Investing through a bank versus yourself questions (1 Viewer)

[Nelson Au]

I didn't see any threads on this topic and I was hoping to get some unbiased insight.


I am not the kind of person who is good at this. It takes a lot of effort to get my head around. Though I understand the basics of investing money.


Early in my working career, I've always put money away and I have a 401k at the last job I was with. But the main thing is that early on when I started to earn money years ago, I put money into some investments at the advise of the investment people at my bank outside of the 401K. My bank became Citibank a few years ago. In the past 8 years, I sort of fell out of this and left all the investments alone. It's too hard for me! But it's been losing money like everyone else. I'm mostly in equity and mutual funds and the rest is cash.


They have a new investment group there now and they've revamped how they work. In the past, what turned me off was it was commission based and they pushed whatever they were told to push without really caring about you. This new group they have now are "real" investor type individuals who work for a fee. If I go with one of the services they offer, they review my accounts, consider allocation and advise me and I make the choice. There is a fee of 1.5% annually. He gave me a hypothetical situation of 1 million dollars with a moderate growth and income plan. The cost is about $10,000 a year at 1.5%. Over 10 years, this hypothetical person earned 177% with a final value of $2.5 million. (Based on a 10 year period of the recent market performance) It was a much more diversified portfolio compared to what I have now. While the return looks good, $10K in the fees a year seems a lot. But I suppose $100K out of 1.5 million is small! I don't have a million to invest, so it sounds like a lot!


Additionally, he told me that all funds have a fee built in averaging 2%, which my funds do have. If I use their services, those fees are not charged. So there is no free lunch, in his words, I may not have the fund fees, but I have his one time 1.5% fee that covers everything, advise and trades and so on.


I always hear to never go with a bank, they won't do as well as if you go with a "real" investment firm. But the money is there that I put in as a youth who didn't know what he was doing. I have an account at Schwab for a rolled over retirement account. I could use that. But as I said, it's more work then my brain is geared for! So I could try this new guy out for a while. He said they check with you every quarter and if the returns are not up to snuff, I can fire him. And I can start slow with the minimum amount.


I have a friend who buys and sells stocks all the time as part of his strategy for investment. I always wonder, in the end, when we are both retired, who will really be ahead. My guess is that it would be pretty close. I guess it's no different then paying for a haircut rather then doing it yourself.


Thanks for any insights!

 

[DaveF]

I'll comment as a middle-class layman, with some modest, long-running interest in investment, and someone who has specifically considered how to sensibly invest in recent years.


You're screwed if you're in the middle class (earning under, say $250k; maybe less than $500k).


It's too expensive to pay someone good as a consultant (hourly rate) to manage your long-term investments. (1.5% to 2% adds up: they need to beat the market year over year by that amount just for you to break even, vs going with a 0.02%-cost, whole-market index fund from e.g. Vanguard. Or they need prevent you from making big mistakes that would have cost you 2% year over year. Make sure you're clear on if they're charging on your specific investments or your total financial portfolio -- house, cars, 401k, long-term investments -- of which they might directly control the portion of long-term investments.)


The affordable options are "advisors" who will advise you to invest in their loaded funds, and so they have a strong financial incentive to steer you into the funds that give them the best profit, and may have no ability to steer you into top-performing (low cost, good return) funds outside their particular company's portfolio. And if you want them to take a holistic approach and your entire financial life (income, home, car, kids' education, etc) it will cost a good deal more.


The third option is to do it yourself. Which gives you access to all the best publicly available funds and investment vehicles, but now you've got to be a self-trained investment expert.


And as for individual stocks: I believe that's a hobby. Given $2000, if you'd enjoy dabbling in stocks more than a new 60" TV, then buy the stocks and enjoy the ride. As an investment, keep it the top of the "pyramid", with money you can afford to lose.


I've chosen the third option, having become convinced the first two options won't work any better for me.


If you want a consultant, talk to a few different companies, including your bank. Look at the funds in their portfolio and compare costs and performance, as well as any upfront or backend fees.


I look forward to the experts who can explain why I'm wrong and show us the affordable, high-performing, disinterested, third party advisor


Good luck!

 

[BrianW]

I would never go with fee-based investing not just for all the reasons Dave so eloquently outlined, but also (and mostly) because an additional 1.5% loss when the market takes a downturn is prohibitively risky.


I look at it like this: It's a basic risk analysis question. You've heard the hypothetical upside, but I don't think you've considered the potential downside. If the market takes a tumble, those (albeit decreasing) $10,000 fees add up and significantly diminish your ability to buy when the market is low so you can benefit when the market swings back up. In this case, you've lost far more than just the fees. You've lost the significant investment opportunity those fees prevented you from making while share prices were low. So the fees don't just lower your profits, they multiply your losses, which, to me, is a downside I cannot bear.


If you could bet everything you own on a coin toss to win everything Bill Gates owns, would you do it? A lot of people would since the potential gain outweighs the loss many times over, and the odds are 50/50. It's pure mathematics, they say. But I wouldn't do it simply because the risk, regardless of the potential upside, is too much to bear. I view fee-based and managed investing in the same way. It diminishes the upside and multiplies the downside for nothing more than the promise of making their investing expertise available. The risk simply isn't worth it to me.


And that's assuming you've found an honest investment advisor/manager. I know a handful of people who have lost significant wealth by putting their trust in mangers who enriched their own bank accounts through a "Churn and Burn" approach to managing other people's investments. And the investment advisor/manager not only needs to be honest, but he has to be good. He has to be better than 1.5% when the market goes up, and significantly better than that when the market goes down.


No thanks.


I manage my investments to the extent that I select the funds available to me through my 401(k). I also have an E-Trade account (with never more than $5000, since I view it as a hobby as Dave describes). I took a hit with everyone else when the market took a dive, but I continued to plow money into my funds, buying shares while share prices were low, and I'm now ahead of where I was before the dive. I'm no expert by any means, but I believe in (and take advantage of) dollar-cost averaging, which, for middle-class wage-earners, is a strategy that is almost completely taken off the table because of the significant chunk the fees take out of principal investment when the market declines.


But that's just me. My methods have worked for me, but they may not suit you at all. I'm not an advisor; it's just what I think.


Edit: Sorry for the edit, but this just caught my eye:

(Based on a 10 year period of the recent market performance)

Recent market performance has been phenomenally good and is no basis by which to judge any long-term strategy. Recently, the Dow Jones went from 7K and change to 10K in less than two years. That's nearly a 40% increase. It's meandered and slowed significantly since its meteoric rise, so the "recent performance" may be more moderate.


Even so, if you do the math, for a $1M investment to grow to $2.5M in ten years, you need to earn 10% every year. And that's not including the 1.5% fee. When you include that, you'd have to earn 11.5% for ten years to match the performance of the hypothetical upside presented to you. Personally (and this is just my opinion, and nothing more), I don't think that's achievable.

 

[Nelson Au]

Thanks for the feedback guys!


I am not totally surprised by your comments. Dave, you make it sound like going to a casino, like the saying goes, you can't beat the house! We may not be a millionaires, but I guess all I care about is that the IRA and self employed IRA money I have sitting at the bank's investment side will do better then a CD or money market.

The mistake for me is I probably should not have done this at the bank, but back in the late 80's and early 90's, before I had a 401K at the company I used to work for, I put money away every year into a IRA. I also put a pretty good chunk of change into a couple of funds for investments at the suggestion of the bank's investment advisor, both at what is now Citibank. Back then, nothing lost money, I had a great ride with those accounts based on the advise I got then. Though today, they've dropped a lot, but still ahead of the original principle. So part of the dilemma for me is I'd hate to move all that money out of Citi.


Brian, I appreciate you bringing up the downside to the fees, yes, that's right, if he guesses wrong and my investments take another dive, I still have to pay his 1.5% fee. His argument to that is that we review the performance every quarter and if it's tanking, I can fire him and move on.

And to add, I asked him, his 1.5% fee seems steep, what's to stop me from going to Schwab? He said he used to work there. If I go there, I still have to pay a $10 fee per trade and on top of that, the funds will be loaded too between 1.5 and 2.0 percent. (I'll see if he's exaggerating the truth there) If I go with him, I have an unlimited portfolio to chose from. There is no limited offerings only from Citibank. And the load fees are all waived because I pay Citibank that fee. That does make it sound good.


I'm self employed now, so I'm trying to figure out how to navigate the waters without a company 401K. I enjoyed having a company 401K for a long time and then the company decided to lay me off a few years ago. So it's either up to me or I get help in investing that money. And I am much better at doing my job then investing! And I agree, paying a fee is not ideal.


I was kinda hoping someone with a positive experience might chime in, but I only posted this yesterday!


Thanks again for the insight!

 

[DaveF]

I don't mean to make it sound like a casino. I believe in a (generally) rational market place and don't ascribe in the trite view that investing is merely a game of chance under a fancy name. Except in the case of buying individual stocks: for the common person, without doing real research and going off tips from friends of friends, etc., yes it's just like gambling. I'd like to invest with a fee-based consultant. But in my quick estimations, it's always been much too expensive for me to be worthwhile. I'd rather go with an hourly rate (or fixed rate) than as a percent of my assets. Your situation may vary. Ultimately, I think it's better for someone to use a bank or broker (with a good reputation) to build a retirement and investment plan and portfolio than to do nothing, or do something badly. (And I hope I'm not doing it badly, on my own...) Better to take your car to the dealer and pay too much than to never change the oil at all. This Atlantic Monthly article captures very well the plight of the common man.

So this is what came out of my mouth: “What do you tell the ordinary mortal—say, the person who works in the press that you talked about—what do you say to the person who has $20,000, $50,000, $100,000, or $200,000, maybe, parked somewhere doing nothing? What is your advice right now for that person?” I looked around. The wizards in the room were having difficulty calculating figures of such humble size. I had thought $200,000 sounded like a large and unembarrassing number. But the room reacted as if I had asked, “Bill, I have 75 cents in my pocket. Do you think I should buy Twizzlers or a big red gumball?”

 

[Scott Merryfield]

We have used a fixed-fee financial advisor for about 18 years now. They help manage our investments, help with tax planning, prepare our tax returns, and will represent us in any audits that may occur -- which have never happened (knock on wood). They have also assisted with some complicated transactions, such as the purchase/sale of rental properties.


The difference with a fixed-fee advisor is that you pay a single annual fee based on something -- in our case, a percentage of our income. So, there is no incentive for them to sell you funds based on a commission fee or fund management fee. The better we do, the better they do.

In our case, we found a private firm that came highly recommended from several people we know. They are not affiliated with any financial institution. We gave them a try, and have been with them now for many years.

 

[DaveF]

Scott, can you give a ballpark figure on the cost of your advisor? Or perhaps the approximate % of income or total assets they charge? Thx.

 

[Scott Merryfield]

I cannot remember the exact percentage (I know our annual fee), but I think it works out to around 2% of our gross income before any tax write offs. Their fee is tax deductible, though, with some going against our base income and the rest written off against our rental property.


So, they are not cheap, but after 18 years they have done much better for us with our finances and taxes than I ever would have been able to do myself. I figure they save us enough on our taxes to almost pay our annual fee. It does boil down to trust, though. After having this business relationship with the firm for so many years, we have developed quite a trust with them, and everything that they do for us is explained in as much detail as we want in our meetings.


I doubt you would get this type of service with most commission-based firms.

 

[DaveF]

Are they a holistic planner: they give guidance on your entire financial life (home mortgage, planning for kids' education, long-term savings, retirement, etc.) even though they may only directly manage some smaller portion of it?


It's interesting they work off a percentage of income. I've heard of such advisors that worked off a % of total assets -- which for my needs is a bad value. But someone working off a % of income might make sense to me. I'll have to re-research this next year.

 

[Scott Merryfield]

Yes, they give guidance on all aspects of your finances, and will also review your insurance needs (no, they do not sell insurance ) as well as all those areas you listed. They also provide legal services for an additional fee, if you need it (my wife is a legal assistant, so we have access to legal services elsewhere). They did draw up a will for us at no additional fee, though.


They do have a different fee structure for their more well-off clients that is based on % of total assets managed, but that does not come into play for a typical middle class family.

 

[Nelson Au]

Thanks for the added comments guys.

I'll read that Atlantic Monthly article Dave.


Scott, interesting to read about your experiences with an advisor. It would be cool if there was a website that has a lot of that kind of information to help one sort that out! I'll do a search.

 

[Scott Merryfield]

Nelson, if you are interested, I can PM you a link to the website of the firm we use, to at least give you an idea of what to look for. They are a Michigan-based firm, so I doubt you would actually use them. Here is a very relevant statement from their website, though, regarding the concept of a fee-only planner:

Fee-Only refers to a specific method of compensation in which financial planners are compensated exclusively from the fees paid by their clients. They specifically choose not to accept commissions, kick-backs, finder’s fees or compensation from any other source.This is significant and important because earning one’s living by selling products or services for which a commission is paid, leaves the financial planner with an inherent conflict of interest. When paid exclusively by the client, the financial planner’s advice can be solely guided by the best interests of the client and the client’s needs and goals.