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The Breakup – Financially Speaking

Firing our advisor was pretty uncomfortable for me.  I was “sucking my thumb,” as Warren Buffett calls it, for an extra three months after our minds were made up.  Until I saw the  Advisor Fee roll through on my statement.  Toughened me up just enough to act.

“It’s not you…it’s me” was my pearl of a line after too much tought.  Nice…original.  Ends up he was fine with it; much more mature than I am apparently.  And just the normal course of doing business.

Perfect DIY Target

Overall, we liked our advisor.  He enabled us to be lazy and thoughtless about our investments.  He also played a helpful role in mediation between my risk-prone self and my risk-averse wife.  And he helped us pay attention to the non-monetary aspects of financial planning (insurance, wills, power of attorneys).

But after FI, our cash flow will be dependent on our assets rather than standard paychecks.  A %-of-assets-fee-based financial advisor creates drag on the cash flow that our assets produce.  A small looking percentage has a large impact. Also, it makes sense to understand the logistics of our income production, rather than just trust someone else to handle it.  So a perfect option for DIY.

Some Frustrations

There were four areas where I felt he was under-serving our assets:

  1. Real estate allocation – We were stuck in MSSB standard allocations including REITS even after several discussions on being over-exposed on real estate through my job & rental houses.
  2. Tax (In)considerations – our assets weren’t weighted across accounts based on tax efficiencies (less bonds & dividend payers in our taxable account).  Also, during his firm’s  merger, our taxable account assets were sold, then other assets repurchased.  So we were hit with a tax bill.
  3. Lack of Clarity – his firm’s online software didn’t give a clear picture of gains/losses and performance.  I have a decently high level of expectation, but for a firm of that size this is inexcusable in my mind.
  4. Partial Picture – Our financial plan with him was focused on the assets with him.  We had a 401k and several real estate assets that were always a second thought in our plans.  I felt like I had to take his plan and wrap in our “extras” anyway – so we didn’t have a one-stop shop.

The Costs

Fees were of course the major factor though.  We were paying him 1% on our assets – a typical fee for a full service broker.  On top of that, he had us in a good number of actively managed mutual funds.

Total annual fees across our accounts added up to 0.46% (plus his 1%).  Almost half of our assets were in passive Vanguard ETFs through him.  Our non-Vanguard funds averaged 0.84% fees.

Most early retirees use something like the 4% rule (as I did above) to determine their asset target.  Meaning that they expect investments to produce at least a 4% real return each year.  With a 3% inflation factor added on top, that would be a nominal return of 7%.  So you have to assume the investments will return 20% higher to cover these fees (7% * 20% = 1.4%), or more likely that you need to save some additional dollars – a higher asset target.

In our particular case, The 1.46% was costing us a little over $4,000 annually (on our $270,000 at the time). Meanwhile we were racing to get our assets grown.  This was creating drag towards the finish line.  And we plan to grow our assets substantially as we roll real estate into stocks, so this drag will just increase in dollar terms.  But even worse is that this expense moves the finish line (asset target) farther back by $100,000 (the math being $4,000 / .04) with this perennial expense.

Learning the Ropes

Without a doubt in my mind, it was worth it to educate myself in the investing / asset allocation world.  With this knowledge, I could take the reins and lower our assets needed.  So in the last year or two,  I’ve read a handful books on the market & financial planning, including:

  • The Intelligent Investor
  • The Intelligent Asset Allocator
  • The Four Pillars of Investing
  • Bogleheads Guide to Investing
  • A Random Walk Down Wall Street
  • Niagra of Capital
  • Your Money or Your Life
  • Against the Gods (History of Risk Analysis)
  • Snowball (Warren Buffett biography)

The first four should give you good enough smarts to understand the workings of the “market.”  The others were read just because I’m a math, finance, and history nerd.

Coming out this research, and a good amount of thought, I feel that financial planning for our family will work best in diversified passively managed funds.  It should produce a fair return, with manageable risk and low time-overhead strategy.

In Defense of Active Management

It’s possible, but takes a truly exceptional investor and large commitment of time to beat the returns of the market in the long run.  I don’t have the time or inclination to try my hand at this point, and I don’t think my advisor had a market-beating method.

I think that there is a place in the market for fee only financial advisors – namely to keep investors from acting on instinct & emotions.  If you do not have this control, it is worth paying someone 0.5-1.0% annually to keep you from losing your shirt when you are greedy or fearful.

Additionally, most people could use a resource for fleshing out a structural financial plan including risk assessment, goal setting, insurance needs, estate planning, gift planning, and will/trust structuring.  Some of this can be researched and done yourself, but each of these areas is becoming so legal & complicated, it could make sense to have an expert in your corner.

The Verdict: Go It Alone

Even with some positives on the side of a Financial Advisor, I think our financial plan is better handled all on our own – or with a one time (maybe periodic – every 5-10 years) assessment and payment for time.  No reason to pay someone a certain percentage of my assets to do this sort of work.  And doing it myself has really forced me to pay attention to risks, rewards, allocations, and decisions.

And with that decision, I’ve opened Vanguard accounts, transferred our money over, and set the allocation percentages across asset classes.  Value averaging upfront then rebalancing annually will be my only touch of timing the markets.  I’ll discuss my research and our asset allocations in a future post.

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