Encounters with a Financial Planner
Other than the addition of a new line to my Monthly Updates I haven’t expanded much on the $4000 I invested in a Traditional IRA to take advantage of tax savings for 2006. Because the decision to invest was a last minute decision based upon my tax return I had not done any due diligence or research on where to place the money.
In a crunch, I did exactly what a large portion of Americans do: I took the easiest possible path and went to a financial planner. My situation is slightly different because I am lucky/unlucky enough to have an uncle who is a financial planner. Since this was a last minute investment and he had offered to help in the past I decided to write him the check and see what he could come up with for me.
Although I wrote the check back in April, until now that money has just been sitting in a money market fund while we worked around our schedules and time zones to get a chance to talk about what he suggested. His solution was this:
split the $4000 up into 4 different $1000 investments; each in a different class to diversify the investment. To do this he suggested class C shares in a World fund, Midcap fund, Large Cap Value fund and a Small Cap fund
This is a perfectly reasonable suggestion and likely the same one I would have gotten from any other financial planner. The problem I had was that I was not overly impressed with how he arrived at his suggestion.
- The first decision he made that caught my eye was the designation of Class C shares. In my limited investing experience I had never used or learned about the different classes of shares because I never thought that I would be investing through a broker. What I learned about class C shares made me question his decision to use Class C shares for my investmet.
- I learned that class C shares carry the highest annual expenses in lieu of paying a front end or back end load and have a 1% penalty if you pull out within a year
- they seem to be best if used for diversifying your money in the short term, allowing managers to chase yields without incurring loads as long as the money has been invested for 12 months.
- Why then am I investing in class C shares when it will be at least 30+ years before I touch this money? The increased yearly expenses are sure to result in lower returns over this period. My impression is that he simply intends to chase yields every year or so without having to pay a load on either end.
- The way he picked which funds to invest in also seemed to be cookbook. He simply had a computer program which sorted out the funds that had the best 3,5,10 year yields in their respective categories. He didn’t seem to be making any long term decisions about which direction he thought the economy was headed, he just knew to split the money up and put it where people have been making money in the past 3, 5, 10 years.
- This form of diversity might not work anymore as we saw at the end of February when almost every asset class took a dip. Currently between my wife and I our retirement is 100% invested in stocks. With any hiccup in the global equity markets, we will likely see some significant loses.
For these reasons I question why we need to use financial planners. Your local financial planner is reading the same magazines, reading the same books, and might not have gone to school any longer that you and I. Should I be paying this guy X% of my assets each year. What value do they add to the equation or are they just yet another layer of middle men making a cut. We will see how he does. If his picks do well does this mean I should move the rest of my investments with him? Only time will tell. I will admit, he has more time than I do.
June 17th, 2007 at 4:52 pm
I think you’re absolutely right that you could do this yourself. You could go to morningstar or yahoo and search the returns of the last year, 5 or ten. Isn’t the question you should be asking is: Is that the best way to select which funds to invest in?
Hey, just a suggestion, but check out this ebook on the brokerage and fund industry:
http://www.portfoliosolutions.com/v2/main.aspx?id=books/seriousmoney
or google the “ye mutual fund study”
The academic studies of the last 20 or so years seem to suggest that portfolio return is largely due to asset allocation and expenses, not specific fund selection. Your main concerns should be getting a diverse (not just stocks!) portfolio with limited expenses, and limited tax consequences.
best of luck…
June 19th, 2007 at 8:02 pm
thanks for the link BC,
I definitely took the easy route at the time. I have taken a more active approach recently and am looking at changing mutual funds for my Roth, this time on my own.
I also felt that my Uncle didn’t fully appreciate my tax situation fully. As a resident I make about $42,000 a year but this should only be for a couple more years. After this I hope to have a salary that would disqualify me from making contributions to a Roth.
So in theory I should be maxing out my Roth NOW because hopefully I will not be able to contribute to it in a couple of more years. This fact seemed to escape my Uncle. He mumbled something about nothing being guaranteed. He believes that the Government will take this tax break away in the future.
keep following along, it should be an interesting journey
February 5th, 2008 at 3:35 am
you need a financial advisor specializing in physicians. i don’t know your field but if you are not going into primary care or a poorly paid subspecialty or academics, you will likely have lots of money to invest. it becomes a question of expertise-you are paying them to know what will help you maximize your return based on their experience with others like you and ahead of you.
most of my senior partners remain in the highest tax brackets in retirement. despite having many tax advantaged investments. their kids college funds are fully funded and being paid out of savings, not out of current earnings. they own multiple homes. you might argue right place, right time, and i couldn’t disagree, but the fact remains that it takes a lot of time and energy to manage your finances carefully and for us, despite the interest in doing it personally, i chose to pay someone to do it so i could spend the time with wife and children. ymmv.
you will regain the option of roth ira theoretically in a few years. you will have to decide roth 401. interestingly, every single financial planner specializing in physicians is arguing that our tax bracket makes the current cost of tax so high that they would not recommend pursuing the roth. i of course established these accounts anyways just to put dates on them in case of changes in future law, but again uniformly the advice was against it once training was completed. this despite a general belief that the tax rates will go up when we are retired and that we will be in whatever the highest bracket is. you may argue that they just get more money to invest (and higher commission), but some of these guys were not commission based and were talking about money they would not manage anyways. the biggest things are trust and competence in a financial advisor for physicians.
i realize you wrote this a long time ago and may not care anymore. obviously i am up on call and really really bored.
ymmv
February 6th, 2008 at 12:37 am
I hope to one day have the problems that your partners have but I don’t foresee that happening over my 30 year career.
I understand that I will eventually pay for a planners expertise but I won’t be needing one for a while. I also firmly believe that no-one is going to be as concerned about your family’s best interest as you will be so I am hesitant to turn too much control over to someone else, I’ll pay for advice, a consult perhaps, but I would prefer to be the one making the final decision.
Physicians do require a different approach, we are(should?) be much more focused on risk management than on chasing higher returns. Most of us have invested so much time and money that it is smarter to play it safe. I just want to be able to retire and provide a good foundation for my children, not to leave my children with an inheritance.
After coming from a very middle class family, I will have to agree with Buffett when he said that inherited wealth is just food stamps for the rich.