I received an important question the other day by email:
I've started to ask myself how much time I want to spend researching and managing my portfolio. I've read your section on financial planners, and like you I'm suspicious enough of them that I'm only interested in fee-only advisers. Unfortunately they are still not cheap. What are the alternatives for those of us who don't want to be total investment geeks but don't want to hand over our entire portfolio to a “financial adviser”?
I thought the question was very perceptive, and extremely important, since it applies to probably 80-90% of doctors. A small percentage want a full-service planner, and a small percentage are do-it-yourself investing geeks like me that wouldn't let an advisor near our portfolio even if they were paying us. Fortunately, there are other options.
But before discussing them, I think it is critical that someone asking themselves this question realizes that 90% of the work is up front. You read a few books, you design and implement the portfolio, and then you put it on autopilot. Actual management of my rather complicated portfolio (not counting Peer to Peer Lending) takes a handful of hours a year, and that's only because I enjoy tracking it and have to add it up occasionally to see where to direct new contributions to rebalance it. Truth be told, I could probably go at least a year without even looking at it and still be just fine. I suspect there are very few docs not willing to put in 2-3 hours a year to maintain the portfolio. Yes, initial implementation will take longer, but it isn't like meeting with a financial planner doesn't take any time (especially when you count in the amount of time you have to work to pay his fees.) But if that's just too much work for you, here are some ways to cut down on it.
Solution # 1: Have a very simple portfolio
I know an anesthesiologist whose entire portfolio, no kidding, is an S&P 500 index fund. He plans to add in some bonds in a decade or two, but has one single holding for now. His wife is a doc as well, and they easily save more than 6 figures a year. The truth is his approach is highly likely to work just fine. I'd pick a different fund (and I think he eventually did too), but the principle is amazingly simple. Nearly every 401K has an S&P 500 fund, and you can get one in any Roth, traditional, or SEP IRA as well. Nothing to track, nothing to manage. A single fund portfolio can be a surprisingly sophisticated approach, perhaps because of, and not in spite of, its simplicity and low cost. Mike Piper, an author and financial blogger, holds a single Vanguard fund of funds, the Life Strategy Growth fund. If you want a single fund portfolio, I'd recommend a Life Strategy Fund or a Target Retirement Fund. Similar funds are available in the TSP and many 401Ks. They have their downsides in a taxable account, but you can't beat the simplicity.
If you can stand just a little complication, you could do a simple three-fund portfolio. Total Stock Market, Total International Stock Market, and a Total Bond Market fund. That would allow you to use the TSM fund in taxable, or in a 401K with limited choices, and keep bonds in a tax-protected account. Taylor Larimore, author of the Bogleheads Guide to Investing does something pretty similar.
Solution # 2 Occasional meetings with a low-cost financial planner
There are financial planners out there who work for much less than the average planner. If you'd prefer paying someone on an hourly rate, you could hire Allan Roth (author of How a Second Grader Beats Wall Street) or someone from the Garret Financial Network. One of my advertisers, FPL Capital Management, which I reviewed here, can usually manage your portfolio for a flat fee of $1000 per year.
Vanguard offers two other good options (besides just choosing an all-in-one fund.) They will have a CFP review your plan and provide recommendations. This costs $250, but you get a discount if you have at least $50K invested with them and you get it for free if you have at least $500K with them (a great option for a second opinion.) I've seen these plans derided as “cookie cutter”, but I have yet to see a plan come out of their recommendations that I would call bad. Vanguard also offers total advisory services at a reasonable 0.70% (discounted rate for more than $1 Million). I'm sure other big mutual fund houses offer similar services, but they will likely be cheaper at Vanguard.
If your favorite price, like mine, is free, you can always run your own portfolio idea, or the portfolio proposed to you by any of these planners, past the Bogleheads for a second opinion. Bad advice is usually readily identified, although there is frequently disagreement about the finer (and far less important) aspects of a portfolio.
Solution # 3 Betterment
These guys are relatively new on the scene, but have made “Simple” their mantra. Fees start at 0.35% of assets, but rapidly drop to 0.15% to implement their portfolio. That's dirt cheap as investment management goes. The portfolio is simple, but sophisticated, and will work just fine as long as you save an adequate amount. You answer a few questions and they help you with your stock:bond allocation, then your stocks are invested into their equity portfolio and your bonds are invested into their fixed income portfolio.
- US Total Stock Market 25%
- US Value Stocks 25%
- Developed Markets 25%
- Emerging Markets 10%
- Mid Caps 8%
- Small Value 7%
- TIPS 50%
- Short term treasuries 50%
Yes, you could do this yourself, but if you don't want to, Betterment will do it for you for just $150 a year per $100K invested. Good deal? You decide. But there are far worse ways to invest. (Disclosure: I get a small commission if you sign up for Betterment from links on this site.)
Remember that Investment Management is Only a Subset of Financial Planning
No matter what you choose, the investment management portion may be the easy part. Yes, there is value in making sure your initial plan is reasonable, implementing and maintaining the plan, and keeping you from shooting yourself in the foot during the next bear market. But the real value may be in the financial planning. You need to make sure your insurance plan is adequate, implement an estate plan at some point prior to your death, develop an evolving asset protection plan, and minimize your tax burden. The most valuable advice may not be telling you to put a 5% slice of small value stocks into your portfolio, but rather teaching you about a Backdoor Roth IRA, walking you through the benefits and costs of incorporating, and ensuring you are adequately insured against disability.
Unfortunately, you cannot hire a single person that can adequately do all this stuff for you, and it certainly doesn't make sense to pay for it based on the amount of assets under management in your investment portfolio. If you truly want to do none of this yourself, you need to hire an investment manager (CFA), an insurance agent (CLU), an estate attorney (JD), a corporate attorney (JD), and an accountant (CPA). Financial planners (CFP, ChFC) like to get in on the action as well, comparing themselves to your primary care doctor managing all the specialists. You'll also need someone to implement the 401K and other benefits for your practice or group. None of these guys work for free. I hope this website can help you do a lot of the simpler stuff yourself, and also show you when it is time to get a professional's help.