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Need advice helping parent move funds from Financial Advisor (American Funds)

Home Financial Advisors Need advice helping parent move funds from Financial Advisor (American Funds)

  • Avatar Yowza 
    Participant
    Status: Physician
    Posts: 19
    Joined: 08/25/2019
    Splash Refinancing Bonus

    Hi, everyone, and welcome to my first post. I’ll try to keep it from being a complete train

    wreck. Long time fan of the blog, listener of the podcast, and reader of the first book.

     

    Here’s my situation:

     

    I have a parent who is turning 70, a retired school teacher. Very modest home and lifestyle. Not a crazy spender by any means.

    Married, but I don’t know much about my step-parent’s financial retirement situation currently. Here’s the situation I’m trying to remedy:

    Current retirement plan for said parent has a balance of nearly $350K as follows:

    1. American Balanced Fund – A (ABALX)  $116K in a traditional IRA and another $66K in what’s listed as “non-retirement” and “IL/TOD” (lives in IL)

    2. Capital Income Builder -A (CAIBX) $106K IRA, $59K IL/TOD

    (Yes, the irony of a 5% front loaded fund being called an “income builder” is not lost on me. Taking 5% up front is not my idea of “balanced” either.)

     

    Additionally, there is over 166K (!!!) sitting in a local community bank (FDIC insured!) account with a whopping 0.20% AP Yield Earned.

     

    Finally, to ice this disaster cake the financial advisor has baked, there is additionally an “Executive Protector” (I see you, whole-life) insurance plan worked in to the mix with the following info:

    * Insurance Amount: $25K

    * Cash value: $13K

    *Premium: $32.75 per month

    *Dividend info: $39K accumulated (3.5% interest rate) of which $1.3K is interest. “Any accumulated dividends will be added to the insurance proceeds your beneficiary will receive or included in the amount paid if you terminate your policy.”

    (I don’t know anything really about such policies, so I’m including the info that seems pertinent from a recent policy status statement)

    I know whole-life is almost always a bad policy to have. Just sell it now and add it to the Vanguard account?

    What steps can I take to convince my parent to move things to index funds at Vanguard and do a lot better with this portfolio (or is there a better option than Vanguard… haha, just kidding)? I’m meeting with said parent and financial advisor later next month and want to be ready to do this as effectively and graciously as possible. Did I mention that my parent REALLY likes this financial advisor (a familiar theme I’ve heard often on the podcast)?

    In addition to shifting the retirement and non-retirement accounts to index funds at Vanguard (I’m thinking 3 fund lazy portfolio with about 40/40/20 bond/US Stock/Intl Stock), what percentage of the bank account would you also move to Vanguard and what percentage might be best in a HYSA with maybe 10K left in the current account to help prevent said parent from getting too jittery from withdrawal of a local presence?

     

    Although I don’t know much about my step-parent’s situation, I do know I’m the primary beneficiary for both people. I’ll assume for now his situation (with a different company) is equally bad news.

     

    Said parent currently lives as comfortably as s/he’d like in a home owned with no mortgage, a paid off car, and a monthly teacher’s annuity of just over $3K per month. S/he plans to leave this all to me, but even if I weren’t the beneficiary, I’d want to help him/her do better with his/her portfolio. I’m already nearly FI myself.

     

    I’ve got a few weeks to prepare for this undoubtedly difficult conversation and meeting with my parent and said advisor.

     

    Thanks in advance for your help!

     

     

    #241630 Reply
    CordMcNally CordMcNally 
    Participant
    Status: Physician
    Posts: 2805
    Joined: 01/03/2017

    Did the parent specifically ask you for advice?

    “But investing isn’t about beating others at their game. It’s about controlling yourself at your own game.”
    ― Benjamin Graham, The Intelligent Investor

    #241645 Reply
    Avatar Insurancepro 
    Participant
    Status: Financial Advisor, Insurance Agent
    Posts: 49
    Joined: 03/26/2019

    I believe the executive protector is a State Farm policy. Based on your numbers they have had it for a long time, and can probably stop paying the premiums out of pocket. I probably wouldn’t mess with a WL policy once it’s 30+ years old. They may have their auto/home/liability with State Farm as well, in which case they could almost definitely save a significant amount by moving that business to an independent P and C broker.

    #241646 Reply
    Avatar Yowza 
    Participant
    Status: Physician
    Posts: 19
    Joined: 08/25/2019

    Did the parent specifically ask you for advice?

    Click to expand…

    Yes, and I’ve told them that I would like to facilitate their understanding of all the options available and have them make the decisions they (the parent) best see fit. I just recently learned this info and handled it as nonchalantly as I could. I emphasized the positive for now (e.g. “the expense ratio is not as high as I’ve seen for comparable actively managed funds”), but know drastic changes need to be made. I told the parent I’d like us to meet together with the advisor and discuss better ways to manage the large chunk in the community bank. I did not mention moving on from the advisor or closing the account at this time. I don’t want any stress built up before the meeting; my parent hates confrontation and I plan to keep the whole meeting as civil as possible, just asking bland, routine questions which I can discuss his responses to later with my parent. Questions about front loaded funds, total market index funds and their expense ratios, etc.

     

    The insurance policy is indeed with State Farm. I have no idea how old it is. That and the banking account are separate issues from the financial advisor, but thought I should mention them, since they seem pertinent to the overall retirement nest egg and general misunderstanding of how to handle retirement planning.

    #241648 Reply
    Avatar Tim 
    Participant
    Status: Accountant
    Posts: 3030
    Joined: 09/18/2018

    Not sure what the purpose of the meeting is. Is it for a portfolio review? If you want your parents to move to a 3 fund Vanguard account and cut him out, why meet?

    Behavioral issues and investment issues are two separate paths. Parents can be greatful and feel relief not having to deal with it. “Whatever you say, just let me know”. Or they can be set in their ways. I’d take a flyer and simply tell them of your 3 fund plan and high yield for the cash. If their response is “Let’s talk to our FA”, you got your answer.

    #241655 Reply
    CordMcNally CordMcNally 
    Participant
    Status: Physician
    Posts: 2805
    Joined: 01/03/2017

    I agree with @tim , leave the advisor out of it. He’ll have plenty of “answers” and “solutions” that still include high fees. I would sit down with the parent and show them exactly how fees affect their portfolio and returns.

    “But investing isn’t about beating others at their game. It’s about controlling yourself at your own game.”
    ― Benjamin Graham, The Intelligent Investor

    #241666 Reply
    Faithful Steward Faithful Steward 
    Participant
    Status: Financial Advisor, Small Business Owner
    Posts: 509
    Joined: 06/12/2017

    What steps can I take to convince my parent to move things to index funds at Vanguard and do a lot better with this portfolio (or is there a better option than Vanguard… haha, just kidding)? I’m meeting with said parent and financial advisor later next month and want to be ready to do this as effectively and graciously as possible. Did I mention that my parent REALLY likes this financial advisor (a familiar theme I’ve heard often on the podcast)?

    Click to expand…

    A few questions, before I can offer any advice:

    1. Did your parents solicit your advice?
    2. On what basis are you recommending a more aggressive portfolio for your parents?
    3. Did your parents request the whole life policy? Or was it sold to them? It’s not uncommon for folks of that generation to want to keep some life insurance for last expenses and an inexpensive whole life policy may have been what they requested.

    Without answers to these 3 questions, here is the advice I can offer.

    Perhaps you should look at surrendering the whole life policy if it was indeed sold to them. If they purchased it for peace of mind regarding last expenses, it may be an appropriate policy. (I am not a huge proponent of whole life, but I’ve worked with enough retirees to know that some folks just like knowing that their last expenses are covered and that they won’t be a burden.)

    I think your most immediate concern should be making sure that your parent and their spouse get their estate plan in order.

    • If they have not done so, there could be a lot of issues that need to be addressed. The first one being the need for each spouse to have Durable Powers of Attorney that name an agent of their choosing.
    • If your stepparent has children from past relationships, there is probably also a need for the wills to reflect their intentions of how to treat all of the children fairly. If you have not seen the will, beneficiary arrangements on the IRA and the TOD account, you may be surprised to find that what your parent meant is that you’re the contingent beneficiary – after their spouse. In that case, if your parent has named their spouse as primary beneficiary and you as contingent, your parent predeceasing your stepparent could end up with you being disinherited completely.
    • What provisions have they made for long-term care expenses? As a married couple, you could see a significant portion of your parent’s wealth go towards paying for the care of your stepparent.

    Finally, I’d suggest meeting with your parent and stepparent outside of the presence of the advisor, especially if your advice is unsolicited. If your advice is unsolicited, you may wind up cementing the advisor’s position, as they rely upon him as an ally in what they may perceive as an ambush.

    Just a few things to think about, as there is far more to great financial planning than just managing the investments.

    Michael Peterson, CFP® | Faithful Steward Wealth Advisors
    https://ProsperousPhysician.com | (717) 496-0900

    #241672 Reply
    Avatar Yowza 
    Participant
    Status: Physician
    Posts: 19
    Joined: 08/25/2019

    Not meeting is a good idea and one I have considered.

    My thinking is that I could ask questions as mentioned above that would make the FA reveal the problems he’s ignoring essentially (and my parent is not aware of). My parent thinks it’s just a $50 annual fee and is clearly not a commission being paid for each transaction. I don’t have any front loaded investments and assumed that every reinvestment of capital gains and dividends is reduced by the 5.75% fee. But a brief internet search suggests I’m probably wrong about this. If that’s the case and there’s no other investing going on (besides dividends and capital gains reinvestments), what’s the best argument for moving from this advisor to Vanguard (besides the minimal annual fee and broader diversification with a total market index fund)? I see these are both 4-5 star Morningstar rated funds.

    My plea for help in this matter really boils down to this question I asked initially: “What steps can I take to convince my parent to move things to index funds at Vanguard and do a lot better with this portfolio (or is there a better option…)?”

    My hope is that others who have been down this road before will chime in and with pointers I haven’t considered. I’m confident they are open to switching, but want to be as prepared as possible (thus the thread).

     

    Thanks.

    addendum: (apparently posted at about same time as @Faithful Steward so I haven’t read that yet)

    #241677 Reply
    Avatar Tim 
    Participant
    Status: Accountant
    Posts: 3030
    Joined: 09/18/2018

    •The “disaster” is the frontload fees. That horse has left the barn. Never coming back.
    •Both funds are “active” but range from 50-70% stock/bond BUT pretty low ER’s for competitors.
    • The strategy is a moderate shift to bonds with market conditions.
    • Your pitch is 80% equity with half of that in INTL.
    • FA fee’s? Some brokers serve as FA and have no fees.
    • Without knowing total retirement assets, how did you come up with 80/20%. (Most important).
    •Going forward, not sure your proposal is better.
    Morningstar rates them fairly well.
    The allure of shifting allocation to a more conservative AA for someone at 70 is extremely strong. Tough sell when the frontload is long gone. The FA didn’t load it up with a lot of garbage. Parked it in decent funds with simple objectives that had a price to join paid long ago (I hope).
    Focus on the fees, high yield savings, and AA. The funds themselves are exactly what some people want. The frontload should be avoided in the future.

    #241680 Reply
    Avatar Yowza 
    Participant
    Status: Physician
    Posts: 19
    Joined: 08/25/2019

    What steps can I take to convince my parent to move things to index funds at Vanguard and do a lot better with this portfolio (or is there a better option than Vanguard… haha, just kidding)? I’m meeting with said parent and financial advisor later next month and want to be ready to do this as effectively and graciously as possible. Did I mention that my parent REALLY likes this financial advisor (a familiar theme I’ve heard often on the podcast)?

    Click to expand…

    A few questions, before I can offer any advice:

    1. Did your parents solicit your advice?
    2. On what basis are you recommending a more aggressive portfolio for your parents?
    3. Did your parents request the whole life policy? Or was it sold to them? It’s not uncommon for folks of that generation to want to keep some life insurance for last expenses and an inexpensive whole life policy may have been what they requested.

    Without answers to these 3 questions, here is the advice I can offer.

    Perhaps you should look at surrendering the whole life policy if it was indeed sold to them. If they purchased it for peace of mind regarding last expenses, it may be an appropriate policy. (I am not a huge proponent of whole life, but I’ve worked with enough retirees to know that some folks just like knowing that their last expenses are covered and that they won’t be a burden.)

    I think your most immediate concern should be making sure that your parent and their spouse get their estate plan in order.

    • If they have not done so, there could be a lot of issues that need to be addressed. The first one being the need for each spouse to have Durable Powers of Attorney that name an agent of their choosing.
    • If your stepparent has children from past relationships, there is probably also a need for the wills to reflect their intentions of how to treat all of the children fairly. If you have not seen the will, beneficiary arrangements on the IRA and the TOD account, you may be surprised to find that what your parent meant is that you’re the contingent beneficiary – after their spouse. In that case, if your parent has named their spouse as primary beneficiary and you as contingent, your parent predeceasing your stepparent could end up with you being disinherited completely.
    • What provisions have they made for long-term care expenses? As a married couple, you could see a significant portion of your parent’s wealth go towards paying for the care of your stepparent.

    Finally, I’d suggest meeting with your parent and stepparent outside of the presence of the advisor, especially if your advice is unsolicited. If your advice is unsolicited, you may wind up cementing the advisor’s position, as they rely upon him as an ally in what they may perceive as an ambush.

    Just a few things to think about, as there is far more to great financial planning than just managing the investments.

    Click to expand…

    I’ll ask about why they purchased whole life. I don’t know.

     

    They recently both completed wills and both have named me as durable P o A and executor. I encouraged them to do a living trust (before they met with their lawyer), since I understand that to be a better option, but they are set on this (“simpler is better”). I explained about avoiding probate, protection of assets, etc. No other children from other relationships and I’m the only child.

     

    I’m aware of the risk of being disinherited of the property in that scenario of my parent dying first. However, I’m the primary beneficiary on the IRA and TOD accounts (and my oldest child the contingent). And I’m listed on the bank account with my parent (the step-parent is not), so I could move funds myself I suppose. My parent did that to basically assure that I would get the funds. (I have other questions about tax considerations of this for myself since I didn’t realize the account had such a large balance before — parent’s address is where statements are sent — but that’s not my primary concern here)

     

    I don’t want it to appear as an ambush, but I also don’t want to appear like I’m not giving the FA a fair chance. Ultimately I want what’s best for my parent, but I want them to come to the realization without feeling I’ve forced the decision.

     

    I was a bit disappointed they ignored my advice about the will vs. trust issue, so I want to be as prepared as I can before this conversation.  I think the parent will ultimately do what I recommend (when the decision is not subject to the step-parent).

     

    Thanks.

    #241688 Reply
    Avatar Yowza 
    Participant
    Status: Physician
    Posts: 19
    Joined: 08/25/2019

    Sorry if it wasn’t clear: 40% U.S. bonds (not 20), 20% intl stock, 40% U.S. stock. All total index funds

    #241689 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 8113
    Joined: 01/09/2016

    I don’t think you’re going to accomplish a lot here and I mean that respectfully. I realize this style of advisor is not the flavor of the day on this forum, but this is what 90%+ (a guess) of that generation is used to. In this situation, you’re not talking about a lot of money – how much would they really benefit out of the shift to Vanguard? Is emotion about the front-loaded funds paying a bigger role than it should?

    As for the cash sitting in a low-interest savings account, this is extremely common with that generation. Maybe the best thing you can do for them and that they will both thank you for is to introduce them to a high-interest savings account and see if they want to move $100k to it. They may have ties to the community bank and may want to leave a balance there. Ultimately, what you are planning for is your own inheritance, as I’m presuming she won’t spend down the IRA and will just take RMDs. If you are the bene of the IRA, you’ll get control eventually. Who knows about the cash, but you’re a physician and, presumably, spend and save reasonable amounts – I doubt it will have much impact on your lifestyle either way.

    A last thought – would some planned Roth conversions be feasible?

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #241691 Reply
    legobikes legobikes 
    Participant
    Status: Physician
    Posts: 287
    Joined: 05/25/2017

    Wait if they’re 70 why are you going to put 60% in stocks? Shouldn’t it be a lot more bonds at that point (and this point).

    #241743 Reply
    Liked by Peds
    Avatar Yowza 
    Participant
    Status: Physician
    Posts: 19
    Joined: 08/25/2019

    Planning to keep 60% in stocks simply to match my current retirement asset allocation plan (since parent is not planning to touch it). But, yes, otherwise, I’d recommend shifting it to >50% bonds if they were funds my parent needed and planned to withdraw.

    Correct re: the inheritance won’t affect my lifestyle. It’s just likely extra insurance effectively for me at this point. As mentioned, I’m nearly FI and realistically could quit my job anytime if I desired. I love my work (and my particular job position) though and will probably see it through another board certification cycle. But if I woke up tomorrow and hated it, I could quit.

    I still haven’t ascertained that dividends and capital gains reinvestments aren’t subject to the front load percentage. If they’re not, I agree that there’s not really that much to gain by moving the (non-bank account) funds other than the lower expense ratio and having things more consolidated for me (which could obviously be done after inheritance).

     

    Thanks, everybody, for the feedback so far.

    #241754 Reply
    CordMcNally CordMcNally 
    Participant
    Status: Physician
    Posts: 2805
    Joined: 01/03/2017

    I don’t think I would integrate their funds into your asset allocation until they’re officially yours even if they’re not planning on using the funds. Things happen and plans change.

    “But investing isn’t about beating others at their game. It’s about controlling yourself at your own game.”
    ― Benjamin Graham, The Intelligent Investor

    #241756 Reply
    Liked by Tim, Lordosis, Peds, Yowza

Reply To: Need advice helping parent move funds from Financial Advisor (American Funds)

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