Who: Donna Shaw, 65
Where: East Hartford, Conn.
Question: Should I dump my financial adviser to save on fees?
Something is nibbling away at Donna’s nest egg—devouring it, actually. A stiff $100,000, representing a sizable chunk of her total retirement savings, has gone to advisory and fund fees since she opened a brokerage account 11 years ago. Over that period, Donna’s investments have returned a modest 4.2% annualized, net of expenses. That’s in line with Standard & Poor’s 500-stock index, but it’s less than she expected. With just a tiny pension and a Social Security benefit from her former husband (now deceased), Donna is concerned about the high fees because she could be drawing on her investments for 20 years or more. So she’s considering writing a “Dear John” note and switching to an adviser who will charge her much less and do at least as well, maybe better. “I am a very frugal person,” Donna says. “I don’t question what my financial adviser does, but how much it’s costing me.”
Donna, who retired in 2002, is hesitant to manage her own money. She is considering investing in index or target-date funds through a discount broker or low-cost fund manager. But poor choices or missed opportunities could leave her starved for income.
“Most people need professional investing help,” says Mike Piershale, of Piershale Financial Group, in Crystal Lake, Ill. But he suggests that with a better adviser who charges about 1%—Donna’s charges closer to 2%—and a diversified portfolio, she could have secured an annualized return at least 1.5 percentage points better over the 11 years. If so, Donna’s portfolio would be more than $100,000 larger, he estimates.
Piershale also takes issue with the makeup of Donna’s accounts. She has a Roth IRA, a regular IRA and a taxable account. Surprisingly, each holds nearly the same 15 mutual funds—and in the same weightings, to boot. “Those identical accounts are a red flag,” he says. It should be elementary for any adviser, especially a highly paid one, to arrange the funds so Donna gets the most tax-efficient returns. For example, investments that throw off capital gains are better held in a taxable account, where they enjoy a preferential tax rate, than in a tax-deferred IRA.
Switching horses. When Donna began working with her adviser a decade ago, she was transitioning from work to retirement and needed an action plan. But building a retirement portfolio is like constructing a house, says Sheryl Garrett, of the Garrett Planning Network. “It’s a lot of work upfront. But once it’s built, all you need to do is clean it,” she says. “Unfortunately, a lot of financial planners price their services as if you’re building a new house every year.” Donna needs a handyman now, not an architect.
Garrett recommends that Donna discuss her options with Vanguard or Charles Schwab. She ought to be able to keep her mutual funds, or most of them, and match the funds to her tax situation. Then she should start courting local fee-only advisers and pick one who is willing to meet with her occasionally to review the risks and asset allocation but who won’t demand that she pay a percentage of her assets.
This article first appeared in Kiplinger's Personal Finance magazine. For more help with your personal finances and investments, please subscribe to the magazine. It might be the best investment you ever make.