from Vanguard into a traditional IRA with Merrill Lynch. I told him I won’t be able to do backdoor roth anymore but he is not a fan. Said is a loophole which is going to close soon. Said the TIRA gives him “more control and more options” than a 403b.

    I am concerned about his affiliation with Merrill Lynch but he said

    “As far as recommending only Merrill Lynch products, I do not recommend a single product in which Merrill Lynch has any ownership.   I am compensated by client fees only, and receive no extra incentive to use any particular product.  In your packet last night, I provided a sample portfolio, including the six funds we currently use in active management, which shows the exact funds I recommend currently.  These are not only the funds I recommend to clients for their retirement, they are also the very same funds, the four equity funds anyway as I am 100% equity, that I have in my retirement account. ”

    Is he right to rollover the 403b into a TIRA? Why he cannot manage the funds where they are? Why he cannot manage my active 403b plan?

    Thank you

    #98136 Reply
    Avatar Peds 
    Participant
    Status: Physician
    Posts: 3618
    Joined: 01/08/2016

    He is wrong. You will be screwed. Cut off all ties.

    #98137 Reply
    ENT Doc ENT Doc 
    Participant
    Status: Physician
    Posts: 3024
    Joined: 01/14/2017

    Do NOT do what he suggested.

    #98141 Reply
    Avatar Adrian 
    Participant
    Status: Physician
    Posts: 42
    Joined: 01/05/2018

    I appreciate your answers guys, I really do, but can you please elaborate? Thank you

    #98145 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 7329
    Joined: 01/09/2016
    1. He cannot have access to your current plan because that will mean he is taking custody and would be subject to a different and more restrictive set of regulations. In general, advisors do not want to have custody of a client’s accounts. Your 403b is through your currrent employer and technically not under your control.
    2. Same for the old 403b. He would be deemed to have “custody” because it is under the control of the old employer.

    When you r/o a retirement plan to an IRA, the advisor can use his own custodian and control the account. Basically, he wants to r/o the 403b in order to charge you for managing it. I’m not saying there is anything wrong with that but this runs counter to your goal of contributing to a backdoor Roth, which he is misinformed about. The answer he gave you indicates that he has his own agenda and is resorting to a scare tactic to convince you he is right.

    Better solution is for you to r/o the 403b into your current plan, assuming your current plan accepts rollovers. Read the SPD to find out. Of course, this cuts out the “advisor” from getting to participate in charging you fees for managing the account  🙂 . @peds and @Ent_doc gave you good advice.

     

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
    https://fox-cpas.com/for-doctors-only/

    #98149 Reply
    Avatar Adrian 
    Participant
    Status: Physician
    Posts: 42
    Joined: 01/05/2018

    Thank you @jfoxcpacfp!

    You advise makes sense if I am going to DIY. But if I am going to hire a FA anyway because I do not know enough about tax efficient fund placements, tax lost harvesting and all these neat things? I am hoping that by applying his knowledge about above things, a FA would compensate the 1% fee of AUM I am going to pay him.

    Am I correct in my assumption that ANY FA I would hire would want to move my retirement accounts in a separate account where he can use his custodian and has access to a set of mutual funds and portfolios that he typically manages? Isn’t this how typically a FA charging AUM fee works?

    #98151 Reply
    Avatar poose 
    Participant
    Status: Physician
    Posts: 16
    Joined: 04/12/2017

    I doubt that tax loss harvesting will cover the 1% AUM fee.

    The robo-advisor Betterment.com shows an analysis of increasing returns by 0.77% over 13 years using tax loss harvesting. So, it would partially cover your AUM fees, but not a reason to use a financial advisor.

    Tax Loss Harvesting+

    If you want a financial advisor, check out the WCI recommendations page– pay by fee for what you need rather than AUM. I dont think these advisors would recommend against the backdoor Roth. https://www.whitecoatinvestor.com/financial-advisors/

    #98152 Reply
    cgossage cgossage 
    Participant
    Status: Financial Advisor, Website Sponsor, Spouse
    Posts: 485
    Joined: 09/12/2017

    Thank you @jfoxcpacfp!

    You advise makes sense if I am going to DIY. But if I am going to hire a FA anyway because I do not know enough about tax efficient fund placements, tax lost harvesting and all these neat things? I am hoping that by applying his knowledge about above things, a FA would compensate the 1% fee of AUM I am going to pay him.

    Am I correct in my assumption that ANY FA I would hire would want to move my retirement accounts in a separate account where he can use his custodian and has access to a set of mutual funds and portfolios that he typically manages? Isn’t this how typically a FA charging AUM fee works?

    Click to expand…

    There are many advisors out there (Johanna and I included) that would not recommend rolling your 403b into an IRA.  Unfortunately, there are many more salespeople calling themselves advisors and do nothing more than invest your assets in investment managers with high fees and average returns.  If that “advisor” is truly acting as a fiduciary they should be doing what it right for you regardless of their compensation.

    That said, there are many other forms of compensation for advisors that aren’t traditional AUM type fees.  Hourly, monthly retainer, etc.  Someone can technically be fee-only while charging AUM, but it does have some conflicts as you found out.  They will also unlikely cover the 1% fees that they will charge you if they are only giving you asset-management services.

    Clint Gossage CFA, CFP, CPA
    cmgfin.com

    #98158 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 7329
    Joined: 01/09/2016

    Thank you @jfoxcpacfp!

    You advise makes sense if I am going to DIY. But if I am going to hire a FA anyway because I do not know enough about tax efficient fund placements, tax lost harvesting and all these neat things? I am hoping that by applying his knowledge about above things, a FA would compensate the 1% fee of AUM I am going to pay him.

    Am I correct in my assumption that ANY FA I would hire would want to move my retirement accounts in a separate account where he can use his custodian and has access to a set of mutual funds and portfolios that he typically manages? Isn’t this how typically a FA charging AUM fee works?

    Click to expand…

    FAs aren’t fungible. In fact, that is one of the big motivators behind the WCI blog and forum.

    Some FAs will actually manage your 401k/403b for you. To clarify my original response, in some states, that would not be defined as custody, and in others (such as mine and probably yours), it would. You are correct that most FAs will want to roll your 403b out to an IRA, though. And, yes, this is how an FA charging AUM fees typically works.

    You should begin your search by becoming familiar with how to understand the Form ADV, which people who advise on investments must file annually. They can be kind of complicated and this blog post I wrote for WCI will help. Don’t expect to find testimonials from happy clients because we are prohibited from using them. In fact, recommendations from your acquaintances is not always reliable because often they don’t even know when they are getting a bad deal.

    In a perfect world, the growth in your assets would more than compensate for the 1% AUM fee. However, the fee, more often than not, ends up being a service fee paid so that you don’t have to deal with handling your investments – opening, closing and combining accounts, rebalancing, and so forth. The best service a great FA can do is to help you develop a plan and stick to it so that you don’t buy and sell at the wrong times. This is, of course, assuming that you have an appropriately allocated and diversified portfolio in place and working with a fee-only FA. Many FAs don’t even structure the portfolios very well.

    Caveat emptor.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
    https://fox-cpas.com/for-doctors-only/

    #98162 Reply
    Liked by pulmdoc
    Donnie Donnie 
    Participant
    Status: Other Professional
    Posts: 770
    Joined: 01/11/2017

    If all you have are tax advantaged accounts, you don’t need to worry about tax loss harvesting or tax efficient funds. Just stick with what you are doing. Target date funds are fine.

    #98164 Reply
    Liked by jz, Donnie
    Avatar pulmdoc 
    Participant
    Status: Physician
    Posts: 417
    Joined: 09/19/2016

    As previously explained, run, don’t walk away from this “advisor.” He is looking to actively hurt you financially for his own gain. Rolling over a 403b with a Vanguard Target Date fund into a TIRA is a terrible idea for high income people, because you eliminate the ability to do Backdoor Roth conversions. No, it is not a “loophole that is going to close soon.” In case he didn’t notice, Congress just passed sweeping tax legislation last month and it was not addressed, so no changes will happen until the next time Congress takes up tax reform, years in the future. In addition, the only rational explanation for the conversion is that he can charge AUM fees and potentially steer that money into even worse products.

    He may say he’s independent, but I guarantee if you stay with him for 5 years 100% of the financial products he recommends will be Merrill Lynch. The financial incentive to do so is too strong.

    You are correct in your assessment that an AUM fee arrangement creates a conflict of interest that benefits the FA the more money is being managed by them. If you do not feel comfortable with the DIY approach, I recommend a fee-only advisor, which eliminates the conflict of interest regarding where your money is held.

    #98294 Reply
    PhysicianOnFIRE PhysicianOnFIRE 
    Moderator
    Status: Physician
    Posts: 1505
    Joined: 01/08/2016
    Said is a loophole which is going to close soon.

    Click to expand…

    Not true.

    Just keep doing what you’re doing. You’ve got plenty of time to learn about TLH (it’s pretty simple), and tax-efficient fund placement can be learned in under an hour at Bogleheads.

    You got this.

    40-something anesthesiologist and personal finance blogger @ https://physicianonfire.com [Part of the WCI Network] Find me on Twitter: @physicianonfire

    FIRE. Financial Independence. Retire Early.

    #98298 Reply
    Avatar jz 
    Participant
    Status: Physician
    Posts: 648
    Joined: 01/09/2016
    Earnest refinancing bonus

    You are not ready/willing  to become a DIY.  No problem; TGs and robos are your friends.  Your  current tax-deferred TG funds are perfect where they are. Set-it-and-forget-it.  Use Betterment or Wealthfront  for your taxable accounts.  They both charge 0.0025 AUM to rebalance and tax loss harvest.

     

    #98299 Reply
    Avatar Gas_Doc 
    Participant
    Status: Physician
    Posts: 203
    Joined: 01/09/2016

    Honestly @adrian, if you aren’t ready to be your own financial advisor, I’d recommend going with @jfoxcpacfp. I’ve been on here long enough to know she really knows her stuff, and she’s a fee-only advisor to boot. In this day and age, you don’t need to have face to face conversations with your financial advisor: phone and email are plenty. Dump your current FA and find someone who isn’t interested in leeching off your portfolio.

    #98300 Reply
    Liked by Kamban, pulmdoc, jz
    Lithium Lithium 
    Participant
    Status: Physician
    Posts: 1058
    Joined: 02/15/2016

    I second the recommendation to go with a RA.  There are some good financial advisors that don’t charge by AUM, but I’m skeptical that they are going to take the time to TLH as aggressively as a robot would.  If you want to learn to TLH yourself, I’d go with WCI’s new course – the savings you receive from learning how to DIY will surpass the $399 before you know it.

    #98302 Reply

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