Please Review this Portfolio Proposal

[bUU]

I recently received a proposal from a financial adviser. Putting aside that he didn't map out how we'd get from where we are to where he proposed we go, could you please assess his recommendations based on:

a) placement of each investment for tax efficiency
b) the quality of the funds he's proposing
c) overall asset allocation for folks 5-10 years from retiring

Non-Retirement Accounts
2% Artisan Small Cap Fund Investor Shares
3% Baron Partners Fund Retail Shares
2% Baron Small Cap Fund
2% Calvert Short Duration Income Fund Class Y
2% Hartford Capital Appreciation Fund Class I
3% Hartford Dividend and Growth Fund Class I
1% Hartford Small Company Fund Class A
3% Loomis Sayles Strategic Income Fund Class A
4% Nuveen High Yield Municipal Bond Fund Class I
3% Pioneer Mid-Cap Value Fund Class Y
2% Royce Dividend Value Fund Service Class
1% Royce Global Dividend Value Fund Service Class
4% Royce Opportunity Fund Investment Class
3% Third Avenue Focused Credit Fund Institutional Class
3% Third Avenue Real Estate Value Fund Institutional Class
1% Wasatch Long/Short Fund Investor Class
2% Wasatch World Innovators
39% TOTAL Non-Retirement Accounts

Retirement Accounts
1% ALPS | Red Rocks Listed Private Equity Fund Class I
1% Artisan Mid Cap Fund Investor Class
2% Artisan Mid Cap Value Fund Investor Shares
1% Baron Partners Fund Retail Shares
1% Baron Real Estate Fund Retail Class
3% BlackRock Equity Dividend Fund Investor A Shares
1% Bridgeway Small Cap Growth Fund
2% Bridgeway Small Cap Value Fund
3% Delaware Small Cap Value Fund Class A
2% Dodge & Cox International Stock Fund
1% Dodge & Cox Stock Fund
0% Fidelity Contrafund Fund
4% Goldman Sachs Growth Opportunities
3% Hartford Growth Opportunities Fund Class I
1% Hennessy Gas Utility Index Fund Investor Class
2% ING Corporate Leaders Trust Series B
1% ING Senior Income Fund Class A
3% Invesco Charter Fund Class A
3% Invesco Convertible Securities Fund Class Y
3% Ivy Small Cap Growth Fund Class A
2% Matthews Asia Dividend Fund Investor Class
4% Prudential Jennison Utility Fund Class A
2% Putnam Voyager Fund Class Y
1% T. Rowe Price Health Sciences Fund
2% The Hartford Healthcare Fund Institutional Class
3% Third Avenue Focused Credit Fund Institutional Class
1% Vanguard Developed Markets Index Fund Investor Shares
2% Wasatch Emerging Markets Small Cap
2% Wasatch International Growth Fund
1% Wells Fargo Advantage Discovery Fund Class A
61% TOTAL Retirement Accounts

[disneysteve]

Is he insane? This man actually does this for a living and people pay him for it?

I'm counting 30 funds on the list for your retirement account. THIRTY!

I hope it didn't cost you anything to get this proposal.

I would run as fast as I could to the website of Vanguard, Fidelity, or T. Rowe Price. Open an account and either do a target retirement fund or build your own portfolio with a total stock market index, a total bond market index, and an international fund index. If you'd like, you can add in a REIT and may a couple of other sector funds. So maybe 5 or 6 funds tops (and as few as 1 if you want to really keep it simple). Plus, there will be no fees or loads to pay. With the adviser and all the load funds, you'll lose 6% of your money up front.

[kork13]

Holy smokes... he wants to put ALL of those funds into your portfolio? Even without looking into them, I can almost guarantee that you have alot more overlapping assets than you would prefer.

And on a similar strain.... why on earth would you accept such outrageous complexity in your portfolio? You could EASILY get comparable diversification & tax efficiency that matches your present outlook with just 5-8 total mutual funds or ETFs...max. I currently use 4. Using 30-40 different funds is totally unnecessary.

And that leads to my last question.... did he explain the fund loads, fees, and expenses to you when he laid out this plan? Somehow I have a feeling that he's set to make a pretty penny off of you if you accept his proposal.

Bottom line, without even researching his proposed fund allocations, I would either a) go back to him and tell him to simplify his proposal into something more practical; or b) fire him altogether and find someone who has the goal of your financial success at heart -- not his own.

[bUU]

Is he insane?

I was wondering the same thing.

I'm counting 30 funds on the list for your retirement account. THIRTY!

Just a note about this, in case it modifies your appraisal: That's spread across what must necessary be seven account: My current employer 401k (with limited, crappy choices), spouse's current employer 401k (with limited, crappy choices), IRA for me, IRA for spouse, Roth IRA for me, Roth IRA for spouse, inherited IRA. However, that shouldn't matter, since the guy, himself, indicated that we should be looking at our portfolio as a single portfolio.

I hope it didn't cost you anything to get this proposal.

It was part of a bigger contract for advisory services, including some other things which have been useful. And he's not done yet. I've expressed my concerns about what he's suggested (i.e., what you've expressed as your concerns, essentially) so he could redeem himself.

I would run as fast as I could to the website of Vanguard, Fidelity, or T. Rowe Price. Open an account and either do a target retirement fund or build your own portfolio with a total stock market index, a total bond market index, and an international fund index.

I've already done so and have been managing things myself - this effort was a sanity check. It looks like it isn't working out as such though.

[disneysteve]

Just a note about this, in case it modifies your appraisal: That's spread across what must necessary be seven account

That helps a little. We've also got more funds overall than I'd prefer for this reason. My wife's old 403b, her 401k, etc. Still, 30 funds is nuts.

I've already done so and have been managing things myself - this effort was a sanity check. It looks like it isn't working out as such though.

You can't get a sanity check from an insane salesman.

[disneysteve]

You can't get a sanity check from an insane salesman.

I should clarify this. He isn't insane. He knows exactly what he is doing. He is a SALESMAN. His job isn't to look out for your best interests. His job is to earn himself the biggest commission that he can. You, however, should stay away from commissioned salespeople and look out for your best interests. Nobody else will.

[Petunia 100]

In addition to the needless complexity, he suggests placing very tax inefficient funds in your taxable account.

[bUU]

In addition to the needless complexity, he suggests placing very tax inefficient funds in your taxable account.

I suspect he claims that some of this is because the best options in our current employer 401k plans are international equity funds.

[disneysteve]

How many of these funds are in the 401k accounts? That's really the only place you don't control the choices. In all of the IRAs, you have total control.

[Petunia 100]

I suspect he claims that some of this is because the best options in our current employer 401k plans are international equity funds.

It is a good strategy to select the best available in an employer plan.

I still don't like his portfolio.

I don't see much diversified domestic large cap, which should be a large part of your portfolio.

I don't like the approach of buying multiple actively managed funds in a single category. The only reason to buy actively managed funds is because you believe the management has a good shot at beating the index. When you buy multiple actively managed funds in single category, there is no chance that ALL of them will beat the index. In aggregate, they are going to mirror the index, minus the high fees. In effect, you are buying an expensive index fund. If you're going to buy an index fund, you will do much better buying an inexpensive one.

It's obvious his strategy is to make it seem investing is complicated and cannot be done without his help. This is a common sales strategy.

[bUU]

How many of these funds are in the 401k accounts? That's really the only place you don't control the choices. In all of the IRAs, you have total control.

I cannot even pick them out now, because apparently the guy changed the ticker from that which was offered by the current employer 401ks to other fund classes within the funds. What a mess.

[disneysteve]

I cannot even pick them out now, because apparently the guy changed the ticker from that which was offered by the current employer 401ks to other fund classes within the funds. What a mess.

I'll stand by my initial advice. Run away from this guy. He is trouble.

[bUU]

I'm going through my adviser's reply. Some of it sounds quite worthy of consideration, such as this comment aimed at explaining why he's recommending an asset allocation close to 80/20:

The concern we have about the amount of fixed income current portfolio (and in 401k plan target date funds) and the reason we’d replace bonds with dividend paying equities, real estate, non-traditional fixed income and other alternatives is that for the first time in 30 years it is reasonable to expect a loss in fixed income over the long-term. Not just an after-inflation “real” loss, but more devastatingly, a pre-inflation “nominal” loss. Interest rates have gone from a peak of over 14% on a 10-yr us treasury, to less than 2% over the last 30 years. As interest rates go down, as they did from 1982 through this year, bonds become more valuable. Rules of thumb like % splits based on age were determined during this time period when it was impossible to lose money in bonds and won’t be equally valid during periods of stable or rising interest rates. You also may see other rules of thumb like “subtracting your age from 100” to get an equity percentage. That rule has been changed to subtracting from 120 based solely on longer life expectancy. Such rules were developed for an audience who were supported by pensions for income and investments were their extra money. Pensions were managed for growth behind the scene, without the pensioner’s conscious knowledge, skewing the effective total portfolio allocation. Your accounts will have to be growth, income, and extra money all at the same time.

What I think he's saying is that things have changed (and that's for sure) - that bonds simply are bad right now (and that's almost surely true, as well). I'm not sure that that really means that the right answer is more equities, however, cash assets are losing "real" value (though not "nominal" value). Is anyone ready to stand up and say that holding 35% of your entire savings in CDs is the way to go?

He also tackled the tax-efficient fund placement issue, in a rather novel way:

With capital gains, you’ll have to pay the tax eventually. You could wait for retirement or reduced income when you might qualify for the 15% rate, but it’s probably better to accept the fact that the government has a 20% claim to your gains whether you take them now or in the future. The bite could even be more than 20% in the future. We hope that your investments keep growing, but if they do, the dollar amount that you have to pay the IRS grows too. It is usually better to put together the best portfolio you can, include tax efficient investments where possible, and pay what you must.

What I think he is saying here is that, essentially, he doesn't see a big benefit in strategically placing funds (at least not with regard to the value versus growth dynamic) because he sees taxes on gains going up (and that's almost surely true), and that we're probably going to get hit with worse taxes when we take the money out than if we just pay the tax now - that the compound effect may actually be smaller than the impact of taxes increasing. I'm not sure that that's true, and I'm not sure it really gets to the heart of the tax-efficient fund placement issue.

[bUU]

Overnight a lot more credence has been added to the adviser's recommendation. Perhaps the most compelling can be found here:

http://www.fatwallet.com/forums/finance/1275372/m17770910/#m17770910

The message after that one gets to the heart of the matter: It's loads of work to figure out the Active Share and Tracking Error of each funds. The question is whether there is a way to do or buy that work without it "costing" more than it offers.

[Petunia 100]

Overnight a lot more credence has been added to the adviser's recommendation. Perhaps the most compelling can be found here:

http://www.fatwallet.com/forums/finance/1275372/m17770910/#m17770910

The message after that one gets to the heart of the matter: It's loads of work to figure out the Active Share and Tracking Error of each funds. The question is whether there is a way to do or buy that work without it "costing" more than it offers.

Well, many have tried. Notice the first point:

1. I think the results make sense, and do not contradict existing literature that active management generally underperforms passive indexing,

And there is your answer.